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The critical steps to a successful partnership

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The critical steps to a successful partnership
The critical steps to a successful partnership

It is a tall order to ask for a business owner to manage everything alone, much less lead their business into success. This is why many successful businesses are born from partnerships.

Partnerships can be advantageous to business owners looking to balance their complementary talents and personalities. Sharing the experience of running a business can make the whole process more enjoyable, especially with a partner who is liked and respected.

However, partnerships are not without their disadvantages. Disagreements are bound to happen over time so it is important to formally structure the relationship. To ensure business success and the longevity of your relationship, there are a few important steps to take when laying out the groundwork for your partnership.

Sort out the basics with your partner first
Be sure to cover issues such as:

  • Business ownership division. Who owns what percent?
  • Decision-making processes. How are business decisions made? Who has final authority? How are disagreements settled?
  • Partnership responsibilities. What are each partner’s responsibilities? How much time and money will each partner contribute? Can partners work in other positions at the same time?
  • Partnership breakdowns. What happens when a partner wants to sell? What happens when a partner dies or becomes disabled? What happens if you want to bring on an additional partner?

Draw up a written partnership agreement
Solidify all the key issues that you have discussed in a legally binding contract. This is to ensure that parties involved are held accountable to the agreed-upon terms of your partnership. Also make sure that contract is drafted with professional legal advice and assistance.

Choose an appropriate business structure
Discuss with an accountant what legal form your partnership should take. This is important to determine your level of involvement in a partnership. For example, a simple partnership does not provide protection for any party’s personal assets.

Consider a buy-sell agreement
A buy-sell agreement acts as an insurance policy for partnerships in the event that a partner dies or becomes disabled, wants to sell their share of the business, or leaves the business. Buy-sell agreements can resolve disputes or differing goals by transferring business ownership and reducing the risk of business failure after a partner leaves. Always seek professional advice before drafting a buy-sell agreement to ensure all situations are covered and the contract is neither too advantageous or disadvantageous for one party.

Division 7A and private loans

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Division 7A and private loans
Division 7A and private loans

It is not uncommon for businesses to provide loans to shareholders or associates of a company. However, business owners should know the conditions that their loan must satisfy under Division 7A, to avoid the amount being deemed a dividend.

Written agreement
Division 7A loan agreements need to be made under a written agreement before the private company’s lodgement date. As a minimum, the written agreement should:

  • identify the parties,
  • set out the essential terms of the loans (e.g. the amount and term of the loan, the interest rate payable under the loan), and
  • be signed and dated by all parties involved.

Minimum interest rate
Loans must have an interest rate greater than or equal to the annual benchmark interest rate outlined in Division 7A. The benchmark interest rate for 2020 is 5.37% and will be 4.52% in 2021. This interest rate needs to be applied for each year after the year in which the loan was made.

Maximum term
The maximum term for a loan agreement is seven years. If the loan is secured by a registered mortgage over real property, the maximum term is 25 years. For this maximum term, the market value of the property (not including any other liabilities for securing the property prior to the loan) must also be at least 110% of the amount of the lo

Refinancing loans
From the 2007 income year onwards, loans that can be refinanced without resulting in a deemed dividend include:

  • An unsecured loan which is converted to a loan secured by a registered mortgage over real property can have the loan term extended (with relative terms).
  • A secured loan which is converted to an unsecured loan with a corresponding reduction in the loan term.
  • A loan which becomes subordinated to another loan from another entity due to circumstances beyond the control of the original entity.

If these loan conditions are not met, Division 7A of the Income Assessment Act 1936 applies and the loan is deemed a dividend. This dividend is treated as taxable income and the company receives no tax deductions for its loan to you or your shareholders.

Avoiding SMSF disputes

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Avoiding SMSF disputes
Avoiding SMSF disputes

One of the benefits of SMSFs is the amount of control you have from managing it yourself. However, self-management can leave room for disputes among related parties, especially when family members are involved.

SMSF disputes can be caused by a number of factors, such as relationship breakdowns, (common in funds where parents and siblings are in a member and trustee relationship) and fundamental differences in opinions. Other common triggers for SMSF disputes include:

  • investment strategy disagreements,
  • differences in opinions over the payment of benefits, especially in SMSFs involving both parents and their children,
  • payment of death benefit disputes, and
  • disagreements on the distribution of SMSF death benefit payments between surviving members.

Consider the following methods to avoid SMSF disputes.

Clear decision-making procedures

Disagreements are bound to occur when it comes to money, so it is important to include concise decision-making provisions to keep things fair for all parties involved. For example, trustee decisions can be made by a simple majority rather than unanimously, and a particular trustee may be provided a casting vote in the case that a deadlock occurs. Provisions could also include voting rights that are based on the value of a member’s account balance within the SMSF to avoid situations where a member with minority interest out-votes a member with a large fund account balance.

Updating your SMSF regularly

A SMSF trust deed will provide provisions which determine the trustees’ rights, obligations and options. It is important to keep your SMSF and trustee information up to date to prevent any unwanted beneficiaries and claims. For example, in the case of an unfinalized divorce or legally unchanged relationship status, a former spouse can claim the others’ superannuation death benefits. To prevent such situations and avoid disputes, be sure to update your super fund regularly.

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