Jeremy Tauri: Partnership structure pitfalls

For rental properties a partnership is probably fine

The partnership as a business structure is one of the simplest to implement but messiest to unpick.

The default legislation, in absence of an agreement, is the Partnership Act 1908, which gives you some indication to the length of time they've been around.

There are some valid reasons for forming partnerships and sometimes they are the default structure.

For example, a jointly owned house that's rented often becomes a rental property partnership.

For rental properties a partnership is probably fine. However, if you're operating a business in a partnership and have done so in some way by default then you need to consider other choices.

I say this after being involved in several partnership dissolutions -- some involving a great deal of assets; some involving husband-and-wife partnerships of businesses that have had a relationship end; and some that have had large debt accumulate with no one wanting to foot the bill.

None of these situations are easy to resolve but there are a few catches under the parameters of a partnership that makes them extra tricky.

Partnerships have unlimited liability, which means either partner can be pursued for the debt created by the partnership. In the husband-and-wife partnership case, often she did the books and he did the work. But then the relationship ended - he continued working under the partnership and, as part of their exiting agreement, she was to maintain the books.

Turned out that after a number of years nothing was filed so creditors pursued the partners -- her first, then him. And because he had the ability to pay he was lumped with the entire debt. Is that a partnership? No, that's unlimited liability.

Partnerships have less flexibility when it comes to allocating profits. Unless there is an agreement it's by default 50/50.

If a partner leaves the partnership or dies then the partnership is dissolved -- this can cause headaches for asset transfers and tax issues to the surviving partner or new entity.

Depreciation recovery is one such issue. This is where, on the partnership ending, assets are moved to the surviving partner. In short, tax can be recouped on the transfer, without there being a real "sale" or money exchanging hands.

Remember, going into business together is a business partnership but you don't have to use a partnership structure as your operating structure.