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New Business / Partnership ... Not Sure What?

Discussion in 'Starting your journey' started by designscoop, May 13, 2009.

  1. designscoop

    designscoop Member

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    Hello there,
    My sister and I both have Design degrees and along with day jobs do the occasional freelance job.
    We are not earning much in regard to the freelance (less than 30k per annum so far) but we are working to build this business.

    We are keeping the earnings we individually get.

    We both want to use the same business name for our freelance work, so would have thought a partnership was the way to go but speaking to various people, they advise that unless the earnings are split 50/50 this is not the way to go ? It is more like 80/20 at the moment... Accountants seem to just raise their eyebrows? We just want to use the same business name?

    I am currently earning a larger percentage than my sister in regard to freelance.

    how can the business be structured. It is much to small at this point for a company and I dont know what a joint venture is? or is there something else?

    Any adivse would be greatly appreciated

  2. Tristan Boyd

    Tristan Boyd Member

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    If I were you I would bite the bullet and form a company. It will save you a lot of hassles in the long run. That way you can both own a share in the company, but draw salaries based on the amount of work you put in.

    You can get a cheap company set up online at Cleardocs - http://www.cleardocs.com/

    Alternatively, you could act as a sole trader, register a business name, and invoice everything through that name.

    Then you could have your sister invoice you for whatever she needs to be paid, so she effectively works for you as a contractor.
  3. designscoop

    designscoop Member

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    Thanks for the quick reply Tristan.
    I will check out that site.

    I don't think we are ready for the company yet but that does look like a pretty cheap way to make it that way.

    So pretty much NOT a partnership you think? I might look to the sole trader option.

  4. Loreden

    Loreden Member

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    I agree with tristan on his point you can start a company and get saved on lots of hassle :)
  5. ray_223

    ray_223 Active Member

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    I was under the impression you could split a partnership up anyway you wish. You can draw a simple contract up between you and your sister and if you are both happy with it, then that's how the partnership runs.
    You should include items such as what if one or the other wants to exit from the partnership, what if one brings in far more work or works more then the other.

    I would consult another accountant.

    If you go through a local Business Enterprise Centre they should be able to offer you a free visit to an accountant and may be able to offer additional advice.

    You can also start up as a sole trader (plus register a business name) and your sister can work for you, another option depending on how committed your sister is.
  6. JagO1213

    JagO1213 Member

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    There are various options available to you.

    Three of these options have already been mentioned:

    It is cheap and easy to set up and yes you can have a partnership agreement in place that states how you split the profits. Under this structure you and your sis could set up your own individual ABN's and issue invoices to the partnership for all the work you undertake. You may wish to retain some funds in the partnership to pay for common costs such as marketing, admin costs etc etc...

    The downside of this arrangement is that liability is not limited to the assets of the partnership. Both partners are equally liable for the debts of the partnership.

    The upside is that the liability is limited to the amount of shares issued by the company. However in start up companies generally banks will ask for personal guarantees from directors anyway so kind of negates that benefit.

    Tax is only 30% compared to Individual rate which can be as high as 49% or thereabouts).

    The setup and compliance costs may make this option less attractive for small businesses.

    Sole trader
    As discussed you can set up as a sole trader and you sis can invoice you through her personal ABN for amount of work she does under the business name which is owned by you.

    The downside of this set up is that you own the business name and not your sister which means in the future this may cause problems between the two of you.

    This structure is not dissimilar to a partnership, the main difference being that the business name is owned by the partnership and therefore when/if you sell the business or transfer the business into a company structure, you will equally be liable for any capital gains tax (I will come back to this)

    The fourth structure which hasnt been mentioned is a Trust.

    Disctretionary Trust

    Cost of set up is minimal and you and your sister can act as beneficiaries of the trust and get the end profits of the business in whatever percentage you desire - usually depending on who has the lower tax would take the larger chunk (but it need not be that way).

    Again the business is run under thename of a trust and you can issue invoices individually to the trust for the work you do and whatever is left over at the end can be split up as you both see fit.

    You will need to appoint a Trustee, but this can again be you and your sister in patnership.

    Capital Gains Tax

    If at some point you want to transfer the business into a company from any other structure, that structure will be liable for Capital Gains Tax as the business will be considered to have some value. The value may be zero or if you transfer assets along with the business name the ATO may consider the business name to have some value other then zero. If this is the case you may be liable for CGT.

    I am not a tax expert so I suggest you seek professional advice.

    Partnership would be the way to go given its simiplicity, however consider what you want to do in the future and that may point you to setting up a company.

    If you need any clarifications please let me know.

  7. Andrew Lowe

    Andrew Lowe Member

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    Hi Michael,

    I've been reading through the replies to date, and thought I might add some comments to hopefully bring some clarity to having a partnership.

    Firstly, you can most certainly have a partnership agreement which specifies who gets what from the partnership.

    Secondly, considering the business is just starting up, I think it would be easier to invoice directly from the partnership rather than have two separate ABNs which subsequently invoice the partnership. This will reduce compliance costs for you and I think you would agree is unnecessary for your current situation.

    Once the business is built up, you can then transfer the business assets into a company. There are a number of "rollover" concessions for tax purposes which would be available to you to minimise/negate and tax.

    Let me know if you need any further information, always happy to help.



    Andrew Lowe
    CA ATIA M.Acc B.Com

    Integrated Alliance
    Chartered Accountants and Business Advisors
    Phone: +61 2 9212 0696
    E-mail: [email protected]

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