Can I run my business as a partnership
Running a business as a Partnership or as a sole trader, you need to tread carefully.
These simple entities are popular, as they are easy to set up. They are also simple to manage and have fewer complications than a company or a family trust, making reporting easy to prepare. However, partnerships are most suited to businesses operated by family members, individuals or those working on a small scale.
It’s worth noting that a partnership can be formed between individuals, trusts, or companies. A sole trader is just you.
Joined together in partnership
The danger lies in the fact that the partners are individuals or a partnership of entities. This puts them at the same level, and they share the same legal liability as sole traders. This means that “YOU” can become personally liable for all partnership debts: yours and your partner’s.
For simple arrangements, a minimal number of partners is needed to form a partnership. Husbands and wives are easy. They often do not need a partnership agreement. A bank statement in the joint name will be sufficient evidence for the tax office to recognise that a partnership is trading. This is further evidenced by the ABN details recorded.
Friends and unrelated parties often start partnerships. While a partnership agreement must be executed, in our experience, it usually isn’t. In fact, no one even thinks about the partnership rules as they are so keen to make the business happen.
Dutton from Yellowstone
Sometimes it’s not a great idea to be in partnership at all. Take John Dutton from Yellowstone . When you like to make your own decisions, being in partnership won’t work. He is a strong-willed man, and what he says goes. If you’re a John Dutton, then don’t go into business with anyone, as it won’t work.
For many a business partnership doesn’t work due to misaligned goals. Your business partner might be old or have different end goals than you . Having an aligned end goal is critical. The end or exit plan needs to be discussed first before deciding whether a business partnership is right for you. We also know partners’ end goals can change over time, so, like a marriage, sit down and discuss the future.
Defining roles in a partnership or any business is crucial. It’s why sometimes being in a partnership business and partners tripping each other up can cause a partnership to break up. Define what each is good at and who’s doing what!
Disputes in partnerships over money
When a dispute often arises over money, happier times and past friendships go out the door. All handshake agreements are often forgotten, and conflict resolution can become protracted if no formal agreement exists.
In summary, a partnership agreement should clearly indicate what each partner contributes to the business, whether in the form of intellectual property, equipment, capital, or time. It should also outline how the profits will be split.
How often are partners paid profits, and what are their respective roles? There are no wages paid to partners in a partnership; therefore, this is often one reason other entity structures are more effective. When in a partnership, make sure money lent to the business and time spent on the business are tracked. Often disputes arise when one person is not working as hard as the other.
Does a business as a partnership pay tax?
Partnerships are considered separate entities and therefore do not pay tax. The profits the business makes are distributed to the partners.
The partners pay tax at their applicable tax rate. The good thing is that losses get distributed directly to the partner and, in many cases, can be offset against other income.
Likewise, the amount of loss that can be offset against a partner’s other sources of income is their share of the partnership loss and not the amount of money they contributed to the Partnership. The ability to distribute losses can be a tax benefit in the set-up stage of a business, likewise for those who act as sole traders.
Joint debts – DANGER
Like a marriage, under partnership law, each partner is jointly liable for the Partnership’s debts.
This is where danger can strike, as if one partner is financially unable to pay their share of the partnership debt; then creditors look to the other partners to make good. In the event that the business fails or the business’s assets do not cover a claim for damages against the business, each partner’s personal assets are available to meet the debts.
There are no disadvantages to a partnership relating to Capital Gains Tax. Partners can claim business tax relief on the sale of a business.CGT tax liability. This can be split when a partnership with more than two owners is involved in a business.
What are my business structure options?
Most business owners are aware of the importance of putting a fence around their business and protecting themselves from legal action for negligence, debt, and the ATO. This is why acting as a sole trader or in a partnership involves personal exposure and can be likened to walking a tightrope over a high cliff.
For some, starting as a sole trader or a Partnership is a cheap and easy option to put a toe in the water. However, if the business is successful, it is beneficial to stop and reconsider. I am using the most tax-effective and protective structure for me moving forward.
Reach out if we can help you further help on 95979966
