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In partnership? What you need to know.

31 August 2017

Many small businesses in New Zealand, including farming businesses, carry on business as a partnership. One reason for this is because they are relatively easy to set up, compared to other types of business entities, such as a company.

What is a partnership?

A partnership exists where a two or more people carry on a business to make a profit. Commonly the partners will be individuals, but it is possible to have other types of legal entities carrying on business as partners, such as a partnership comprising two trusts. Just because people own property together or embark upon a joint venture together does not mean they are necessarily partners. Whether or not a partnership exists legally will depend on several factors, in particular the purpose of making a profit and the sharing of that profit. As a group the partners are referred to as “the firm”. The firm is not a separate legal entity and is not registered anywhere like a company (although the partnership must have its own IRD number).

What law applies?

The law governing partnerships is the Partnership Act 1908. There is also a considerable body of case law (also called “common law” or “judge made” law) that applies. (The Limited Partnerships Act 2008 provides for the formation of special types of partnership which are registered with the Companies Office and allow limited liability to the investor partner.)

How does a partnership work?

Usually the partners contribute their property, skill or labour to the partnership, although this is not necessary. It is possible to have a “sleeping partner” who contributes property but is not involved in the day to day running or management of the partnership.

A partnership is a type of contract between the partners and each partner is an agent of the partnership. This means that the individual partners can enter into most types of contracts that legally bind the partnership and each partner will generally be liable for the debts and liabilities of the partnership. Being legally bound by the actions of another partner and being liable for the partnership debts can be a significant disadvantage of carrying on business as a partnership.

Unless the term of the partnership is agreed upon, then the partnership is “at will”. This means that one partner can give notice dissolving the partnership immediately. The partners will also share equally in the profits and losses and the partnership assets when the partnership is wound up, unless they have agreed otherwise between themselves.  The partnership will be dissolved on the death or bankruptcy of one of the partners, or by order of the Court.

The law characterises the relationship between partners is one based on mutual trust and confidence. Each partner must act with fairness and utmost good faith towards the other partners.

Why have a partnership Agreement?

As it is sometimes difficult to decide whether a partnership exists or not, and because there will be different legal and practical consequences depending on whether a business or association is a partnership or not, it is desirable to have a written partnership agreement. If there is no written partnership agreement then the terms of the partnership will be those set out in the Partnership Act 1908 and implied by the common law.

A written partnership agreement usually covers things such as the firm name; the nature of the business; the term of the partnership; the amount of capital or loans to be contributed by the partners; how profits and losses are to be shared; holidays and illness; how the business is to be managed and what the partners must do; when the partnership can be dissolved (such as on bankruptcy, death, misconduct or retirement of a partner); the rights of partners to buy out other partners when the partnership is dissolved; and dispute resolution.

Partnerships have their place

For a larger enterprise where greater ease of entry into and exit from the business is required and where the parties wish to reduce their personal liability then a partnership may not be the best choice. Despite this, a partnership is very useful where a simple business structure is required.

 

Please email me at barbara.mcdermott@nwm.co.nz with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.


Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.

 

Barbara McDermott