If you’re thinking about going into business with a friend or family member, you’ll want to understand the partnership structure before you get too immersed in the other exciting aspects of your business idea.
A partnership business structure is considered to be relatively inexpensive to set up and operate. However, choosing a business structure is the most important decision you have to make at the beginning of your new venture. We can assist you in choosing a structure that best suits your business goals and plans. We can also help you consider where you want to take the business in the future.
What is a partnership structure?
A partnership structure refers to a group of two or more people that carry on a business and distribute income or losses between them. The most likely situation where this structure is used is between two friends in business, or parents and children running a family-owned shop or restaurant.
Each partner is responsible for the debts of the whole partnership, no matter how close the partnership. It’s the ideal business structure for small businesses like parents and their children running a family-owned restaurant, or two friends running a small clothing store because it’s simple. While the partners in a partnership are not employees, the partnership might employ other workers to benefit the business.
Advantages and disadvantages of partnerships
It might sound like the perfect business structure for you, but you should consider the advantages and disadvantages of a partnership. It’s important to choose the right business structure to protect yourself and your assets from liability should things go wrong. Below are some of the advantages and disadvantages of a partnership business structure.
It’s simple and inexpensive: One of the most attractive aspects of partnerships is their ease and simplicity. It’s easy and inexpensive to set up a partnership through the Australian Taxation Office (ATO). Once up and running, we can assist you in a few setup and administration tasks. However, there are fewer reporting responsibilities with the ATO as a partnership isn’t considered a separate entity.
Superannuation is in your hands: Partners are responsible for their own superannuation agreements which means you can put as little or as much towards your super as you wish. This means you can be much more flexible with the spending of your profits.
Responsibility is shared: Running a business as a sole trader can put a lot of weight on your shoulders. In a partnership, you can share the weight. Partners share income, losses and control of the business.
Profits are taxed differently: Instead of paying income tax on the profits the partnership earns, each partner reports their individual share of the partnership income in their own tax return. This tax is paid at the individual tax rate that may be eligible for the small business tax offset.
More opportunities for tax planning: Unlike a sole trader, partners have more opportunities for tax planning such as splitting income between family members or keep it aside for your next holiday.
Liability is yours: Like a sole trader, a partnership is not a separate entity. While profits go straight into partners’ pockets when business is good, you and your business partners are personally liable for the debts of the business.
No deductions: As a partner, you can’t claim deductions for money drawn from the business as they’re not wages for tax purposes.
Potential for disputes: While you might have big dreams of running a business with your best friend, misunderstandings or disputes can occur over business decisions, profit sharing and the future business direction. You’ll need to consider the dynamics of the relationship before committing to working together.
How do I set up a partnership?
If you’re our client, we can have you set up as a partnership. You’ll need:
- A Partnership Tax File Number (TFN) to lodge your income tax return.
- An Australian Business Number (ABN) to use across all business dealings.
- Register for Goods and Services Tax (GST) if annual turnover exceeds $75,000.
Although it’s not an essential part of a partnership, we highly recommend a written partnership agreement to solidify the business relationship. The agreement should outline how income or losses will be distributed to the partners and how the business will be controlled to prevent disputes and misunderstandings. It should clearly outline what each partner brings to the business and what they are entitled to receive in profit. This is particularly important for tax purposes if the profits or losses are not distributed equally among partners.
There are also a few rules you need to follow as a partnership:
- Report all your individual income in your tax return.
- Although a partnership is not a separate entity, you must lodge one partnership tax return at the end of each income year. The tax return must include the distributions made to every person who was a partner at any time during the income year, including those who left the partnership during the year.
- Put aside money to pay your annual income tax at the end of the financial year. These will be paid through quarterly Pay As You Go (PAYG) instalments.
Learn more about partnerships
At Business Tax & Money House, we take the time to listen to you to determine which business structure is right for you. We look into your business succession, the distribution of your profits, your financial exposure, and your ongoing costs to decide how each structure will work at each stage of your business journey.
Whether you’re starting up a new partnership, or restructuring your current business, getting us involved is a step in the right direction to help maximise your growth. If you want to learn more about partnerships, or any of the other business structures, contact us today.