A partnership business structure works best when there is more than one person (up to 20 people) that decide to go into business together.
There are two types of partnerships,
general and limited.
A general partnership shares equal responsibility and ownership amongst partners, and has unlimited liability when it comes to debt.
A limited partnership on the other hand is where the liability starts to shift. There is still a minimum of two general partners, where they share equal unlimited liability, however, the additional partners can have reduced authority and liability. A step beyond this is an incorporated limited partnership for instance where a business has high-risk projects.
Liability
Similar to a sole trader, a partnership business structure is not a separate, and therefore the partners become personally liable for the debts of the business.
In the case where there is a limited partner, they are only liable for the financial amount they have contributed to the business. This is in contrast to the above where we talk about general partners.
This also applies to any business conducted outside of the state [as laws differentiate between them], as the limited liability rule still applies.
Directorship
There needs to be a minimum of two general partners who are not deemed to be employees of the business, and therefore super is not being payed on their behalf. Where this is the case, it’s important to look at your contributions strategy.
If there is a change of partner positions, it has a direct effect on the liability each one holds. If a general partner becomes a limited partner during the course of the business, their liability is not limited to anything that arose before the changeover. Similarly if a limited partner becomes a general partner, the limitation on their liability applies to anything that arose before the change, but ceases to apply from any forthcoming date.
Whilst the limited partner options sounds like the far safer and more appealing option out of the two, they are also restricted to their operations within the business. They are not allowed to have a role in managing the business, otherwise they become liable as if they were a general partner.
Business Name
The good thing about this is that if you are operating under your own personal names, there’s no need to register your business name, because again, your business is not a separate entity to your person. If you do come up with a great new name you want to use though, it needs to be registered (and our tip is to make sure you can get a domain name to match before you do as well!).
TFN’s and ABN’s
Even though the directors [general partners] are personally liable for the businesses debts, the business has its own separate Tax File Number (TFN). Because the partners are equally split, they can’t use a personal TFN, so the business is registered for its own TFN. It also requires an ABN.
Let’s talk about TAX
You [the director/partner] don’t have to pay income tax on the income that the business has earned [yay!]. Although, it doesn’t mean you pay no tax. Each partner has to pay tax on the net income they receive. This is paid at the individual’s marginal tax rate [although you may also be eligible for the small business tax offset – so that’s a bonus].
The partnership business structure also allows you to split your income amongst the partners easier than other structures. This becomes handy where you see those profits are starting to rise and a great tax planning strategy to make sure you’re not in the top tax bracket.
How about goods and serviced tax (GST)? Well if your partnership happens to have a turnover of $75,000 or more then you need to be registered for it.
Okay, so if you don’t have a lot of employees yet, and you are paid mostly from your personal effort, time and expertise, then your deductions are treated a little differently. This is referred to as ‘Personal Services Income’ as means your income is generated by you personally, and not by the partnership business structure.
So, is a partnership the right business structure for you?
- Do you have a business partner?
- Are you currently being taxed in the highest tax bracket?
- Are you good at managing your funds?
If you answered yes to the above then you might be looking at a partnership for your business structure. Have a chat to us just to be sure, and to create the best tax strategy for you to get the best return come June.
If you want to check out the partnership act, you can find it here.
If a partnership business structure dosen’t sound like the perfect fit for you, maybe have a look and see if a sole trader or even a company business structure might work better for you.