What Is A Partnership?

We often hear clients setting up a business with another person mention they have a partnership or want to set up a partnership. But what they really mean is they have a business partner and they want to set up a company. 

Having a business partner is completely different from the legal term ‘partnership’. A partnership is a type of business structure. 

A partnership business structure works in a similar way to a sole trader, in that there is no separate legal entity created by a partnership. However, instead of control resting on one person like in a sole trader, a partnership has a minimum of 2 people who both control the business and share income and losses of the business. 

Each partner is personally liable for any debts and losses from the business, thus making them liable for the decisions of themselves and the other partner. Though a partnership is easy to set up, it can be risky for this reason. A common alternative business structure with more than one co-founder is a company structure.  

What Are The Types Of Partnership?

Partnership business structures have different rules depending on the country they are in.  

In New Zealand, there are two main forms of partnership recognised under the Partnership Act 1908.

1. General Partnership 

• Does not need to be registered and is the simplest form
• May be used between family members for instance
• Is the most common type of partnership

2. Limited Partnership

• Needs to be registered with the New Zealand Companies Office
• Consists of general and limited partners who have different liabilities and obligations.
  • General partners have unlimited liability, and manage daily operational requirements
  • Limited partners have their liability limited to the amount they invest in the partnership and don’t have anything to do with running the business
• Often used for investment purposes, such as venture capital or private equity funds

How Do I Set Up And Maintain A Partnership?

To set up a partnership in New Zealand, you must apply for an Inland Revenue Department (IRD) number for tax purposes. If the annual turnover is expected to be over NZ$60,000, you must register for Goods and Services Tax (GST).

You should also have all partners sign a Partnership Agreement that has been drafted specifically to your business’ needs. It will cover important issues such as who makes decisions in what areas, how income is separated, and what happens if a partner wants to leave.

Each year, partnerships must file a tax return with the IRD. There is far less paperwork and reporting obligations in running a partnership than in running a company. 

What Happens When A Partnership Ends?

A partnership might come to an end for a number of reasons. For example, the partnership becomes insolvent, a partner becomes bankrupt, dies or wants to leave, or the partnership comes to an end because it has an expiry date set out in the partnership agreement. 

If any of this happens, the partnership is dissolved. This is where the Partnership Agreement comes in, as the terms of how the partnership will be dissolved relies on this contract. If there is no Partnership Agreement, the partnership must be dissolved according to the Partnership Act 1908. 

Lastly, the partners may sign a Partnership Dissolution Agreement to formally end their partnership. 

What Next?

Here at Sprintlaw, we’ve spoken with a lot of clients who have reached out to a lawyer for the first time because their partnership needs to be dissolved but they don’t know where to start because they never set up a partnership agreement. 

Setting up a partnership agreement can avoid a lot of stress down the track, even if you are setting up a partnership with a friend or family member. Don’t hesitate to reach out to us if you want help deciding on your business structure, drafting a partnership agreement or dissolving your partnership.
We can be reached for a free chat on 0800 002 184 or at [email protected].

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