Understanding the Necessity of a Partnership Deed in New Zealand
Establishing a partnership can be an excellent way to combine resources, skills, and expertise to create a successful business venture. However, like any business relationship, it’s essential to lay a solid foundation to avoid potential disputes and misunderstandings. In New Zealand, this is achieved through a partnership deed.
Partnerships have an Inland Revenue number, but the partnership does not pay income tax. The Partnership needs to complete a Partnership income tax return (IR7) to allocate the profits or losses to its partners. Partners then declare the profits or loss they have received through the partnership in their personal income return using their own Inland Revenue numbers. Partnerships must also register for GST and pay it if their turnover exceeds $60,000 a year. Additionally, the partnership must obtain a New Zealand Business Number (NZBN), a unique identifier that all businesses in New Zealand must now have. Using the NZBN speeds up interactions with government, suppliers, customers, and other businesses.
What is a Partnership Deed?
A partnership deed is a legally binding document that outlines the rights, responsibilities, and obligations of each partner involved in the business. It serves as a blueprint for how the partnership will operate, addressing various aspects of the business relationship to ensure smooth operation and conflict resolution. The provisions of the Partnership Law Act 2019 apply to partnerships. Under s 35 of that Act Partners’ rights and duties may be varied by consent. This is done in the partnership deed.
When Do You Need a Partnership Deed?
While New Zealand law does not require a partnership deed for a partnership to exist, having one is highly recommended. For a Partnership to obtain an Inland Revenue number, Inland Revenue requires a partnership deed. Here are situations where you should consider drafting a partnership deed:
Starting a New Business: If you are establishing a new partnership, having a partnership deed in place from the beginning can prevent misunderstandings and provide clarity on each partner’s role.
Existing Business Partnerships: Even if your business has been operating without a formal agreement, it’s wise to create a partnership deed to formalise the terms of your partnership.
Changes in Partnership: You need a partnership deed to enable changes in the partnership structure, such as admitting new partners or when a partner leaves, without the need to update the partnership deed and without the need to obtain a new partnership IRD/GST number.
Choosing Between a Long Form and a Short Form Partnership Deed
The complexity of your business and the number of partners involved will determine whether you need a long-form or a short-form partnership deed.
Short-Form Partnership Deed (our fee $1,207.50 including GST)
The short-form partnership deed is suitable for simpler business arrangements, typically involving two partners, often a couple, who are starting or running a small business. This form covers basic aspects of the partnership but omits detailed provisions for more complex scenarios. It does not include clauses dealing with:
Admission of new partners
Capital requirements
Insurance
Illness, accident, death or pregnancy
Expulsion
Mediation and Arbitration
The short-form partnership deed is ideal for businesses with a low likelihood of significant changes in the partnership structure or operational complexities.
Long-Form Partnership Deed (our fee from $1,811.25 including GST)
For more complex businesses or those where there is a possibility of new partners joining, a long-form partnership deed is necessary. This comprehensive document includes detailed provisions to address various scenarios that might arise, such as:
Admission of New Partners: Guidelines for adding new partners to the business.
Capital Requirements: Rules regarding the contribution of capital by each partner.
Insurance: Provisions for business insurance policies.
Illness, Accident, Death or Pregnancy: Procedures for handling situations when a partner is unable to participate in the business due to health or personal reasons.
Expulsion: Conditions under which a partner can be expelled from the partnership.
Dissolution: Steps to be taken if the partnership needs to be dissolved.
Mediation and Arbitration: Methods for resolving disputes among partners.
General Matters: Any other relevant issues specific to the partnership.
Conclusion
A partnership deed is a critical document for ensuring the smooth operation and longevity of a business partnership. Whether you choose a short-form or a long-form deed depends on the nature and complexity of your business. For small, straightforward partnerships, a short-form deed might suffice. However, for more complex arrangements or businesses with potential for growth and additional partners, a long-form deed is essential to cover all possible contingencies.
At Ross Holmes Virtual Lawyers Limited, we can prepare both short-form and long-form partnership deeds tailored to meet the unique needs of your business.
Contact us to ensure your partnership is built on a solid legal foundation.
Ross Holmes Virtual Lawyers Limited, based in Auckland, New Zealand, provides expert legal services tailored to the needs of businesses and individuals. Our website ensures convenient and efficient access to legal advice and support.
