When starting a business, one of the first decisions you’ll need to make is choosing the right structure. In Australia, there are four common business structures: sole trader, partnership, trust, and company. Each structure comes with its own set of benefits and challenges.
In this article, we’ll explore the partnership structure in detail—what it involves, how to set one up, and the pros and cons you need to consider before taking the plunge.
What Is a Partnership?
A partnership is a business arrangement where two or more individuals share ownership, management, and the profits or losses of the business. Unlike a company, which is considered a separate legal entity, a partnership ties the personal assets and liabilities of the partners to the business. This means that while partners share the rewards of the business, they also share the risks.
How to Set Up a Partnership
Setting up a partnership is one of the more straightforward ways to establish a business. However, even though it’s simple, there are still several important steps to follow:
Create a Partnership Agreement: While not legally required, a partnership agreement is highly recommended. This document outlines each partner’s roles, responsibilities, and the distribution of profits and losses. It also covers what happens if a partner wants to leave the business or if there’s a dispute. Having this in writing can save a lot of headaches down the road.
Choosing a Business Name: The partnership can operate under the names of the partners or a registered business name. If you choose a business name, it must be registered with the Australian Securities and Investments Commission (ASIC).
Register for an ABN: An Australian Business Number (ABN) is required for the partnership. This can be easily obtained online through the Australian Business Register.
Obtain a Tax File Number (TFN): While the partnership itself doesn’t pay income tax (as it’s not a separate legal entity), it still needs a TFN to file an annual tax return. Each partner will also need to include their share of the partnership’s income in their personal tax return.
Register for GST: If the partnership expects to have an annual turnover of $75,000 or more, it must register for GST (Goods and Services Tax). This registration allows the partnership to claim GST credits for any GST paid on business expenses.
Pros of a Partnership
Partnerships offer several advantages, making them an attractive option for many entrepreneurs:
- Partnerships are generally inexpensive to set up compared to companies. There’s no need for extensive registration or compliance processes, keeping initial costs low.
- Unlike companies, partnerships don’t require formal annual reporting to ASIC (other than tax obligations). This means less administrative work and more time to focus on the business.
- Partnerships allow for a flexible management structure, as partners can decide among themselves how to run the business without the need to adhere to strict corporate governance rules.
- Unlike a company, where financial information is often publicly available, a partnership provides a higher level of privacy for its financial dealings.
- With more than one partner involved, the business benefits from a broader range of skills, knowledge, and financial resources. This can result in more effective decision-making and a stronger business overall.
Cons of a Partnership
However, partnerships also come with certain disadvantages that are important to consider:
- The biggest drawback of a partnership is that partners have unlimited liability. This means that if the business incurs debt or faces legal action, the personal assets of all partners could be at risk.
- Each partner is jointly and severally liable for the debts of the partnership. If one partner is unable to pay their share of the debt, the other partners must cover it. This can lead to significant financial strain if not managed properly.
- Partnerships require a high level of trust and cooperation. Disagreements over business decisions, profit-sharing, or management roles can lead to conflicts. Without a solid partnership agreement, these disputes can be difficult to resolve.
- If a partner wants to leave or if new partners want to join, the partnership agreement needs to be amended. In some cases, the partnership may need to be dissolved and re-formed, which can be a complex and time-consuming process.
- Generally, partnerships are limited to a maximum of 20 partners (with some exceptions). This limitation can restrict the ability to raise capital and expand the business, especially compared to a company structure that can issue shares to a potentially unlimited number of shareholders.
Is a Partnership Right for Your Business?
Choosing a partnership as your business structure depends largely on your specific circumstances and goals. If you have a trusted partner with complementary skills and a shared vision, a partnership can be a powerful way to build a business. The combined resources, expertise, and shared responsibility can lead to a successful venture.
However, the risks associated with unlimited liability and potential disputes should not be overlooked. It’s crucial to have a clear, written agreement in place and to regularly communicate with your partners to make sure everyone is on the same page.
You can consider consulting with an accountant or lawyer before making a final decision. They can provide guidance on whether a partnership is the best fit for your business or if another structure might better suit your needs. Ultimately, the goal is to choose a structure that supports your business’s growth while protecting your personal assets and interests.
If you haven’t come across a professional who can address all your needs and offer appropriate solutions, try Clear Tax Accountants. We are a team of professional tax accountants who can take care of your tax matters and make things easier for you.
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