The requirements of starting a business as a sole trader or in a partnership

by The FindLaw Team

Many people who start businesses, usually don’t begin with grandiose intentions of creating a massive corporation, but rather, are more likely to start a small business that is either a sole enterprise, or partnership. Although, it would be lovely to imagine that the little business we start, will turn out like Apple – which began life as a partnership. However, most people would be satisfied just to have a business to call their own, and a good starting point is either as a sole trader or in a partnership with other people. There are many requirements and considerations that need to be taken into account when starting a business as either a sole trader or in a partnership, and by being aware of the obligations, will help a person to get their business up and running.

Starting a business as a sole trader

Perhaps one of the biggest drawcards of going into business as a sole trader, is that a person gets to be their own boss. Isn’t that what everyone wants? Additionally, as a sole business owner, the person gets to hire their own staff! Again, what’s not to love? Furthermore, sole traders also get to keep all of the profits, and there are minimal statutory or legal requirements that need to be adhered to when a person is a sole trader.

Sole traders when starting off, have the option of registering their business name under the various State Business Names Acts, or they can go ahead and just trade under their business name.

Disadvantages of being a sole business trader

Moving away from the romanticisation of starting business as a sole trader, being in charge of your own destiny – although appealing – still has various downsides. The obvious negative is that the sole trader has the burden of conducting all of the duties of running the business themselves. And this can be especially difficult for a person who has no prior experience in running a business.

However, the biggest disadvantage, is the fact that sole trading business are usually unlimited liability companies – and if something does go wrong – that person is usually responsible for all debts incurred.

Starting a business as a partnership

When choosing a partnership as a business structure, the States all have their own laws relating to partnerships, and just like a sole trader, there are minimal formalities that need to be followed, which makes starting a business in a partnership an attractive proposition.

Although a partnership has a lack of formalities that need to be followed, there are still some requirements that need to be adhered to, and includes the following:

• the partnership must be between two and 20 people
• the partnership arises between persons carrying on a business in common, with a view to profit.

Partnerships can come into fruition either in writing via the form of a Deed, verbally, or by the conduct of the parties. However, readers should be aware that joint ventures will not usually be recognised as a partnership in most instances.

What test is applied when deciding if a business structure is a partnership?

In ascertaining whether or not a business is a partnership, there are numerous tests which are applied and the following inquiries must be answered in the affirmative in order for the business to be deemed as a partnership:

• all parties in the partnership share in the profits and losses
• all parties have a voice in the management as proof of agency.

There are also additional considerations that must be taken into account, with three further ‘negative’ rules, that outlines the circumstances in which a joint enterprise is not a partnership:

• co-ownership, joint tenancy, or tenancy in common does not signify a partnership, and the prime example being is when a number of people buy and sell property together for profit
• sharing of gross returns is not a hallmark of a partnership
• sharing of profits and losses is prima facie evidence of a partnership.

It should be noted, that although the sharing of profits is usually prima facie evidence of a partnership, there are some caveats that may still be applied, in which a partnership does not exist and is spelled out in the various Acts relating to partnerships. One such example is when a widow or child of a deceased partner, receives an annuity of the portion of profits and the law has considered such actions do not usually constitute a partnership.

Rights in a partnership

The usual requirements of sharing profits and liabilities equally should be apparent in a business that is a partnership – unless there are expressed provisions that suggest otherwise. Also, all partners should be allowed to participate in management decisions.

Further rights available to partners include the following:

• partners are indemnified against costs which may arise out of the ordinary course of business
• all partners have the right to access books and records related to the business
• all partners have a fiduciary duty to act in the best interests of the business
• there is an existence of a mutual principal-agent relationship
• there is interest on advances other than capital
• a determination has been made in regards to interest on capital, after net profits
• there is no entitlement to wages between the partners, unless expressed terms have been noted in the partnership agreement
• when introducing new partners, it must be done with the unanimous agreement of all the current partners
• any disputes are settled by the majority
• any action of expulsion must be done in good faith, and in strict accordance with the expressed terms in the partnership agreement.

Disadvantages of a partnership

There are numerous disadvantages that have been alluded to in the article, such as the as the sharing of management decisions if there are multiple partners for one. However, the biggest drawback in a partnership, is perhaps the fact that partnership structures are also usually unlimited liability businesses. Therefore, all partners are responsible for debts incurred, and if there is insufficient funds to pay off the debts, then the personal assets of each partner may be taken in order to reconcile the debts of the partnership.

This piece is only a basic overview of starting a small business as a sole trader or in a partnership. Before considering beginning a business, always seek the help of a lawyer, who can assist you with all of the requirements of starting a business.


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