When you’re starting a business with someone else, it’s important to choose a structure that gives you the right balance of flexibility and control. Many of our clients at POP Business operate a partnership and it’s one of the most common structures in Australia. However, like other business models, it has its benefits and drawbacks. Let’s take a closer look at what these are.
What is a partnership?
A partnership allows multiple individuals, usually between two to twenty, to run a business together. Although it isn’t a separate legal entity, a partnership must have its own Tax File Number (TFN) and Australian Business Number (ABN). It must lodge an annual partnership income tax return too.
Advantages of a partnership
Pooling skills and resources
Every individual potentially brings something unique to the business. With a partnership, you can tap into the skills, experience, network and perspective a business partner has to offer.
When you go into a partnership, you can also combine resources in order to start off with a stronger capital base. Better finances allow you to invest in growth and would likely lead to greater borrowing capacity.
Low-cost set up and less paperwork
Compared to companies, partnership set-up costs are relatively low. Better still, there are few reporting and compliance obligations to follow, which means less admin and paperwork.
Doing things your way
You and your business partner can decide how the partnership works, for example whether each partner participates equally in making business decisions or if one partner is responsible for them all.
A formal written agreement is usually recommended as it clarifies each party’s role and how profits will be distributed.
Partners report their share of partnership income on their individual tax return and pay tax at their individual tax rate, making tax compliance quick and simple.
Disadvantages of a partnership
Each partner has unlimited liability for the partnership’s debts, which puts your personal assets at risk if the business fails. As each partner is considered an agent of the partnership, you could assume liability for actions of other partners.
Disagreements and discord
Working with others increases the risk of conflict over business decisions.
Having a formal agreement that details roles and responsibilities, expectations and operational guideline is recommended, however, you’ll still need to be flexible and be able to compromise.
You’ll have to share your profits even if you’re putting more into the business.
Every time a partner joins or leaves, you’ll have to dissolve the current partnership and begin a new one. This process can be costly and creates additional burden.
A final word
Ultimately, the right structure comes down to personal factors like how well you work with others, how much you value their input and whether you’re comfortable with risks around unlimited liability. what is a partnership business? The business you’re in matters too, as a different structure could mean qualifying for government incentives to get your business off the ground faster.