It is critically important to understand the different business structures available to you before you launch your business. In this series of articles, we are looking at the various business structures through which you can run a business, as well as their respective advantages and disadvantages. Last week, we looked at sole traders and this week, we turn to consider partnerships.
What is a Partnership?
A partnership is an association of two or more people or entities running a business together. It differs from a company as it is a relationship between the people/entities, rather than a separate legal entity. The partners jointly own the business’ assets and jointly share the business’ profits and losses. Except for limited liability partnerships, the partners are each fully responsible for all debts and liabilities incurred by the other partners (known as joint and several liability). This is regardless of whether each partner had knowledge of such debts and liabilities before entering into the arrangement.
What are the Advantages?
Advantages of running a business as a partnership include:
- Low start-up costs: Operating your business through a partnership is relatively straightforward and inexpensive to set up. You will most likely need to register a business name unless it is called the partners’ surnames (i.e. Lu and Joyce Accountants). We would also strongly recommend that you enter into a partnership agreement with your partners. The Agreement sets out the rights, responsibilities and obligations of each partner. It will also set out:
- Each partner’s role in the business,
- Their level of authority,
- Their share of the business’ profits and losses,
- Their expected financial contribution, and
- Clear procedures for resolving disputes and dissolving the partnership.
- Few formalities: There are few legal formalities or reporting requirements.
- Confidentiality: Partners’ business affairs are confidential.
- Responsibility: It is easy to share responsibilities (such as management and staffing responsibilities) between the partners.
- Capital: It is easy to access finance with the resources of several partners.
- Incentivise employees: Partnership structures can motivate high-calibre employees to work hard to receive a promotion to Partner.
- Teamwork: Combined expertise, skills and knowledge can provide a better business product or service. Two (or more) heads are better than one!
- Tax: There may be tax benefits to running a business as a partnership. For example, a partner’s share of the business tax losses may be offset against other personal income, subject to certain conditions. There may also be greater opportunities for tax planning, such as splitting income between family members. You should speak with your tax adviser or accountant for more information.
- Employees: There is no obligation to pay partners’ superannuation contributions or workers’ compensation insurance on earnings from the business because partners are not employees.
- Exiting: It is relatively simple to dissolve or exit a partnership and recover your share of the business.
- Change of structure: Should circumstances change further down the track, it is easy to change your business structure.
A partnership can be an advantageous business structure if you want a simple, cost-effective way to pool together the experience and knowledge of a few trusted experts.
There are, however, disadvantages that you should consider, and we will step through these in our next article, “Partnership Disadvantages”. It is sensible also to consider other business structures that, again, we will explore later in this series.
Choosing a business structure to operate your business through can be an exciting time. If you have any questions or require any advice on which business structure is most beneficial to your circumstances, please get in touch. One of LegalVision’s business structuring experts would be delighted to assist you as well as advising you on any other needs you business may have.
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