A partnership is a relationship between persons carrying on a business in common with a view of making a profit. A typical example is two or more persons pursuing their trade or profession together over several years and sharing the profits of their enterprise. This article will outline the advantages and disadvantages of operating under a partnership business structure.
Partnership Structure
The most common form of partnership is a general partnership. This is where all partners are equally responsible for the management of the business. Likewise, each has unlimited liability for the debts and obligations it may incur. There are also limited partnerships and incorporated limited partnerships.
Advantages of a Partnership Business Structure
Leveraging Resources
One aspect of a partnership business structure that makes it particularly appealing is that it allows for the sharing of resources, including:
- labour;
- expertise;
- skill;
- equipment; and
- financial resources (including greater borrowing capacity).
Cost-Effectiveness
Unlike other business structures, the costs associated with establishing and forming a partnership are relatively cheap. Usually, a written partnership agreement brings a partnership into being. Apart from this, setting up a partnership is as simple as:
- registering a business name; and
- 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.
Tax Benefits
A partnership is not a separate legal entity. Accordingly, there are certain tax benefits that you can obtain. For example, a partner can use the partnership’s losses, to the extent of their partnership share, to offset the income they have earned from other sources. The effect is reducing their assessable income for the relevant financial year.
Sharing Profits and Losses
Partnerships are also a great vehicle for sharing profits and losses between partners. You can arrange this in flexible ways.
Continue reading this article below the formDisadvantages of a Partnership Business Structure
Personal Liability
Generally, each partner will be personally liable for the debts and liabilities of the partnership. They will also be liable for the acts and omissions of their fellow partners. This is known as the principle of ‘joint and several liability‘. Notably, you and your business partner will have unlimited liability for the partnership’s debts.
Accordingly, if one partner’s poor management incurs a significant debt on behalf of the partnership, each partner is liable for their proportionate share of the partnership. Likewise, in the event a partner cannot repay their own share, each other partner must cover each defaulting partner’s proportion.
Tax Detriments
As a partnership is not a separate legal entity, this means that proceeds will be assessed in the recipient’s own name, alongside their other income streams. As a result, if the partnership is increasingly successful over time, you may realise your higher income is causing your taxation liability to move into higher brackets. This is different to a private company or trust structure which has tax benefits.
Furthermore, a change in the makeup of the partnership has certain capital gains tax implications.
Membership Limitation
Usually, the maximum number of partnership members is 20. In comparison, a company structure can allow for a great number of shareholders, particularly public companies.
Membership Changes
A partnership will cease to exist every time there is a change in membership. Therefore, if you wish to add or remove individuals from the partnership, you must dissolve the present partnership and create a new one.
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Key Takeaways
A partnership is a common way to structure a business if you and other persons wish to carry on a business in common with a view of making a profit. However, there are advantages and disadvantages to operating under a partnership structure.
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Frequently Asked Questions
A partnership is a type of business structure that joins two or more parties together to carry on a business, project or activity. Under this arrangement, profits and losses are distributed evenly amongst the partners.
There are multiple benefits to a partnership business structure. First, it allows you to best leverage your human resources, finances and capital throughout the partnership. Second, it is a cost-effective business structure given the low costs of registration and low cost of maintenance.
If one partner gets the partnership business in trouble, each of the other partners can be personally liable for the partnership’s debts. It is also problematic that you must dissolve the present partnership and create a new one whenever you wish to add or remove partners.
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