At the beginning of a new business venture, it is important to think about the best kind of business structure that you can set up. But it becomes crucial when you’re launching a company with another person, it’s essential to select a structure that offers the ideal balance of control and flexibility.
Many entrepreneurs prefer to begin their new business in the form of a partnership, and it’s one of the prominent types of entity in Australia. But, as with many other types of business structures, it comes with its advantages and negatives.
Before starting a partnership business in Australia, it is essential to have a clear understanding of the business concept, target market, and the necessary resources. Furthermore, it is crucial to carry out market analysis and formulate a detailed business strategy.
Through this article, we will be going to provide you with an in-depth guide to the various pros and cons of partnership business in Australia. Let’s look at these.
What is a Partnership?
Partnerships are a way you can start a business of another, without the obligation of registering an organization. By forming a partnership in Australia you’ll operate an enterprise in partnership with several individuals.
Partnerships are a fantastic method of running an enterprise with others however, you must ensure that you’re on the same level. All of you will receive the same ‘cuts from the profits and will be equally responsible. Numerous corporate businesses like law and accounting, work under this type of structure.
Although partnerships are inherently informal in the sense that they are not formal, having a partnership agreement is vital. A contract can clarify the obligations of each partner, as well as the procedure for moving forward should there be any disputes.
Distinct Pros & Cons of Partnership business in Australia
Pros | Cons |
Shared decision-making | Unlimited personal liability for debts and losses |
Increased financial resources and expertise | Potential for disagreements and disputes among partners |
Greater flexibility in management and operations | Limited life of the partnership |
Ability to share workload and responsibilities | Difficult in transferring ownership and management |
Partners can pool their resources and skills | Difficulty in raising capital compared to other business structures. |
Partners can share the risks and costs | Joint and shared liabilities among partners. |
Potential for tax benefits through income splitting | Potential for loss of control by one partner or group of partners. |
Partners can provide emotional support and motivation | Personal differences or conflicts may negatively impact the business |
Ability to attract and retain talent through partnership agreements | Partnership dissolutions can be complex and time-consuming |
Increased credibility with customers and suppliers | Lack of continuity in the partnership structure |
How to Create a Partnership?
A partnership is among the easiest methods to form a company and is fairly simple to create.
- In a partnership you will need to select a name which is not taken by or enlisted by a distinct company.
- All companies operating in Australia are needed to enlist for an Australian Business Number (ABN).
- If the partnership’s annual turnover is $75,000 or more, it must register for GST.
- Although not legally required, a partnership agreement is highly recommended.
- Depending on the nature of the partnership’s business, it may need to apply for various licenses and permits at the local, state, or federal levels.
- The partnership should open a separate bank account for the business to keep its finances separate from personal finances.
- Register for Pay-As-You-Go (PAYG) withholding tax, as this tax, must be paid to the Australian Taxation Office (ATO) regularly.
Advantages of Partnership in Australia
1. Resources and skills are pooled
Through a partnership, you will be able to benefit from the expertise, experience network, perspective, and network that a business partner can bring to the table.
2. Cost-effective setup and less paperwork
Compared to corporations and partnerships, the costs of setting up a partnership are quite affordable. Even better as there aren’t many requirements for reporting and compliance to adhere to this means that there is less administration and paperwork.
3. Performing things as per your own understanding
Your business partner and you will decide on how the partnership will operate, such as whether the partners are equally involved in business decisions or the one partner is responsible for the entire partnership.
4. Straightforward taxation
Partners are required to report their share of income from partnerships on their tax returns as individuals and pay tax according to the rate of their tax compliance, it is quick and easy.
Disadvantages of Partnership in Australia
1. Unlimited liability
Each partner is liable for the debts of the partnership, which could put your assets in danger if the company fails. Since each partner is an agent for the company, you may be held accountable for the conduct of the other partners.
2. Discord and disagreements
Collaboration with other people increases the chance of conflict regarding business decision-making. A formal agreement that defines the obligations and roles along with expectations and operating guidelines is highly suggested, but you’ll need to remain open and willing to make compromises.
3. Profit sharing
You’ll need to share the profits even when you’re investing more money into your business.
4. Dissolution of a partnership
When a member decides to join or leave the partnership, you’ll need to dissolve the existing partnership and start another. This is a costly process and can add a new burden.
Various Taxes on Partnerships in Australia
Every person who is a part of the partnership must declare their part of the profits of the partnership on their tax return for personal use and submits it under their tax file number.
- Goods and Services Tax (GST): Goods and Service Tax is applied to most goods and services in Australia and is currently set at a rate of 10%.
- Pay income tax on partnership income: Partnership income is not taxed at the partnership level in Australia. Rather it is taxed individually according to each partner’s tax rate.
- Provide PAYG payment summaries to partners: Partnerships are required to provide PAYG payment summaries to each partner at the end of the financial year. These summaries detail the partner’s share of the partnership’s income and the amount of tax withheld from their share.
- Pay-As-You-Go (PAYG): The partnership must withhold tax from the salaries of workers and other staff. The PAYG tax must be paid to the ATO on a regular basis.
Conclusion
The best structure is based on personal considerations such as how well you interact with others, how you appreciate their contributions, and whether you’re comfortable taking the risks associated with the possibility of unlimited liability.
There are a variety of pros and cons to partnership business in Australia. But, it is one of the most convenient methods to conduct business with other people. It is also important to be aware that you’ll still be accountable for the financial losses and liabilities of the company.
If you’re not sure whether a partnership is the right choice for you, consult with professional experts from OnDemand International who can help you.
FAQ’s
Common partnership business examples are Lawyers, physician groups, Real estate investment companies, and accounting companies.
The partnership does not pay tax on its income. However, you have to file an annual partnership tax return in order to report the earnings that the company earns.
It is true that there is a requirement to apply to get the Australian Business Number (ABN) through the Australia Business Register.
Minimum two members as partners. Maximum of not more than 20 or fewer partners.
