In Short
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Decide early between a partnership and a company based on liability, costs, control and investor plans.
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Partnerships aren’t separate legal entities; partners are jointly and severally liable—use a robust partnership agreement.
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Companies are separate legal entities, better for raising capital, but have higher set-up/ongoing compliance and directors’ duties—use a shareholders’ agreement.
Tips for Businesses
Map your five-year goals before choosing a structure. If moving from partnership to company, plan contract assignments, new registrations and tax implications (e.g., possible CGT). Document governance and dispute processes early to avoid stalemates and protect assets. Seek tailored legal and accounting advice.
Over two million businesses are currently trading in Australia. If you and your business partners are transforming your ideas into products or services, you will need to consider your business structure and growth ambitions. We have already looked at how you can start a business as a sole trader. Below, we explain the characteristics of a partnership and company and the process of changing your business structure to a partnership or company as you grow.
Are We Business Partners or in a Partnership?
We have all likely heard the word ‘partner’ tossed around in various contexts. In the small business space, a business partner refers to a person who is either:
- committed with you to a business venture; or
- operating a business with you as a partnership.
The difference is important. Individuals who are committed to a business venture can be business partners. Likewise, together you can choose from a number of different structures to establish the business, such as a:
- partnership;
- company; or
- trust structure.
On the other hand, a business partnership means that you have established a legal relationship with your partner with a partnership structure. As a result, you will have fiduciary duties towards each other.
Who is Responsible for What?
In a partnership structure, each partner is personally liable for the business’ debts. Unlike a company, a partnership is not a separate legal entity. The law treats you and the business as the same. You are also jointly and severally liable for the debts of your business partner(s). This means if one of your business partners cannot pay a debt they have incurred on the business’ behalf, you may need to pay instead.
Ultimately, a partnership structure means you will have joint and severable liability. Accordingly, you will be liable for the acts and omission of your fellow partners. This makes it crucial to enter into partnership with someone you can trust.
Continue reading this article below the formAdvantages of a Partnership
A partnership structure does have several advantages including low set-up costs and minimal ongoing costs. Unlike a company structure, you are not subject to directors duties but owe fiduciary duties towards your other partners.
Likewise, a partnership allows you to leverage resources and skills of each partner as you work towards a common business goal. Indeed, a partnership business structure allows for the sharing of:
- labour;
- expertise;
- skill;
- equipment; and
- financial resources.
Additionally, it is important that you have a partnership agreement in place that sets out the terms of the relationship and how the partnership will operate. Amongst other considerations, your partnership agreement should detail:
- What happens when a partner retires?
- What happens if my partner dies?
- How can new partners be appointed?
- How should disputes be resolved?
Should I Set Up a Company?
Altnernatively, you and your business partner(s) may decide to set up a company rather than a partnership. The key players in a company are:
- the directors who manage the company; and
- the shareholders who own the company but are not involved in the day-to-day operations.
We recommend that you speak with a lawyer to draft a shareholders agreement once you have two or more shareholders. You shareholders agreement should set out and answer the following questions, including:
- What happens when the company wants to issue new shares?
- How can directors gain shareholder approval on certain decisions?
- What happens if there is a deadlock in decision making?
- What happens if the shareholders are in dispute?
When choosing the most appropriate business structure, you should consider your growth plans. Likewise, ask yourself:
- Where do you want the business to be in five years?
- Are you looking for others to invest in your business?
- Do you want to raise capital?
Partnership vs Company Structure
If you plan to bring on investors and raise capital, a company structure is a good idea. The table below summaraises the key differences between the two structures.
| Partnership | Company | |
|---|---|---|
| Set Up Costs | Low set up costs.
| Higher initial set up costs. ASIC registration fee of $469 for a proprietary company |
| Ongoing Costs | Renewal costs for business names (same cost as registration). |
Higher ongoing costs due to an annual review fee for companies. ASIC must review your company each year, and late fees are imposed if you fail to pay or lodge your documents on time. |
| Liability | A partnership is not a separate legal entity. Each partner is personally liable for the business’ debts. |
The company is a separate legal entity to you personally. The law treats your company’s assets as separate to your personal assets. You could protect your personal assets even further by choosing to hold your shares in the company through a discretionary trust with a corporate trustee. |
| Duties | Fiduciary Duties | Directors Duties |
| Tax | Each partner pays tax on their share of the partnership profit at their individual tax rate | The company tax rate is currently 27.5%. There is no tax-free threshold for companies. |
The purpose of a dual company structure is to separate the assets and liabilities of your business. If there are any problems with your operating company (for instance, late payments of debts), the holding company protects the business’ assets.
Changing a Business Structure: Partnership or Company?
There are tax implications that you should consider before proceeding with a business restructure. For instance, the partnership may hold all of the business’ supply contracts. When you change to a company structure, you will need to assign those existing contracts to your new company or sign entirely new contracts with a third party. Changing from a partnership to a company also requires a new Australian Business Number.
If you have to move valuable assets from one entity to another, you may need to consider capital gains tax implications and should speak with your accountant.
The LegalVision Startup Manual provides guidance on a number of common challenges faced by startup founders including structuring, raising capital, building a team, dealing with customers and suppliers, and protecting intellectual property.
The guide includes 10 case studies featuring Australia’s top VC fund partners and leading Australian startups.
Key Takeaways
When you are looking to grow your business, changing from a sole trader to either a partnership or company structure can be beneficial to achieving your business goals. A partnership structure is ideal if you have someone in mind who you can trust, and who can bring additional skills and recources to the table. In that case, be sure to have a partnership agreement in place. Alternatively, a company structure is a separate legal entity and can provide greater asset protection. However, note your ongoing corporate obligations.
If you have any questions about restructuring or need assistance setting up your business, our experienced business lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
If you commit to a venture with another individual, you can choose to set up your business under a number of different structures. As a company, your business will become its own legal entity, and you can operate it together with your business partner. This is different from a partnership, which is a specific business structure that allows you and another party to operate the business together. There will be no separate business structure, meaning that you and your partners will be personally responsible for any profits or losses.
A partnership is a desirable option due to its low set-up costs and minimal ongoing expenses. Also, you do not need to worry about complying with the directors’ duties, although you will likely owe fiduciary duties towards your other partners.
Although a company will have higher set-up costs and higher ongoing costs, it is a good option if you want to bring on investors and raise capital. It also allows you to establish the business as its own legal entity so that the company’s assets are separate from your personal assets.
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