Originally Posted by designscoop
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
There are various options available to you.
Three of these options have already been mentioned: Partnership
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. Company
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. Conclusion
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.