Which structure is best for you? – Partnerships

In our continuing series of reviews on business structures we now turn our attention to the partnership business structure.

Partnerships are relationships between partners carrying on a business in common with a view to profit. This is different to a joint venture where the joint venturers share gross income, rather than net profit, and incur their own expenses in deriving their share of gross income. A partnership is not a separate legal entity and partners are assessed individually on their share of profit. Effectively the partnership is not taxed in its own hands but rather, acts as a conduit through which the profit travels to be taxed in the partners’ hands. The partners in a partnership can be any entity (i.e. company or trust) or individual.

Advantages

  • Simple to set up
  • Cheap to set up with the only initial costs being registration of a business name if required and drawing up a partnership agreement.
  • Ongoing costs are cheaper than other entities and the entity is not governed by Corporations Law.
  • Losses made by partnerships are not stuck in the entity. They can be distributed to the partners.
  • There is some flexibility in income splitting with different notional salaries able to be paid to each of the partners.
  • General 50% CGT discount available to partners if asset held for more than 12 months.
  • Access to CGT small business concessions is available if the partners are individuals or entities that otherwise have access.
  • No tax ramifications of taking profits out of the business (as with companies) as the profits are deemed to be received by the partners each year whether drawn or not.

Disadvantages

  • Partners are jointly and severally liable for the debts of the partnership. One partner can end  up paying all the debts of the partnership if the other partners cannot meet them. In that regard, other assets held by the partner separate to the business are available to meet the outstanding debts of the partnership.
  • Succession planning can be a bit more difficult with the possibility in some circumstances for a new partnership, with new registrations and statutory requirements needed once a new partner is admitted.
  • If large profits are earned, the profits will be taxed at the highest marginal tax bracket (i.e.  49%) unless the partner is a company.

Summary

Partnerships are an extremely popular and useful structure for a business. It is simple, cheap to run and is ideal for small businesses where there is little risk involved. For larger businesses where exposure to risk is prevalent, company or trusts may be more relevant. Access to the CGT small business concessions is easiest of all the entities.