Partnership (Australia) - Who Is A Partner?

Who Is A Partner?

As to whether any given person involved with a company is a 'partner', guidance is found in s.6 of the Act. Several rules are given. The most common are as follows:

• Joint-ownership:

Rule 1 - s.6(1)provides that there must be joint-ownership. This is rather self-explanatory but the mere fact that persons may be joint-tenants or have part ownership do not in themselves create a partnership. Typically, where the rules below point towards a partnership, such would generally satisfy this rule.

• Participating in gross returns:

Generally speaking, 'partners' must share gross-returns each according to their share in the business. Thus at first instance, if persons share the gross-returns, one would be inclined to say that a partnership exists. However, rule 2- s.6(2) complicates this. It provides that the sharing of gross returns will not in itself create a partnership.

All this notwithstanding, sharing of gross-returns is a strong indication of a partnership - particularly where a set percentage is prescribed in the agreement.

• Sharing of profits:

Rule 3- s 6(3) provides that the sharing of profits is prima facie evidence that a partnership exists. However, this is not categorical. To cite two examples where a person entitled to a share was not a partner is where that such person is a creditor or by virtue of s.6(3)(b) where that 'sharing of profits' is simply remuneration or a wage. Note in the latter example, s.28(6) provides that although partners are not entitled to remuneration - and thus he who receives remuneration is prima facie not a partner - this may be varied by partnership agreement. Therefore, receiving remuneration does not conclusively indicate against a partnership.

• Sharing of losses:

Rule 3 – s6(3) also concerns sharing of profits. Section 28 explains that all partners must contribute equally to firm’s losses.

• Exercise partner’s rights:

Generally, where a person exercises those rights that would typically be exercised by a true partner, the more likely a partnership can be imputed. Section 28 includes a non-exhaustive list of partner’s rights.

The most common partners rights are the right to participate in the firms management (s.28(5)) (which can be illustrated by attending meetings) and the right to access the firm's books and confidential financial reports (s.28(9)). A partner without the right to participate in the firms management is often referred to as a silent partner.

But, at the end of the day there is flexibility in the partnership agreement and it is possible for the partners to consensually agree to exclude one or more of these partner's rights in relation to any given partner. Thus, put simply, the mere fact a person does not exercise these rights does not indicate categorically that they are not a partner.