Why Choose a Partnership Business Structure in Australia: Pro and Cons
If you’re thinking about starting a business or thinking about restructuring an existing one, you might be wondering if a partnership is the way to go. Well, in that case, let us find out everything about partnerships in Australia. We’ll explore the advantages, disadvantages, and everything in between to help you make an informed decision.
Key Highlights:
- What is a Partnership? A partnership is a business structure where two or more people share profits, responsibilities, and liabilities. Common types include General, Limited, and Incorporated Limited Partnerships.
- Pros and Cons: Partnerships are cost-effective, flexible, and allow resource sharing but come with risks like unlimited liability, potential conflicts, and shared debt responsibility.
- Is it Right for You? Partnerships suit small businesses valuing flexibility and shared expertise. Professional advice is essential to weigh the pros and cons for your goals.
What’s a Partnership Business Structure?
First things first, let’s get our heads around what a partnership actually is. The Australian Government’s business.gov.au explains that a partnership is “a business structure where two or more people or entities run a business together, but not as a company.”
It’s like sharing a flat with your mates, but instead of splitting the rent and chores, you’re sharing the responsibilities and profits of a business.
Legal and Tax Liabilities:
Now, before you start daydreaming about your future business empire, let’s talk about the serious stuff—legal and tax liabilities. In a partnership, you and your partners are jointly responsible for the business’s debts and losses. It’s a bit like sharing a slab at the bottlo – if your partners can’t pay their share, you’re stuck with the whole bill.
In matters of taxes, partnership is different. The business itself doesn’t pay income tax. Instead, each partner reports their share of the partnership’s income (or loss) in their individual tax return. It’s like a ‘pass-through’ arrangement—the business passes its income straight through to the partners.
Understanding the Legal Responsibilities:
Partnerships come with their fair share of legal responsibilities. You’ll need to register for an Australian Business Number (ABN) and Tax File Number (TFN). Not to forget, you’ll have to lodge an annual partnership tax return with the Australian Taxation Office (ATO).
Even though it doesn’t sound as amusing as planning your business launch party, it’s crucial to keep everything legal.
Taxes on Partnerships:
Speaking of taxes, let’s break it down a bit more. Partnerships in Australia are subject to various taxes, including:
1. Goods and Services Tax (GST): If your partnership’s annual turnover is $75,000 or more, you’ll need to register for and collect GST.
2. Pay As You Go Withholding (PAYG-W): If you have employees, you’ll need to withhold tax from their wages and report it to the ATO.
3. Fringe Benefits Tax (FBT): This applies if you provide certain benefits to your employees or partners.
Remember, while the partnership itself doesn’t pay income tax, each partner is responsible for paying tax on their share of the partnership income. It’s like splitting the bill at a fancy restaurant—everyone pays for their own portion.
Types of Partnership Business Structures in Australia
Now, let’s talk about the different flavours of partnerships available in Australia. There are three main types:
1. General Partnership (GP): This form of partnership is a typical one in which all partners involved are bound to debts and decisions concerning the business on an equal basis.
2. Limited Partnership (LP): In this setup, you have general partners who manage the business and limited partners who invest but don’t get involved in day-to-day operations.
3. Incorporated Limited Partnership (ILP): This legal structure is more sophisticated and often used for venture capital investments. It’s a separate legal entity, offering some protection to limited partners.
Here’s a quick comparison table to help you wrap your head around the differences:
| Feature | General Partnership | Limited Partnership | Limited Liability Partnership (LLP) |
| Liability | Unlimited for all partners | Limited for limited partners; unlimited for general partner | Limited for all partners |
| Formation | Simple, no formal registration required | Requires written agreement and registration with ASIC | Requires written agreement and registration with ASIC |
| Management | Equal management rights for all partners | General partner controls; limited partners have limited rights | Equal management rights for all partners |
| Profit Sharing | According to partnership agreement | According to partnership agreement | According to partnership agreement |
| Taxation | Not a separate legal entity; taxed individually | Not a separate legal entity; taxed individually | Separate legal entity; taxed as a separate entity |
| Suitable for | Small businesses with trust and willingness to share risk | Businesses where a partner invests capital while limiting liability | Businesses sharing risk and liability, maintaining separate legal identities |
The Pros of a Partnership: Why It Might Be Your Cup of Tea
Alright, let’s look at the bright side. Why might you choose a partnership? Here are some of the perks:
1. Sharing of Resources: It’s like carpooling for business. You can pool your finances, skills, and networks to get your venture off the ground.
2. Diverse Skills and Expertise: Two (or more) heads are often better than one. You can bring together different skill sets and perspectives to tackle business challenges.
3. Cost-effective to Establish: Setting up a partnership is generally cheaper and simpler than forming a company. It’s like choosing a backyard barbeque over a fancy restaurant—fewer worries, at minimal expenses.
4. Tax Advantages: Partnerships can offer some tax benefits. For example, you can split income among partners to take advantage of individual tax-free thresholds. Westcourt Chartered Accountants states that “partnerships allow for flexible profit-sharing arrangements, which can be beneficial for tax planning purposes.”
5. Flexible Management: Unlike companies with their formal board structures, partnerships can be more flexible in how they’re run. It’s like choosing your own adventure in the business world.
The Cons of a Partnership: The Not-So-Great Bits
Of course, it’s not all sunshine and rainbows. Here are some potential downsides to consider:
1. Unlimited Liability: In a general partnership, you’re personally on the hook for the business’s debts. It’s like cosigning a loan for a mate – if things go pear-shaped, you’re both in trouble.
2. Discord and Disagreements: Remember those housemate disputes over whose turn it was to do the dishes? Now imagine that, but with high-stakes business decisions. Partnerships can lead to conflicts if partners don’t see eye to eye.
3. Profit Sharing: While this can be a pro, it can also be a con. You’ll have to share the fruits of your labour, even if you feel you’ve put in more work.
4. Dissolution of a Partnership: If a partner wants out or passes away, it can cause major disruptions to the business. It’s like trying to keep a band together when the lead singer quits.
Partnership vs. Company: Which Offers More Benefits For Your Business?
Now, you might be wondering how partnerships stack up against companies. Here are some key differences:
1. Liability: In a company, shareholders have limited liability. In most partnerships, partners have unlimited liability.
2. Tax Treatment: Companies pay corporate tax rates, while partnerships’ income is taxed in the hands of individual partners.
3. Continuity: Companies have perpetual succession, meaning they continue to exist even if shareholders change. Partnerships can be more vulnerable to changes in membership.
4. Regulatory Requirements: Companies generally face more regulatory requirements and compliance costs than partnerships. According to LegalVision, “While partnerships offer flexibility and tax advantages, companies provide better asset protection and may be more attractive to investors. The choice depends on your specific business needs and goals.
When to Choose a Partnership?
So, when might a partnership be the right choice for your business? Here are a few scenarios:
1. Small businesses: If you’re starting a small venture with a few trusted partners, a partnership could be a good fit.
2. Shared expertise: When partners bring complementary skills to the table, a partnership can leverage these diverse strengths.
3. Simplified management: If you prefer a less formal management structure than what’s required for a company, a partnership might suit you better.
As ClearTax Australia points out, “Partnerships can be ideal for professional services firms, where partners contribute different areas of expertise to serve clients collaboratively.”
Choosing the right business structure is a big decision, and there’s no one-size-fits-all answer. Partnerships offer a unique blend of flexibility, shared resources, and potential tax advantages. However, they also come with risks like unlimited liability and potential conflicts between partners.
Before you take the plunge, it’s crucial to weigh the pros and cons carefully. Consider your specific business goals, the nature of your industry, and your long-term plans. And remember, while this article provides a general overview, it’s always a good idea to seek professional advice tailored to your situation.
Speaking of which, if you’re feeling a bit overwhelmed by all this information, why not have a chat with the experts at Future Advisory? They can help you navigate the complexities of business structures and find the best fit for your unique circumstances. After all, getting the right advice at the start can save you a lot of headaches down the track.
