Getting hitched: The pros and cons of business partnership
When it comes to deciding on your business structure, there’s often more to it than simply thinking about its tax effectiveness, legal requirements, and set-up costs.
If you’re debating about forming a business partnership, consider the following when it comes to deciding if you fly solo or have other people involved.
A business partnership in Australia means you’ll be jointly running the business with another person or a number of people (up to 20). There are two types of partnerships – general and limited. Partnerships are governed by the relevant law depending on your state or territory. They have an Australian Business Number (ABN), Tax File Number (TFN), be registered for GST if the annual income turnover is $75,000 or more and will lodge an annual tax return.
Between business partners, the equity can be equal or different. For example, one partner may have a 60% share, the other 40%. Partners share profits and losses based on the agreed split. They are all jointly liable for any debts in the partnership. It’s important to remember that a business partnership is like a sole tradership in this regards. It is not a separate entity to you, the individual, as a company would be. Similarly, each partner is responsible for their own superannuation arrangements – you are not an employee of the partnership.
Some pros of business partnership
Lower cost to set up
"Sometimes a business spouse is harder to separate from than a marital one! "
Compared to setting up a company structure, a partnership is relatively low cost. Registering for an ABN is free. If registering a business name applies to you, business name registration is $35 for one year or $82 for three years.
A burden shared…
Let’s be blunt, running a business can be hard work. There are major highs and also serious lows. Having another person (or persons) involved in the business means you have someone with which to share the journey. It can be less lonely compared to a sole-tradership, especially when you’re in start-up phase. Many people forget that they are often walking away from a shared workspace and co-workers when they leave a j.o.b to set up a business. For a natural extrovert, that can take some getting used to. Having someone in partnership can make it more social.
Two (or more) heads are better than one
No single person brings all the necessary skills to run a business. You need sales, marketing, administration, accounting, budgeting, IT, HR and legal expertise. Going into partnership with someone who has complementary skill sets to yourself can be useful. It also means you have another set of eyes and opinions when it comes to business ideas and brainstorming. Having a different perspective offers new creativity.
Some cons of business partnership
Unlimited Liability: Unlike a company structure, which is a separate entity to you the individual, a business partnership has unlimited liability. So if something goes wrong – let’s say you are sued by a customer or supplier – your personal assets are not ring-fenced or protected. Similarly, if one partner is at fault, he or she does not shoulder all the responsibility. All partners are liable.
Less autonomy: With a business partnership, you need to take the aims and objectives of the other partner(s) into account. You may have differing opinions. It’s always good to have a frank and open conversations about your personal business objectives before you enter a partnership in case they don’t align. You may be passionate about building the business into a multinational empire. Your business partner may have a smaller vision, closer to home.
Rewards versus reinvestment: Nothing can bring out the differences in people faster than money! Linked to lack of autonomy, in a partnership you agree to split losses and profits. Yet, in order to grow, your business may require profits to be reinvested, particularly in the early years. Yet if one partner seeks faster rewards, he or she may prefer to pull out the share of the profits due at the end of each financial year, rather than put them back into the business.
The transfer/ termination of partnerships
There are likely as many ex-business partner horror stories as there are ex-spouse horror stories. Sometimes a business spouse is harder to separate from than a marital one! If things go sour, it may be many years before either of you have the cash to buy out the other. The result can be a toxic relationship that can drain time from your schedule and conflict with your vision of how to build and manage your business.
Faced with toxicity, it’s always worth asking yourself: why are you seeking a business partnership? Is it because you feel you don’t have all the skills? If so, there may be other ways of sourcing them, such as pulling together an informal board of advisors.
Or does it ‘feel’ more secure to have someone in the business boat with you, sharing the financial risk? If that’s the case, is it better to seek financial resources elsewhere and run it yourself? If your excuse is can’t service the business loan, have an honest look at your business and ask yourself if it’s viable.
Ultimately, if you do decide a business partnership is for you, ensure you have a clear, strong, partnership agreement in writing. This is not something you ought to be figuring out once you have started the business, or have scrawled on the back of a napkin over a few drinks after you’ve come up with a market-exploding business idea.
A partnership agreement is the legal document that defines each person’s rights and responsibilities, as well as provisions for running the business, both day-to-day and in the event that someone dies or the partnership dissolves. It’s one of the most important things you can do before you start investing time and money in a joint venture.
Some key clauses for a partnership agreement:
Decision-making: decide how you will make decisions, especially in those cases when it’s an important topic and there is no consensus. For the big decisions you may stipulate decisions have to be unanimous and without it you cannot move forward.
Capital contribution: who is putting in how much to the business? What will you do if you need more capital? The partnership agreement can also stipulate responsibilities if one partner is the ‘workhorse’ (ie: doing the bulk of the work) and the other is the ‘gifthorse’ (ie: the one doing less everyday work but ponying up the money)
Distribution: decide in writing when partners will be able to take money out of the business and how much needs to be reinvested.
Death and Disability: bad things can and do happen. Insurance, trusts, and wills all come into play on this topic. Be clear at the outset and ensure all your loved ones are aware of your intentions and agree.
Dissolution: never a pleasant topic, and few partnerships like to talk about this one. Yet it’s vital. Think ahead to a time when you and your partner(s) may not be in agreement about the business. That is not the time to start arguing about the exit strategies. The time to figure out exit strategies is at the beginning when everyone is working to make the business take shape.
Are you in a business partnership? How do you measure the pros and cons?