Operating your business as a partnership
Partnership Business Structure
Choosing which business structure to set up your business is a big decision. Each business structure has its advantages and disadvantages. Before making your final decision, it is important to undertake research to ensure you choose the best option for you and your business.
Previously we examined the advantages and disadvantages of being a sole trader. Next we will be looking at the merits of a partnership business structure.
Operating your business as a partnership means operating your business with one or more other people as partners and receiving joint income. Should you choose to establish a partnership, you and your partner(s) are personally responsible for the partnerships debts.
Tax Implications: A partnership is not a separate legal entity and does not pay income tax on income received by the partnership – each partner pays tax on their share of net partnership income
CGT Discount: Partners are able to access the 50% CGT discounts as they hold an interest in each partnership asset as an individual.
Sharing of burdens: The workload, losses and legal responsibilities are shared among the partners.
Simplicity: Partnerships are relatively simple and easy to run and are also less costly to establish than a company or trust.
Control: The partners own and operate the business so this means they can make all the decisions. However, this control is sometimes difficult to manage because some decisions may require unanimous or joint consent from partners.
Liability: As a partnership is not a distinct legal entity, the partners have joint liability. This means that, if any of the partners do not have enough money or assets to pay their share of the debt, the other partners may be personally liable.
CGT Disadvantages: The law treats an individual partner’s share in the partnership as representing a direct fractional interest in each and every asset of the partnership.
Asset Exposure: Generally there is no asset protection, meaning that the partners’ personal assets may need to be used to repay the business’ debts.
Tax Return: Whilst the partnership doesn’t pay tax, it has to lodge an annual partnership tax return to show all income the partnership earned and deductions it claimed for expenses incurred in carrying on the partnership business
Continuity of Business: If there is a change in the membership of partners this will usually alter the partnership agreement unless the agreement stipulates otherwise, affecting the continuity of the business.
It’s important you get your business off to the right start by choosing the structure that suits your needs. Stay tuned for next month’s article where we look at the advantages and disadvantages of setting up a company.
If you would like more information on how to set your business up as a partnership, or would like professional advice in regards to the various types of business structures our dedicated team of accountants and lawyers can assist you. Call us today on 02 9223 9166 or 1300 QUINNS or submit an online enquiry.