Choosing the right business structure part 2- Partnership

In this series of articles, we are covering off the different types of business structures. In Part 1, we learnt about Sole Traders, uncovering the advantages and disadvantages of this business structure, as well as the tax implications.

In this article, we will cover off partnerships.

What is a partnership?

A partnership involves 2 or more partners that jointly own the business’s assets and liabilities, and make decisions relating to how the business is run. From a legal perspective, all the partners are treated equally.

A written partnership agreement is not required but can help prevent misunderstandings and disputes about what each partner brings to the partnership, sets out how income and losses are to be shared and set out how the business should be managed.

If there isn’t a written agreement, all partners will equally share in profits and are equally liable for any losses.

A partnership has no separate existence from the partners who make up the partnership.

Advantages of a Partnership

• This business stricture is easier and less expensive to set up over a company
• Partners can carry out business under a trading name
• Partners can tap into the resources and expertise of several people
• Partnerships are quite simple to administer
• Partnerships allow greater flexibility with holiday and sick leave when compared to sole traders
• It’s relatively simple to change a partnership to a company later stage
• CGT small business concession and 50% CGT discount for sale of assets held by a partnership are available.

Disadvantages of a Partnership

• Each partner is liable for debts incurred by other partners. This is referred to as ‘jointly and severally’ liable, or ‘unlimited liability’. Each partner can be sued and be required to pay the full amount of any debts of the partnership. If one or more partners is unable to pay, the other partners are required to pay the debt
• All partners have a say in the management of the business, which may be a disadvantage if agreement can’t be reached. Personal differences may complicate partnerships
• Partners cannot transfer their ownership to someone else, unless all partners agree
• Partnerships can be challenging to dissolve and leave on good terms

Key tax obligations

• A partnership has its own TFN
• It must lodge an annual partnership return showing income and all deductions, and how these are distributed to the partners
• Must apply for an ABN
• Must register for GST if the annual turnover is over $75,000, provides taxi, limousine or ride sourcing services regardless of turnover or wants to claim fuel credits
• The partnership doesn’t pay tax, instead each partner reports their share of income or loss in their own tax return

Check back soon for Part 3 of this series, where we cover off Trusts.