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When is a partnership structure ideal for a business? It offers flexibility to operate the business as individuals without the need of a company structure and strict reporting obligations. However, while it’s a good way to combine resources and expertise, a partnership comes with challenges as well.
A partnership is a business entity established by two or more people. It runs like a sole trader business structure and unlike a company, it follows a simple registration process with no paperwork or financial reporting obligations. It only requires an agreement between all parties, ideally a written partnership agreement that highlights roles, expectations, business and operational details.
There are three types of partnership: general, limited and joint venture. The most common type is the general partnership, which divides responsibilities, liability and profits among all partners based on the established agreement. A limited partnership divides input and liability as per the percentage of each partner’s investment in the business. Because of its scaling nature, this structure is ideal for short-term agreements. A joint venture is a general partnership with an agreed start and end date.
A partnership structure is flexible and simple to run. It brings opportunity for partners to pool their resources and different skills to the table. It requires less paperwork and allows individuals to claim business losses on their personal tax return. However, decisions are not equally made, which may result to disagreements in management.
It is difficult to add or remove partners; it can be costly to dissolve an existing partnership and start a new one. Profits are split between parties and each is taxed at an individual tax rate. It has unlimited personal liability and can be complex when the number of partners increase. It also does not have access to government grants such as early stage investor concessions or R & D tax concessions.
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A business partnership does not pay tax on its income but partners are required to lodge a partnership tax return which declares the income earned and deductions claimed through the partnership. This identifies the distribution of income among partners. They lodge this income under their individual tax file number and deduct losses from the business partnership on their individual tax return.
If you’re thinking of forming a partnership, ask yourself if you have complete faith and trust in the people you’re partnering with because you would need to seek for their agreement and approval on all business decisions. You need to know if more people are expected to join the business in the future and if anyone is expected to exit the business. Find out if you’re comfortable shouldering unlimited personal liability and a rigid tax structure.
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As you look for different ways to grow and improve your business, seeking professional advice could prove to be an important and helpful decision.
You can click here to speak to a business, accounting and bookkeeping firm. We also offer hospitality business consultation and mortgage services. We will give you a call to know more about your needs. We will explain to you how we can improve your business.
We would love to help you formulate investment strategies and streamline your processes to take your business to the next level. Our goal is to help you grow your business, find ways to invest more and increase your productivity.
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