Setting up your small business as a partnership can offer real
pluses, providing access to more capital, possible tax breaks and greater expertise. It can also mean shared responsibility, potentially allowing one partner to take time off something that can be a luxury for sole traders. But it pays to be picky about whom you go into business with because a partnership can also mean double trouble. Partners are liable for their own and each others actions and, in a worst-case scenario, the poor decisions of your business partner could put your personal assets in jeopardy.
What's a partnership?
In a business sense, a partnership exists when two or more people (up to 20) go into business together with a view to making a profit. You can choose to operate under your own names or use a separate business name, which must be registered. The cost of registration can be up to $200, depending on the state or territory. Other than this, a partnership can be remarkably inexpensive to set up.
A partnership is not a separate legal entity, so while the partnership requires its own ABN and must lodge its own tax return, the partnership itself is not taxed. Any profits are shared between partners, and this is where a partnership offers the chance to minimise tax by allocating the lion's share of profit to the partner with the lowest marginal tax rate. This is common amongst husband/wife enterprises where one partner may also have a job outside the partnership, allowing a couple to minimise their overall tax bill.
Why do it?
Pluses of a partnership include a bigger pool of capital and the ability to share upfront expenses, as well as the option to spread the workload. It also means an increased skill base, possibly with partners bringing on board complementary skills like business acumen combined with sales and marketing know-how. Some partnerships may even have a "silent" partner who provides capital or business expertise without being actively involved in the day to day operations.
The most significant pitfall is that partners share joint liability for one another's actions. In other words, liability is unlimited and shared equally between partners. If something goes wrong and the business cannot pay its bills, creditors can turn to your personal assets (including your home) to make good any debts. This shared liability still holds even if your partner made a decision you weren’t privy to. The only way around this and it's not a foolproof solution is to be careful about who you go into business with. If you have any doubts on this score, it may be better to use a company structure (more on this next month).
Rob Vinci, runs Ace Landscape and Turf Supplies on Sydney's northern beaches in partnership with his brother Joe. "It's essential to have 100% trust in the person you're going into business with," Rob says. "If your partner isn't a family member, you’d be crazy not to have a partnership agreement drawn up."
How do you do it?
Depending on the complexity, you should allow upwards of around $500 in legal fees to have the conditions of the partnership formally spelt out in a contract. At a minimum your partnership contract should include:
- Date of commencement of the
- How profits, losses and capital will be shared.
- An "escape clause" outlining what happens if one partner wants out how much notice he or she should give and how the business assets will be divided up for a return of capital.
In terms of the daily running of your business, Rob explains, "A partnership works best when each partner has defined roles." Rob prefers to work behind the scenes administering the business while Joe is more of a "front man". According to Rob, "The only time we disagree is when we tread on each other's turf."
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