Home – New Forums Starting your journey Partnership or Sole Trader? (Tax Implications)

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  • #979542
    SuzzyGal
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    Hoping I can get some feedback on this.

    I am going into small business with my friend who I trust 100% <- That's important to remember. I already own my own business and on the second to highest tax bracket, my friend is a low income owner and on the lowest tax bracket. You would probably need to crunch some numbers on this to know for sure, but going on the above, would it be worth considering having only my partners name in as being a sole trader and not going in as a partnership? This will stop myself for needing to declare any more income and paying more tax. And because he is a low income earner, there will be lower tax overall. We would be splitting the profits 50/50 but I am aware of what could go happen if things go sour and the risks of only him being on the business registration, but again I do trust him 100%. Or will this not even work at there and there will be legal repercussions which I have not thought about it when it comes to taking earnings? I know the obvious is ask an accountant but I do not have one yet – although will soon but want to try to educate myself a little firstly. The taxes for my own business have been very simple to date and I’ve easily been able to do them myself, but it’s when these type of uncertainties come where I have no idea.

    #1115051
    marketingweb
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    The only way I can see this working is if he is a partner of the other kind! Or in other words, husband, defacto, partner in life – and you thus share all your living expenses etc.

    Forgetting the above, you can’t legally take a 50% cut of the profits if you aren’t a 50% owner so I don’t see your plan working. Unless of course instead of a drawings you are paid it as a wage, a consulting fee, or something like that – in which case it will affect your income anyway.

    Of course it’s technically possible to have him pay you your half in cash, but two problems – one it’s illegal, and two he will then be paying tax on your drawings and/or profits.

    I’m not an accountant or a lawyer, but there could be better options setting up a company, perhaps backed by a trust. I’m fairly sure it would be better for you, but how exactly that would work is a little out of my pay grade, so you probably need professional advise

    #1115052
    SuzzyGal
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    Thank you for your reply. I will look into the trust part. Because my own current business is just as a sole trader, I had also considered making this new venture a part of my existing business and then moving to a company for the 30% tax break. But this definitely something for the accountants.

    As for the 50/50 cut… It would have been my partner (talking strictly business) would still honestly declare the entire profits with the tax office, but then giving me the half of the profits afterwards. I/we were only thinking this way because he is on a lower tax bracket that in the overall scheme of things, it may have meant less tax is paid on the business (If my theory is correct).

    #1115053
    marketingweb
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    SuzzyGal, post: 129090 wrote:
    As for the 50/50 cut… It would have been my partner (talking strictly business) would still honestly declare the entire profits with the tax office, but then giving me the half of the profits afterwards. I/we were only thinking this way because he is on a lower tax bracket that in the overall scheme of things, it may have meant less tax is paid on the business (If my theory is correct).

    I really think you need to speak to a good accountant.

    The “giving me half the profits afterwards” doesn’t work unless you are talking cash in hand, and in that case it’s potentially tax fraud – or if you do it on the books, then you have to pay income from this anyway and haven’t gained anything.

    There are lots of good tax minimisation stratagies out there, but I don’t think your plan works as one of them – as I said, would strongly reccommend speaking to an accountant.

    Matt

    #1115054
    Chris Brodie
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    SuzzyGal, post: 129090 wrote:
    Thank you for your reply. I will look into the trust part. Because my own current business is just as a sole trader, I had also considered making this new venture a part of my existing business and then moving to a company for the 30% tax break. But this definitely something for the accountants.

    As for the 50/50 cut… It would have been my partner (talking strictly business) would still honestly declare the entire profits with the tax office, but then giving me the half of the profits afterwards. I/we were only thinking this way because he is on a lower tax bracket that in the overall scheme of things, it may have meant less tax is paid on the business (If my theory is correct).

    Hi SuzzyGal,

    You are going into business with another person and while it is a good start that you have trust in your partner you still need to step back and look at this business and how it fits with your current situation. You talk about making this new business part of your existing business. However you should question why you would risk your existing business when a seperate entity maybe more appropriate.

    You should both seek professional advice as to the best way to structure the new venture for the benefit of you both. Having the best structure will allow you to obtain the best tax advantage. There are too many variables which need to be considered and discussed. A succinct answer to your original question isn’t really possible so please do get some professional advice.

    #1115055
    James Millar
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    From my understanding of the facts some obvious issues come to mind

    1. The structure will dictate the true legal ownership of the business and obviously the degree to which you are formally documented as an owner will effect your entitlement to a potentially valuable asset (the business).

    2. In the sole proprietor scenario – if the other partners tax situation changes you could easily be left with poor outcome all round. Social security issues, higher tax rates if it starts performing well, no formal ownership stake – all bad. Per 1 above, you also have no enforceable entitlement under this scenario. There is nothing illegal with this provided the partner reports the income in full and pays the appropriate tax. What they do with the after tax monies is not of concern to the ATO. I doubt you would have exposure to assessable income problems when the money is handed over as there is no income earning type activity (even though you are getting regular receipts). You’d be surprised what the ATO will contend if they see regular / semi receipts.

    3. Generally we’d recommend against a discretionary / non fixed trust for non-family businesses or businesses where there may be the need for partial exit or entry of stakeholders. No fixed entitlement means no fixed ownership value. If you trust this person 110% and if you don’t think long the term business capital value will be significant then perhaps this is an option. If something happens to you will they honour that arrangement with your next of kin?

    4. Transferring your existing business to a company could trigger capital gains tax. Be careful with this.

    My advice is that whilst it’s tempting to take the cheaper (easier) road and pursue tax outcomes as a priority over commercial outcomes, at the end of the day it’s about making money for each of you. There is little point creating a valuable business only to have to contend with commercial problems with its structure and also at the risk of losing what is clearly a valuable friendship.

    Find a good accountant (there are several here located in each state). Let them make a balanced recommendation based on your objectives. Follow their advice.

    Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900
    #1115056
    ray_223
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    [QUOTE=SuzzyGal;129090
    As for the 50/50 cut… It would have been my partner (talking strictly business) would still honestly declare the entire profits with the tax office, but then giving me the half of the profits afterwards. I/we were only thinking this way because he is on a lower tax bracket that in the overall scheme of things, it may have meant less tax is paid on the business (If my theory is correct).

    First, what you are saying is illegal – so DON’T DO THAT!

    Second, the whole “trust thing” – I have seen houses stolen from people from someone they trust. Trust is easy if there isn’t much at stake.

    Thirdly, I’d love to be in the top tax bracket! Plan and operate your businesses with good sound business knowledge and reasoning – once you have good income worry about tax reduction.

    #1115057
    SuzzyGal
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    I really appreciate all the replies. For some reason that ‘sole owner’ 50/50 split made sense in my head, but after writing it right, it definitely won’t work.

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