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  • #967023
    Chris Bates
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    Hey all your accountants and legalo’s out there!

    I’m in discussions with somebody about the possibility of joining forces and presenting a united front. We’re both very cautiously towing the partnership/company line, but I’ve discovered this magical thing called a Joint Venture.

    From what I know about it so far:

    • You remain seperate entities

    Oh wow that was a long list!

    My questions are:

    1. Is there any “legal” definitions as to the difference between a JV and a Partnership
    2. How are finances in a JV managed, who invoices the clients, what ABN is put on the invoices, etc?
    3. Does a JV pay tax like a Company would, or is that fed down the line to the two entities?

    I understand that a JV is more of a “temporary” thing, or when two entities are supporting each other but it’s not their main business.

    In this scenario, it WOULD be our main business/focus. Personally I see a JV as a safer way into a partnership, it’s lower risk – then after 12 months if things are going great, we would be comfortable with establishing a Company/Partnership.

    My main question is the management of finances. GST, Invoicing, Profit/Loss, etc. Does one entity take on the responsibility, or does the JV get it’s own separate legal entity.

    Cheers,
    Chris

    #1022706
    ray_223
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    Hi Chris,

    I’m no expert – I would actually say the opposite.

    Saying that companies I have worked for have done (or proposed a number of times) joint ventures.

    In the cases I have seen 1 company (the primary company) gets a contract with the customer and does all legal / accounting work. The minor company is involved in some way to actually produce the product and/or provide the service.
    There needs to be a legal agreement between the 2 joint venture companies as to how issues are resolved and money is paid.

    Joint Ventures tend to be made between 2 larger type organsiations and having both names on an agreement makes sense for getting the customers business.
    Otherwise the major company would just outsource the work to small “unknown” organisations without getting involved with the hassle of JV’s.

    I’d be interested in other responses as well.

    #1022707
    Chris Bates
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    So it’s just a “formal” way of subcontracting really.

    Are there any benefits of a Partnership vs Company? Apart from the costs of establishing the business, there is no need for capital.

    I’m confident everything would work out for the best, because we’re both open with each other enough to share our concerns and settle on a fair agreement. I was just thinking a JV would be an easier way to get it off the ground quickly.

    The whole idea is centralized around pooling our skills and knowledge – so that we can easily promote and market one business rather then compete as two.

    Feel free to give your thoughts on the best way to structure it.

    Cheers

    #1022708
    ray_223
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    I apologise for my wrong information – I just looked up:
    http://en.wikipedia.org/wiki/Joint_venture

    which also led to:
    http://topics.law.cornell.edu/wex/joint_venture

    Which indicates that it is a legal business.

    I doubt if anyone could suggest the best partnership type being legally qualified and sitting down with both parties for an hour to nut it out.

    A partnership is very easy to start and very flexible – it is a great way to start because startup costs are minimal.

    Companies are more complex and costly to start but you also get liability protection if things go south.

    I’d suggest looking up your closest BEC (http://www.becaustralia.org.au/) – have a talk to them and also ask for a free appointment with an accountant.

    good luck

    #1022709
    James Millar
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    There are unincorporated JV’s and incorporated JV’s. It was more often associated with sharing specified business outputs (such as mining operations) rather than a typical partnership arrangement where you both work together with a view to making a profit. The line does get blurred and you will need to be careful that your governing stakeholder agreement (and your ensuing business practices) contains adequate provision to ensure you avoid being considered a partnership.

    To be honest if you are looking a starting a business with someone but aren’t really certain of the relationship and interactions etc then perhaps you should reconsider if your co stakeholder is really the right party.

    If you are both fundamentally happy proceeding together then a solid governing agreement will eliminate many of the common management / stakeholder problems (decision making, sale, closure, new partners / shareholders etc).

    Very general tip – a partnership of trusts (non fixed) is very tax friendly and well suited to many small businesses that are not looking to make a dynamic exit within X number of years. They stream income (provided it isn’t personal services income) and capital gains well for the duration of operations. This structure is less ideal for a company with a more dynamic profile that requires a broader number of unrelated stakeholders (for fundraising) and a higher rate of retained profits. i.e there is no point distributing profits and reinvesting after personal tax rates if a 30% retained rate is available from a simple company structure. (a partnership and trust must distribute profits each year)

    Recap – dynamic high growth business with larger need for retained funds and ongoing stakeholder fundraising = generally company. More traditional small business relying on the disbursement of all profits, no reinvestment, no broader stakeholder group, no expectation of fundraising for expansion = small scale tax friendly structures like partnership of trusts etc.

    Again this is pretty general stuff. There will no doubt be specifics to your circumstances that make part of this redundant. Even so I hope this helps.

    Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900
    #1022710
    FletcherTax
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    Chris

    Have a look at the following link for more information:

    http://www.charteredaccountants.com.au/financial_reporting/analysis_of_aasb_standards/summary_of_standards/A122019342

    Basically, you report for your share of assets, liabilities, equity, income and expenses.

    But please do get specific accounting advice when considering this option.

    Janna

    #1022711
    Chris Bates
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    Thanks guys – it sounds like we’re going to be more suited to a partnership.

    James: It’s not a matter of concerns, it’s more a matter of caution. We’re both coming from a sole trader position with no experience with this sort of business. You hear to horror stories, so we want to do our best to avoid the common issues.

    Open lines of communication and lots of planning seems to be a good start! :)

    Cheers

    #1022712
    exstatic
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    I’m not expert in company structures at all..

    But what about something like a unit trust.. where you set up the company together and both hold shares in that company..

    From what I am aware, you can both own the same amount of shares in the company and be 50/50 directors.. with limited liability.

    #1022713
    Chris Bates
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    Yeah that’s what I was thinking originally, 50 shares each. Just a bit off put by the complexity of starting a company.

    Can partnerships be made into company’s later?

    #1022714
    FletcherTax
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    Chris,

    Please note in a partnership, the liability of the partners for the debts of the business is unlimited. You and your partner will be liable personally and for each other. (Basically like a sole trader structure but with more people)

    A strong Partnership Agreement would be highly recommended which addresses who does what, who pays what, how to exit, problem resolution etc etc.

    Janna

    #1022715
    CruzAccountant
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    Chris

    You can’t “transform” a partnership into a company. The partnership will need to cease and transfer the assets into the company. The company itself if another entity and will therefore need to apply for it’s own ABN, TFN, etc.

    The company might cost a bit more to start up and run, but it might be worth it for you in the long run.

    Then again, it depends what you’re doing, how much business you’ll be expecting, how much exposure you’ll have and how long you’ll run it.

    Richard

    #1022716
    Chris Bates
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    If all goes well, like any business, we’ll operate for a very long time and have lots of exposure! :P

    Janna: I understand that. I’ll keep it in mind, but with no big moves like financing equipment I think things should be alright in that department.

    What are the costs of establishing a company? I’ve heard about $600-$1000 in fees?

    So :
    Partnership – Easy to set up, but higher risk if things turn south
    Company – Harder to set up, but very little liability if things turn south

    What about ongoing operation? Tax obligations, etc.

    Haha sorry I’m clueless – I can fix your computer though? :P

    #1022717
    FletcherTax
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    Chris Bates, post: 26826 wrote:
    So :
    Partnership – Easy to set up, but higher risk if things turn south
    Company – Harder to set up, but very little liability if things turn south

    What about ongoing operation? Tax obligations, etc.

    Haha sorry I’m clueless – I can fix your computer though? :P

    May I correct you on the ‘harder to set up’ part – very easy to set up. $400 to ASIC plus an accountants/solicitors fee for set up. The harder part is the inflexibility of a Company. For example, you can’t simply go the bank account and take money out. Must be in form of wages, dividends etc. If wages – you need to pay workers comp, withhold tax from your employees and pay 9% super for example (and must be paid by strict deadlines). Companies are governed by the Corps Act hence more rules involved and hence the limited liability advantage.

    As for fixing computers – may take you up on that one day! Not my area of expertise.

    #1022718
    Chris Bates
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    Ahh ok – so in a partnership, we can make drawings (to an agreement, of course) rather then having to pay a wage. Versus in a company, it would have to be through PAYG etc.

    Is income for tax purposes in a partnership split across the owners evenly? Eg. 50k profit in a financial year is 25k each in income (based on ownership %s of course)? More in line with operating a Sole Tradership?

    I understand Company’s pay tax on its profit as an entity.

    #1022719
    akagrp
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    Hi Chris

    All great advice above, but from my professional experience irrespective of a partnership, a company or trust there should always be some form of legal document between the parties no matter how well you know them or get along.

    Have a read of http://nett.com.au/people/hr-and-training/design-a-partnership-for-profit/11643.html

    What you need to keep in mind is how much can you be at risk for, is the business structure the most tax effective for me.

    Some structures may cost a bit more to setup but what benefits could they generate for you over 1 – 2 years. You also need to look at can the structure easily allow for another business to come on board with causing large stamp duty implications, capital gains tax etc.

    Also as a partner in a partnership you really need to be very careful as the partner can commit the business to something you did not approve and be liable for your share.

    As Janna said a company would result in extra costs above a partnership such as workers compensation and super so all these need to be factored in.

    The issue you will have though under a partnership is that you will not be able to change the percentage from one year to another of what each partner gets, this could be an issue if Income & Expenses are not planned to be split equally, you can get over this but will mean you continue to operate as a sole trader along with partnership.

    Not that I am promoting speaking to your accountant, but this is not something you should jump in with consulting with them first, as a couple hundred dollars now could save you thousands.

    Good luck with your new venture

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