A partnership is an association of individuals or businesses that have come together for the purpose of carrying on a business, a project or even an activity, for a set or indefinite period of time. Entities create partnerships for various reasons, however, at its core partnerships (like most business structures) are created with a view to making a profit.
Regulated under the Partnerships Act 1982 (NSW) there are limitations on the maximum number of entities that can join to create such a structure. Usually the quota is capped at 20, although it is possible to have a larger partnership in certain situations.
In determining whether a partnership structure is right for you and your business needs, it’s essential to peruse the advantages and disadvantages offered by this particular model.
Advantages of a partnership business structure
- One aspect of a partnership business structure that makes it particularly appealing to individuals and businesses alike, is that it allows for the sharing of labour, expertise, skill, equipment and financial resources. The potential for ‘synergy’ and the leveraging of resources cannot be overemphasised.
- Unlike with other business structures (i.e. incorporated entities), the costs associated with establishing and forming a partnership are relatively cheap. Usually a partnership is brought into being via a written partnership agreement. Apart from this, setting up a partnership is as simple as registering a business name, obtaining an Australian Tax File Number and an Australian Business Number. Depending on the partnerships turnover, it may also be necessary to register for the Goods and Services Tax.
- A partnership is not a separate legal entity. Accordingly, there are certain tax benefits that can be obtained. A partner can use the losses of the partnership (to the extent of their partnership share) to offset the income they have earned from other sources.
- Partnerships are also a great vehicle for sharing profits and losses between partners. The ways in which profits and losses can be divided are infinite and this is but one factor which makes this type of business structure particularly appealing.
Disadvantages of a partnership business structure
Like with anything there are certain notable disadvantages that attach to the partnership business structure.
- As mentioned above, a partnership is not a separate legal entity. This means that each partner will be personally liable for the debts and negligence of the partnership. However, more so than this, a parent will also be liable for the acts and omission of their fellow partners. This is referred to as the principal of joint and severable liability.
- The biggest pitfall of a partnership is that it will cease to exist every time there is a change in membership. If you wish to add or remove individuals form the partnership, you must dissolve the present partnership and create a new one. This is done by executing a new partnership agreement.
- A partnership is not an effective vehicle for holding or amassing appreciating assets. A change in the makeup of the partnership has certain capital gains tax implications.
Would you like to know more about the partnership business structure and whether it is right for you? Our dedicated and friendly team of LegalVision lawyers would be happy to assist you. Call us on 1300 544 755 and find out how we can help today.