Running or starting a business solo can be challenging. You have fewer resources, more accountability of tasks, a more limited skill set, and less time to knock out tasks – compared to businesses with more human power. That’s why some sole traders choose to go into business with a trusted partner. A business partnership can be an incredibly empowering business structure. For starters, you have another person to motivate and encourage you, keep you accountable, and onboard extra tasks to get projects completed more efficiently. Further, you have more resources to pool together and a larger combined skill set. While bringing on a partner can provide a little extra comfort, safety, and solidarity, there are some potential pitfalls that you’ll need to consider. Sometimes, things don’t always go as planned. That’s why Shoebox provides a guide on everything you should know before entering into a partnership. Read on to learn more about business partnerships before you make the leap and join forces.
What is a Partnership?
According to the ATO, a partnership is a "group or association of people who carry on a business and distribute income or losses between themselves.” Similarly to a sole trader structure, the individuals in the partnership are liable for any legal or financial consequences, much like a sole tradership. It’s important to note that working in a partnership doesn’t mean the business is a company; this is a different business structure altogether. To learn more about the sole trader and company structures and how they differ, read our recent article for small businesses
Overall, a key difference between a company and partnership is the risk liability each individual faces. The business does not function as a separate legal entity, which means that if the business is suffering a loss, so is the individual. That being said, you have another individual or several other individuals to share that responsibility, unlike a sole trader ship where you are solely responsible for the loss. In regards to the documentation and legal processes of starting a partnership, it’s pretty easy and inexpensive. It’s a matter of registering an ABN and a company name – as well as any additional registrations that may be specific to your business. Regarding the taxation process, it’s a touch more work – there’ll be more on that later.
Key Elements of a Partnership
- Relatively easy and inexpensive to set up
- Minimal reporting requirements
- Requires a separate tax file number (TFN)
- Requires an Australian business number (ABN) and use it for all business dealings
- Shared control and management of the business
- Requires each partner to be responsible for their own superannuation arrangements
- Business must register for GST if turnover is $75,000 or more
Types of Partnerships
There are three types of business partnership structures in Australia – General, Limited, and Incorporated Limited. Ultimately, they vary in the level of liability and responsibility each partner takes in the operation of the business. Here’s how each structure works, according to Business.gov’s
- General partnership (GP): This is where partners incur all liabilities and responsibilities for the debts and obligations the business may incur. All partners are distributed and responsible for all liabilities as per discussed between each other. Each partner, however, may choose to share a different percentage of interest in the business.
- Limited Partnership (LP): The structure provides less liability for partners in the sense that the partners invest into the company but do not play an active role in the daily runnings of the business and are usually passive investors. The liability is limited to the amount of money they have invested in the company
- Incorporated Limited Partnership (ILP): The investors or partners in the business have limited liability for the debts incurred by the business. However, it must consist of at least one general partner as they will incur all liability if the business cannot fulfil its obligations.
Setting up a Business Partnership
No written agreement is legally necessary when setting up a partnership. However, experts recommend that partners create their own written agreement to determine how the income and losses will be distributed among members as well as how decisions are going to be made. This kind of agreement should be established before the commencement of business. Many law firms and legal companies provide partnership templates for individuals going into business to use and complete – this added expense can be utilised as a business expense as well. Apart from working out each role and percentage of interest in the company and decision making processes, it’s important to understand some of the setup costs and procedures. The following are some of the common protocols involved in business planning.
Protocols in Business Planning
- Market research
- Preliminary accounting and legal advice
- Tenancy or lease bond and stamp duty
- Telephone and internet installation
- Statutory requirements such as obtaining licences and insurance
- Power connection and bond
- Signage and initial marketing
- Equipment, fixtures and fittings purchases
- Staffing and wages
- Initial raw materials and/or stock purchases
Paying Tax in a Partnership
There are two important aspects of lodging a partnership tax return – the partnership tax return and the individual tax return. It’s important to do both – but with so many people, who does what?
How Tax Returns Work in a Partnership
- You don’t pay income tax on the income earned – each partner pays tax on the share of the net partnership income each receives.
- Requires a partnership tax return to be lodged with the Australian Taxation Office (ATO) each year
As a business partnership isn’t a separate legal entity, it is taxed separately. Tax is paid, instead, by each individual based on their share of the business’ income in addition to any other personal income on their tax return. However, two forms need to be lodged during a tax return for one individual in the partnership – a partnership tax return, which lists all of the business’s net income (assessable income minus the allowable expenses and deductions), and an individual tax return, which lists the individual’s share of the net income. The partnership tax return should be lodged by the resident partner (meaning they reside in Australia) whose individual interest in the partnership is the greatest.
Calculating shared income and expenses can be challenging among some partnerships. Thankfully, there are many capable bookkeepers and tax agents that can make tax time a stress-free time for small businesses. Shoebox hires qualified and experienced bookkeepers
to take the complexity of tax returns out of the hands of business owners. It’s also a great way to wrap your head around the tax system and its processes as a new business. Check out the services we can provide for you
as a small business.
The Advantages and Disadvantages of a Partnership
Let’s look at the overall pros and cons when it comes to business partnerships.
- Low start-up costs and easy of establishment
- The spread of liability (compared to a sole trader)
- More capital is available for the business compared to a sole tradership
- Greater borrowing capacity allowing more rapid growth
- Other high-value employees can be made partners
- Splitting the income results in lowered tax on the business profits
- It is easy for businesses to change the legal structure from a partnership if need be
- Limited external regulation
- No financial reports are needed to be provided therefore there is more privacy
- Unlimited liability for partners (in general partnership)
- Less capital is available for the business compared to a company limited
- Due to the flexibility, and low regulation, disagreements on decision making can be common
- Each partner is an agent for the partnership and is responsible for the decisions of the other partner
Dissolving a Partnership
All good things must come to an end, as they say. For one reason or another, all partnerships get dissolved at some stage. Thankfully, dissolving a partnership is just as easy as entering into one. This process simply involves one partner providing a written request to dissolve the partnership to the other partners – although there are other ways (see below). If the remaining partners wish to continue the partnership, one of them must notify the ATO of the changes to the partnership within 28 days. They may continue as a reconstituted continuing entity – using the same TFN and ABN – as long as one member of the partnership is a continuing partner from the previous partnership, otherwise, a new partnership will need to be registered. Sometimes dissolutions can be messy, so it’s important to get some legal assistance in the initial setting up of the partnership as well as the dissolution.
Other Instances Where a Partnership is Dissolved
- All partners agree to dissolve
- The life of the partnership has expired if a partnership agreement was in place with an end date
- A partner dies or becomes bankrupt
- The partnership becomes illegal due to operations of the business
When it comes to business structures, partnerships are incredibly common, and for good reason. As long as you’re confident in the people you’re joining forces with, you can reap many benefits from joining a business partnership. To safeguard yourself and partners from any legal and financial consequences, enlist the help of legal and financial specialists throughout your business journey. For all your tax and accounting processes, seek assistance from the highly skilled bookkeepers from Shoebox Books. Find your local bookkeeper
today or contact us
to learn more about our services.