Thinking of going into partnership with a colleague? Charmaine Teoh shares some legal and financial issues to consider before opening the doors to your business
Some of history’s most SUCCESSFUL businesses are built on partnerships: Wilbur and Orville Wright, Steve Jobs and Steve Wozniak, Keith Richards and Mick Jagger.
“People go into partnership to combine their skills, knowledge and contacts to create a bigger and stronger business, and improve service to clients,” says Georgina Odell, a senior associate at Meridian Lawyers, a firm with a practice area dedicated to advising veterinarians. “A good business partner can provide valuable support and resources in terms of skill sets, time and marketing.”
But for every productive union, there are many more that have soured. Disputes can arise for many reasons, such as questions over people joining or exiting the business, underperformance from one party, and whether to withdraw or reinvest profits.
“Disputes can be avoided if partners methodically discuss and agree on roles and responsibilities, ethos and values, and key business, financial, operational and legal issues before they enter into business,” advises Odell.
Some of these issues include business control and profit sharing; exit arrangements; and restrictions on involvement in a competing business. Vets should also discuss whether one partner is to be primarily responsible for certain aspects of the business such as employee management or stock control.
“These details should be recorded in a legally binding partnership agreement,” says Odell. “Partners should regularly review the partnership agreement and ensure it is updated as circumstances and the business changes. It may also be useful to have a management agreement covering the practice’s day-to-day operations.”
There are a number of structures that a business can take. The simplest is a partnership, which can be based on a 50:50 split or on an agreed proportion of control and entitlement to profit.
While partnerships are relatively easy and inexpensive to set up, partners are jointly responsible for the business’s debts and liabilities, and will generally be bound by their partner’s acts. “If the business does not go well, there is more at risk for partners and their personal assets than if they trade through a company,” says Odell.
“From a tax perspective, partnerships offer little flexibility as the profit will be split between partners, and the partners themselves will be taxed at their marginal tax rate,” says Anne Lencioni, a principal accountant at specialist veterinary accounting firm APL Accountants.
Vets can also trade as a company. In New South Wales, the Veterinary Practice Act 2003 requires that a company representing itself as a veterinary practice has a veterinary practitioner as the owner of the controlling interest in the company.
A company is treated as a ‘legal person’, meaning it can take leases, contract with suppliers and employ staff in its own name. “This reduces the risk of partners’ personal assets being seized by creditors or through litigation against the business,” says Odell.
“Profit retained in a company is taxed at 30 per cent, which is particularly good when the business is profitable as owners would normally be taxed at a higher rate if they withdraw more money,” says Lencioni. “However, a company has fewer capital gains concessions if partners decide to sell the business.”
Another option is a unit trust, where ownership is split into well-defined ‘units’. The business can be split into further units if more partners are introduced.
“One of the main differences between a unit trust and a company is that minority holders are better protected,” says Lencioni. “All profits are distributed based on the percentage of units held by individuals. Another advantage of a unit trust over a company is that there may be better capital gains tax concessions.”
With money a major cause of partnership breakdowns, it’s important to instil sound financial practices from the start. “A new business generates expenses from day one, but you may not have many customers and thus very little in terms of revenue,” says Lencioni. “You have to plan for this and determine how much you can spend and what you can afford in terms of interest on any loans.”
Lencioni says there are three key financial issues that vets are likely to encounter. The first is cash flow. “Set realistic expectations. Don’t overspend in the beginning and discuss who is going to pay for the ‘household’ bills in the first few months when the business may be making very little money,” she says. “If you are going to buy into a business, have it professionally valued by an accountant. We’ve seen many people overpay and become stuck with a business that can’t generate revenue to service the debt.”
Tax is another issue that vets must prepare for. “New business owners often find they don’t put enough aside for their tax obligations,” says Lencioni. “You have to pay 10 per cent of what you take to the tax office as GST, as well as money you withhold from employees as PAYG [pay as you go]. Any profit will be also taxed. Have a tax planning meeting with your accountant in April, so you know how much tax you need to pay in 12 months and can save for it.”
“A good business partner can provide valuable support and resources in terms of skill sets, time and marketing.” Georgina Odell, senior associate at Meridian Lawyers
Vets should also agree on remuneration and profit sharing. “When you’re a business owner or in business with someone else, what you earn depends on the business’s profits,” says Lencioni.
“Partners should agree on remuneration for hours worked, especially if they work very different numbers of hours. Any resulting profit is split according to the structure of the business. For example, in a partnership, the profit is based on each partner’s share; in a company it is based on shareholding; and in a unit trust it is based on the number of units held.”
Insurance is critical in a business. Vets should look for a package that offers professional liability cover (in the event of allegations of professional wrong-doing) and public and product liability cover, in case of accidental injury or damage to customers, for instance, if they slip and fall during a visit to the practice. The package should also include cover for veterinary practice contents such as stock and office and surgical equipment.
As in other occupations, vets should also take out life insurance, as well as income protection insurance.
Aside from legal and financial considerations, potential partners must have honest talks about what they expect to get out of the arrangement.
“Good partnerships are based on trust, respect and common agreement,” says Odell. “A business partnership is like any other human relationship, so put aside time to take care of and manage that relationship. Partnerships thrive when everyone knows what is expected of them, and everyone meets those expectations.”