Ever heard about a business partnership that went wrong? You probably have – it’s a common scenario. We hear about partnerships breaking down, partners having huge disagreements, or worse, one partner suing another. Yet a partnership is the preferred business structure for Australian small business start-ups. What’s the deal?
What is a partnership?
It’s an association of people (or entities) running a business together. Partnerships are not set up as companies. They are more similar to a sole trader set-up, except with more than one owner.
There are pros and cons of a partnership that you need to consider before taking the plunge:
PERKS OF SMALL BUSINESS PARTNERSHIPS
Partnerships are easier to set up and maintain
Many people choose a partnership simply because it’s the cheapest and easiest of the business structures to set up in the first place. No need to form a company, pay wages or set up trusts. For example, it requires a separate Tax File Number, but it’s not mandatory to have an Australian Business Number. This also means a partnership is generally easier to manage ongoing.
Get a mix of skills and opinions
Perhaps you want to grow your business, or you recognise that you lack certain skills to make the most of your business. In these cases, partnerships can be very beneficial. Partners can bring specialist skills and knowledge to your business that you don’t have. Maybe you have a lot of knowledge about project management, but not the day-to-day running of a business. You can bring on a partner who is experienced in this area. Your partner can also become a sounding board if you’re struggling, offering different solutions from their experiences. In the oft lonely world of being a business owner, this can be extremely valuable.
Because a partnership is not recognised as a separate entity by the Australian Tax Office, the partnership doesn’t pay income tax on the income earned. Instead, each partner pays tax on the share of the net partnership income they receive. This makes partnerships tax effective for splitting income between people. By splitting income across personal tax rates, you get the benefit of a tax rate no higher than the corporate tax rate, maybe even less. And if the partnership knows it will incur losses for a certain period, those losses can be set against a number of incomes for tax purposes. There are also advantages with capital gains tax. If you sell an asset, the CGT is split. That said, every business is different, so always seek advice from your tax accountant.
Strength in numbers
Facing hurdles can be far less formidable with a partner beside you. There’s also the matter of combining resources. With partners, you have access to more resources – financial or other – which can open the door to new business opportunities and horizons that may not be possible alone.
PITFALLS OF SMALL BUSINESS PARTNERSHIPS
One partner’s mistake is everybody’s
This is perhaps the biggest pitfall of partnerships. In legal terms, all members of the partnership are jointly and severally liable for business debts and liabilities. Say one partner becomes insolvent, the full liability rests on the solvent partners. That’s because, unlike a trust or company, a partnership is not a separate legal entity. You aren’t separate from the business, so, if your business can’t pay its debts, your personal assets are at risk.
You can’t make decisions alone
Independence, flexibility and the ability to make and act on decisions are some of the biggest reasons small business owners choose to run their own venture. But a partnership doesn’t always offer these things. What happens if you have one partner who outright disagrees with the others? Or one partner doesn’t ask the opinion of the others before acting? The more partners you have, the more difficult and frustrating it can be.
You have to split profits
Run a business by yourself and you have an opportunity to gain all the profits. But in a partnership, you have to split the profits. Obviously, the more partners you have, the smaller your share of the profits.
Sole trader, company, trust or partnership? What is the best structure for your business?
Before you make your final decision, seek professional advice from your accountant or a business adviser. Whatever you choose, remember that you’re not locked into a business structure – you can change it as your business changes or grows.
Need more information?
- Learn about partnerships and tax on the ATO website.