If you are starting a business with one or more others, choosing a partnership business structure might seem like the logical option. But there are both advantages and disadvantages you must be aware of before making the choice.
Previously in this article series on choosing the right business structure we examined the advantages and disadvantages of being a sole trader. Here we will be looking at the merits of a partnership business structure.
Operating your business as a partnership means running your business with one or more other people as partners and receiving joint income. Should you choose to establish a partnership, you and your partner(s) are personally responsible for the partnership’s debts.
Tax Implications: A partnership is not a separate legal entity and does not pay income tax on income received by the partnership – rather, each partner pays tax on their share of net partnership income.
CGT discount: Partners are eligible for the capital gains tax (CGT) discount of 50 per cent, as they hold an interest in each partnership asset as an individual.
Sharing of burdens: The workload, losses and legal responsibilities are shared among the partners.
Simplicity: Partnerships are relatively simple and easy to run and are also less costly to establish than a company or trust.
Control: The partners own and operate the business so this means they can make all the decisions. However, this control is sometimes difficult to manage because some decisions may require unanimous or joint consent from partners.
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Liability: As a partnership is not a distinct legal entity, the partners have joint liability. This means that if any of the partners do not have enough money or assets to pay their share of the debt, the other partners may be personally liable.
CGT disadvantages: The law treats an individual partner’s share in the partnership as representing a direct fractional interest in each and every asset of the partnership.
Asset exposure: Generally there is no asset protection, meaning that the partners’ personal assets may need to be used to repay the business’ debts.
Tax return: While the partnership doesn’t pay business tax, it has to lodge an annual partnership tax return to show all income the partnership earned and deductions it claimed for expenses incurred in carrying on the partnership business.
Continuity of business: If there is a change in the membership of partners this will usually alter the partnership agreement unless the agreement stipulates otherwise, affecting the continuity of the business.
It’s important you get your business off to the right start by choosing the structure that suits your needs. The next article in this series will look at the advantages and disadvantages of setting up a company.
For tips on running a successful business partnership, click here.
Do you operate your business as a partnership? What advantages or disadvantages have you encountered?