Going into business with a mate sounds simple. You trust each other, you both know the work, and you’d rather split the profits than hand them to a boss. The law takes a less sentimental view, and if you don’t write your own rules, it has a set ready for you.
The first call is structure. A general partnership is the simplest option, and business.govt.nz, the Government’s business advice site run by MBIE, says partnerships are easy to start and can be set up with a partnership agreement. “Entering a partnership legally binds you to your other partners,” it says.
That bind covers the debts. Inland Revenue says that in a general partnership, each partner can be made to pay the full amount of a debt. The Insolvency and Trustee Service says that if your partner can’t be found or can’t pay, you’ll be considered responsible for all the business debts, tax included.
A company works differently. The Companies Office says setting one up creates a separate legal entity, and every company needs at least one share, one shareholder and one director. The Insolvency and Trustee Service says a registered company is responsible for its own debts.
There are two big catches. If you’ve personally guaranteed a company debt, the service says you’re responsible when the company can’t pay. And if you keep trading after the company becomes insolvent, you can be prosecuted or made responsible for its debts.
Which structure suits two tradies depends on turnover, tax and how much risk you’re each carrying. The Companies Office’s advice is to talk to an accountant or lawyer before you decide if you’re unsure which to choose.
Skip the agreement in a partnership and the Partnership Law Act 2019 fills the gaps. Its default rules say partners share equally in capital and profits and contribute equally to losses, and that no partner is entitled to pay for working in the business. Differences over ordinary business matters can be settled by a majority of partners, which with two of you means both.
The Act also says the death or bankruptcy of any partner dissolves the partnership, unless you’ve agreed otherwise. Where you haven’t agreed a fixed term, either partner can end it at any time by giving notice to the other.
That’s workable if you each put in the same money and the same hours. It gets awkward if one of you brought the digger and the other brought the client list.
The business.govt.nz site lists what a partnership agreement should cover. That includes how much each partner puts in, what property belongs to the business, how partners get their income and what each does day to day. It also covers how disputes get resolved, what happens if a partner dies or wants to leave, and how you could sell the business.
The site recommends legal advice when you draw one up. For a company, it suggests setting out the shareholdings in a shareholder agreement, with help from an adviser.
Injury belongs in there too. The same site says each partner gets ACC personal injury cover from day one, with levies based on each partner’s role. ACC covers the person, so the agreement needs to cover the business, including who picks up the work and how profit is split while one of you is laid up.
Then there’s the home front. The Community Law manual says a business used to produce family income is generally treated as relationship property under the Property (Relationships) Act 1976. If your mate’s relationship ends, their share of the business can come into the split, so agree upfront how a departing partner’s share gets valued and bought out.
Partnerships don’t pay income tax themselves. Inland Revenue says the profit or loss is shared between the partners, who pay tax on their share and can claim partnership losses against their own income.
The partnership files an IR7 return each year showing how much went to each partner, and each partner files their own IR3. The partnership needs its own IRD number, and business.govt.nz says to register it for GST if turnover will be more than $60,000 a year.
On drawings, business.govt.nz says each partner can draw funds from profits as they need them, like a sole trader, but should keep a record of what they take. The agreement can restrict withdrawals. Partners can also take a salary or wage with PAYE deducted, if the partnership agreement says so, and the business must keep records for at least seven years.
Who does what is easy to agree over a beer. One of you prices jobs and chases invoices, the other runs the crew. Write it down anyway, with what each role is worth, because the Act’s default is equal shares and no pay for the work, whoever’s doing the early starts.
Book the accountant for the structure and the lawyer for the agreement before the first invoice goes out. It’s easier to agree how you’d part ways while you’re still getting on.
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