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’ve 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 and 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 can’t pay a debt they have incurred on the business’ behalf, you may need to pay instead.
What are the Advantages 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.
It’s important that you have a partnership agreement in place that sets out the terms of the relationship and how the partnership will operate. This legal document will detail:
What happens when a partner retires?
How can new partners be appointed?
How should disputes be resolved?
Should I Set Up a Company?
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.
If you are a small business owner, you’ll likely be both a director and shareholder.
We recommend that you speak with a lawyer to draft a shareholders agreement once you have two or more shareholders. A shareholders agreement sets out the following:
when the directors need shareholder approval on certain decisions;
what happens when the company wants to issue new shares;
what happens when there is a deadlock in decision making; and
what happens if the shareholders are in dispute.
When choosing a business structure, you should consider your growth plans and 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?
If you plan to bring on investors and raise capital, a company structure is a good idea. We have summarised the key differences between the two structures in the table below.
Set Up Costs
Low set up costs.
One year registration fee is $34.
Three-year registration fee is $80.
Higher initial set up costs. ASIC registration fee of $469 for a proprietary company
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.
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.
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.
If you are going to hold valuable assets in your company and intend to expand your business, you should look at a dual company structure.
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 ABN.
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.
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