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Choosing the Right Business Structure – a Closer Look at Partnerships

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Choosing the Right Business Structure – a Closer Look at Partnerships

I’ve been writing a series of articles on business structures, and this instalment takes a look at partnerships.

In their simplest form, partnerships are used as the perfect business structure for couples who both play an active full-time role in their business. Partners share in the profits and take equal responsibility for any debts the partnership incurs. This seems a natural choice for couples whose personal finances take a similar approach.

Partnerships can, however, consist of two or more entities. They can be individuals or companies, or a combination of both. A company, for example, may form a partnership with two sole traders. They’ll register a business name and obtain an Australian Business Number (ABN) for the partnership.

How are they different to a joint venture?

A joint venture is where parties come together for a limited purpose. Rather than an ongoing business, a joint venture is more like a ‘project’, and for that reason, you wouldn’t require a separate ABN. Joint ventures are still required to be registered with the Australian Securities and Investment Commission (ASIC), but the name of the joint venture is registered using the existing ABN/Australian Company Name (ACN) of each party.

Back to partnerships.

  • An effective partnership brings together the skills and resources of complementary parties to create a new business. In the right combination, it enables partners to play to their strengths.
  • They are quite easy to set up, but a solid partnership agreement should be factored into your establishment costs.
  • Partnerships can employ staff, and although they are legally obliged to pay staff superannuation, partners often overlook making those payments for themselves. As in the case of the Sole Trader, this can have serious ramifications on long term wealth if left unchecked.

Fellow Smallville contributor and Virtual CFO, Amanda Fisher says:

One of the main benefits for partnerships is that profits are allocated to the partners and tax is paid by each partner based on their own tax position and the entity which is the partner in the partnership. This is especially useful where the partners have very different financial positions.

Partnership agreements.

Although a formal agreement isn’t legally required to register your partnership, they’re commonly used – and for good reason. Like any agreement that starts over a drink and ends with a handshake and a few notes on the back of a serviette, much of the detail isn’t discussed (or remembered). At the very least, a sound partnership agreement will consider:

  • How profits and losses should be managed.
  • Roles and responsibilities.
  • A dispute resolution process.
  • How and when your business will close.

Even if these issues have been canvased, it’s human nature to avoid difficult conversation topics like unexpected death or serious injury, so the guidance of a professional at this point can be invaluable. Drew Browne has written a great Smallville article on this topic, What’s the back-up plan if your business partner died tonight?, that is well worth the read.

Two types of partnerships:

Partnerships can range in complexity, but the two most common types are referred to as ‘normal partnerships’ and ‘limited partnerships.’

Normal Partnerships bestow joint ownership on the partners; allowing them to participate in the daily running and management of the business. These types of partnerships don’t have to be registered with ASIC, but their business name must be registered if it’s anything other than the names of the partners. For example, ‘J & P Roberts’ won’t need to be registered as a trading name, but ‘J & P Roberts Plumbing Services’, will.

Limited Partnerships have two types of partners; a ‘general partner’ and a ‘limited partner’ (also known as a silent partner). This structure allows ‘limited partners’ to invest in a partnership without having any involvement in the day to day running of the business. The advantage for the general partner(s) is that they maintain active control of the business while benefiting from the cash injection.

The downside is that the limited partner’s liability is ‘limited’ to the sum they invested. Any additional losses will fall squarely on the shoulders of the general partner(s). Limited partnerships must be registered with The Department of Fair Trading, and application forms can be obtained from the Australian Business Licence and Information Service (ABLIS) website.

Choosing the right structure is something to get sorted, from day one. Access whatever free information you can from The Department of Fair Trading website, but nothing beats the advice of a solicitor and accountant who can discuss what’s best for your personal circumstances.

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