A good mate and I are starting up a business breeding and selling fat lambs. The business will only be small to start. Would a partnership structure work?
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Going into business with a business partner requires you to both get the set up right from the start.
One of the things you need to consider is what business structure to use. Apart from trading as an individual, the three most common business structures are partnership, trust or company. A partnership is formed when two or more people agree to go into business together. As an operating entity, a partnership is the least expensive structure to set up compared to a trust or company.
Although not required, most advisers would recommend having a written partnership agreement irrespective of the business partner being a third party or direct family. The agreement should set out clearly how the individuals, as business partners, intend to operate the business together.
It should cover topics such as (but not limited to), what role each of you undertake in the business, your respective share in partnership results, how decisions will be made, how funds can be drawn and how to resolve disputes if you are unable to agree.
Going into business with a business partner requires you to both get the set up right from the start.
A partnership is not a separate legal entity; accordingly, the partners are personally liable for all the debts and obligations of the business. This means your personal assets may be at risk if the partnership cannot meet its obligations. As part of the set-up of a partnership, you will need a tax file number (TFN) and an Australian business number (ABN). Your partnership must also be registered for GST if the annual GST turnover is likely to be $75,000 or more.
With regards to income tax, the partnership's profit (or loss) is split between the partners (based on the agreement) and included in their individual tax return. For example, if the partnership made a profit of $37,000 and you and your friend are equal partners, you would both include $18,500 in your tax returns. The same would be applicable if the partnership made a loss.
What we've outlined here is a brief summary of issues to consider with a partnership and it is important to note it is possible to out-grow a partnership structure. Just because you start with a partnership, it does not mean that will always be the best business structure for you in the future.
To explore if a partnership structure is the best fit for your business, please discuss with your accountant. If you would like more information on this topic or have a question, please email albury@findex.com.au
