The Pros & Cons Of A Partnership As A Business Structure
If you’re looking to go into business with someone, the chances are that you might be looking at using a business structure known as a partnership. A partnership is a type of business structure that is made up of two or more people who distribute income or losses between themselves and is a fairly popular form of structure amongst those looking to develop a business.
It offers ease and flexibility to run your business as individuals, eliminates the need to create a company structure and avoid reporting obligations. You’re also not going into creating a business by yourself, which can be an added bonus for some and reduces some of the initial financial burden and uncertainty of the setup.
Just as there are advantages to choosing to set up a partnership, one must also examine the disadvantages.
A partnership generally exists between two or more parties, so disagreements in management may occur, and decision-making may never be truly equal. It can be difficult to add or remove partners into and out of the partnership, and adding more partners can make the partnership more complex to manage.
Partnerships also generally do not receive access to many government grants (barring special exemptions).
A partnership business structure may be the structure for you to employ as they possess the following key elements:
- Partnerships are relatively easy and inexpensive to set up
- Have minimal reporting requirements
- Require separate tax file numbers
- Must apply for an ABN and use it for all business dealings
- Share control and management of the business
- Don’t pay tax on the income earned, as each partner pays tax on the share of the net partnership income that each receives
- Do require a partnership tax return to be lodged with the Australian Taxation Office (ATO) each year
- Require each partner to be responsible for their own superannuation arrangements.
There are three main types of partnerships that you may have come across in your own research. Each one has advantages and disadvantages that you may want to take into account when considering what would be the best suited to your situation.
A general partnership is where all partners are equally responsible for the management of the business. For any debts and obligations that may be incurred by the business, each partner has unlimited liability for them.
A limited partnership is made up of general partners whose liability is limited to the amount of money that they have contributed to the partnership. Those involved in this style of partnership are known as limited partners who are usually passive investors without a role to play in the day-to-day management and running of the business.
An incorporated limited partnership is where the partners involved in this type of partnership can have limited liability, but at least one general partner must have unlimited liability. If the business cannot meet its obligations, that general partner (or partners) become personally liable for the shortfall and debts.
Each state and territory has different legislation and regulations that must be abided by when setting up a partnership. Learn what is legally required from you prior to setting up your partnership, or discuss with us what you may be obligated to do.
