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Partnership Agreements in South Australia
Partnership agreements in South Australia involve a business structure used by a group of people who want to carry on a business together with a view to sharing the profits. Similar to the other States, South Australia allows a person to create three different kinds of partnership:
- normal or general partnerships
- limited partnerships which consist of general partners and limited partners, and
- incorporated limited partnerships, where the partnership itself is established as a separate body corporate.
The rules for how partnerships are created in South Australia are contained in the Partnership Act 1891.
Normal or general partnerships
Normal or general partnerships are commonly used in small mum and dad type business operations because they are the simplest to create. They are not required to be registered with the South Australian government and the partners do not need to enter into a written partnership agreement to govern the relationship between them. Each of the partners is liable for all of the debts of the partnership from the time at which they became a partner. They each also have the power to bind the partnership as one of its agents (for example, by taking out a loan for the partnership).
General partnerships are not required to be registered, therefore the Partnership Act has specific rules for determining whether a partnership exists. For example, a person who shares in the profits of a business with another person prima facie carries on that business with them in a partnership. Other factors which may suggest there is a partnership include whether people hold property together and whether they share gross returns. No one factor is generally sufficient to prove a partnership exists, so it requires a case-by-case analysis. The most significant outcome of running a partnership is the income tax consequences, which are discussed below.
Similar to normal or general partnerships, a limited partnership does not require the partners to enter into a written partnership agreement. However, they do need to be registered in order to be created. Limited partnerships are made up of general partners and limited partners. General partners have control over the management of the partnerships’ business, but they are liable for all the debts of the partnership from the time they become a partner. On the other hand, limited partners cannot generally participate in running the management of the partnerships’ business; however, their liability for the debts of the partnership are limited to a certain amount that is specified in the register of limited partnership for their partnership.
A limited partnership must have at least one limited partner and one general partner; however, it cannot have more than 20 general partners in most cases.
Incorporated limited partnerships
Incorporated limited partnerships were created as a kind of partnership to encourage investment in venture capital projects (i.e. projects with high growth potential). They are established as bodies corporate that exist separately from their partners. Similar to limited partnerships, they need to be registered in order to be created. However, they also need to have a written partnership agreement in place at all times.
They consist of both general partners and limited partners, who have the same rights to manage the business of the partnership as they do in the case of a limited partnership. However, unlike limited partnerships, each limited partner has no liability for the debts of the incorporated limited partnership. It is this feature which makes the incorporated limited partnership model so attractive for venture capital projects, because it allows someone to raise a lot of finance relatively easily compared to the other partnership models.
Incorporated limited partnerships are a type of body corporate, they therefore generally need to be wound up in order for the partnership to end. There are specific rules for how such winding up should occur in the Partnership Regulations 2006. A limited partnership or normal partnership can also be dissolved due to the death or insolvency of a partner, or if it becomes unlawful for the business of the partnership to be carried on. The Supreme Court of South Australia can also order a partnership to be dissolved in certain circumstances.
Taxation of partnerships
Partnerships usually do not pay income tax. Instead, each partner pays income tax on their share of the partnerships’ income. Some corporate limited partnerships, which include incorporated limited partnerships, are taxed in the same way as companies, but in some circumstances they may be taxed in the same way as other partnerships when they relate to venture capital projects.