Business partnerships are often likened to marriages, but with such a high number of marriages…
When Is a Partnership Not a Partnership?
The term ‘partnership’ is waved around wildly in the business community, but more often than not, the arrangement described is actually something else.
When my children were young, they were fans of Captain Planet and echoed his empowering shout, “When our powers combine, I am Captain Planet!” The show revolved around a bunch of ordinary individuals with special interests, who created something particularly impressive when they joined forces.
That’s the general nature (and benefit) of partnerships. Combining complementary skills is an efficient way to achieve a common purpose. But the term ‘partnership’ is frequently used to describe anything involving a form of collaboration, and that can cause dangerous confusion.
Here are some different types of business relationships and why it’s important to know the difference:
Partnerships (at law).
A true legal Partnership is a registered business structure. It is the joining of (at least) two separate businesses (or individuals) to form a new business. They have to be registered with Australian Securities and Investment Commission (ASIC) and meet the Australian Taxation Office (ATO) obligations like any other business. They can also be difficult to end, and everything that happens within the partnership is governed by a Partnership Agreement.
This is a document that sets out the ground-rules for the entire business. At the very least it should cover how money is split, who makes decisions, what is expected of each party in terms of time and money investment, how the partnership will end, and how parties will deal with disputes or unexpected events, like the death or incapacity of one of the partners.
This type of collaboration is usually for a pre-determined purpose and limited time. Property development is an easy example. A construction company and an architects firm may come together to buy a block of land, develop it and sell it to share in the profits. It also needs to be registered with ASIC.
This is the most common form of ‘partnership’ many of us will encounter. But rather than the legal structure I’ve explained above, it’s just a form of co-operation. It’s frequently used when the provision of a service may need input from specialists. An example might be a multi-disciplined course or program.
The arrangement would be governed by a contract (usually a Service Agreement) that provides each contributor to the project with some assurances that the other isn’t going to pinch clients, misuse intellectual property or up and move to Texas halfway through the project. The contractual agreement lets each party know what to expect from the other, but significantly, they have not formed a new business together, and they are each responsible for their own taxes and other financial obligations.
Just like the contractual arrangements, these operate on the basis of mutual benefit. The benefit to one party is often so great that they are prepared to provide services for free. An example might be a speaker who is willing to provide their time at no cost, in exchange for the opportunity to be in front of 500 members of their target market.
In one-off cases where no money is exchanged, a written agreement may not be needed. But if this arrangement is to span a period of time, or one party significantly depends on the fulfilment of the arrangement, then the terms of the agreement should be spelled out in writing. To use the same example, the speaker may have no risk involved in providing services for free, but the host may outlay event costs that depend on the speaker turning up.
Why are these distinctions important?
Other than a low-risk one-off freebie situation, each of these relationships requires documentation to make sure each party understands the terms and scope of the agreement. Without something in writing, the parties face ongoing uncertainty and huge costs if things go pear-shaped.
The process of working through the necessary documents highlights a whole range of issues you may not have considered. And importantly, it clarifies whether or not the relationship you’ve created is, in fact, a partnership or something else.
Understandably, Small Business owners baulk at anything that might slow them down. They get concerned that a delay or additional costs will jeopardise the great opportunity they’ve been offered. But let me say this, partnerships may require complementary skills, but the best partnerships share a common approach to how business is conducted. They have similar values and core driving principles. If a project comes undone because you want to do it the right way, take that as a sign that you’re not as well matched as you may have thought.
Nothing slows a business down like months in court, so invest wisely at the beginning and make the most of your business relationship.
“The opinions expressed by Smallville Contributors are their own, not those of www.smallville.com.au"
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