Partnerships
An increasing number of professionals choose to start a business with another person in a Partnership structure. Joining forces with others in a business can make a good idea better, as increased shared expertise, resources, new business efficiencies, and potential reach can be difficult for an individual to build quickly. Partnerships are considered a business of between 2 to 20 people all pooling their expertise, working better together, and sharing ownership of the business.
What does a Partnership do?
A general partnership is a business that’s established with 2 or more owners (partners) and accelerates the business potential through shared resources and the pooling of shared efforts and focus, but it also increases the exposure to people-based risks.
While Partnerships are not separate taxable entities (and therefore don't pay tax on their income), however, you must lodge a partnership tax return to declare the partnership income, deductible expenses, and the income distributions of the net income (or loss) between the partners. Instead, each partner includes a share of their income or loss on a personal, corporate, or trust tax return, and this is then taxed at personal income rates (or corporate rates in the case of corporate partners).
- For the majority of small business owners, the majority of their wealth is tied up in their business — and they are heavily dependent upon their Partners and Key Business people — and this is inherently risky.
While the main identifier of a Business Partnership is the shared control and management with other partners, the other identifier is increased personal risks and liability. If a general partnership is undocumented and uninsured, the unlimited liability of each Partner is further expanded with each additional partner you bring on.
In addition, for each new partner you bring into your business, you increase your exposure to people-based risks.
- These people-based risk exposures are what we call The Numbers of Business.
Here are some of the Statistical Risks of Business Life we all face:
The Numbers of Business | Additional Statistical Risks for Business Owners Working with Multiple People
The odds of a business partner dying or becoming totally disabled before age 65
| Number of Business Partners |
# 1 Partner Dying |
# 1 Partner Dying or now Disabled |
||
| 2 partners | 35 in 100 | 52 in 100 | ||
| 3 partners | 47 in 100 | 67 in 100 | ||
| 4 partners | 57 in 100 | 77 in 100 | ||
| 5 partners | 66 in 100 | 84 in 100 | ||
| 6 partners | 77 in 100 | 89 in 100 |
Why you need to actively manage 'The Numbers of Business' in a Partnership
The overwhelming majority of small business owners who go into business with another cite as a primary motivation their desire to provide more time and resources for their families. This naturally means some time needs to be put aside to develop a strategy to protect their families, from their business.
When a business runs on its people, the statistical risks to those same people will impact the business, unless there is a plan in place to manage them. Because a general partnership is a business that’s established with 2 or more owners (partners), straight away the people-based risks are increased.
- This is why healthy partnerships have a documented Partnership Agreement, up-to-date Debt insurance, and a strong commitment to communication and culture.
Advantages and Disadvantages of a Partnership Business Structure
There are pros and cons to think about, along with tax implications, when deciding if a general partnership could be the right business structure for you.
Advantages
- Relatively easy to set up (in fact, you may only need a verbal agreement to form a partnership) and dissolve the partnership structure.
- A partner's share of the business tax losses may be offset against other personal income, subject to certain conditions.
- Business Partners are not employees so superannuation contributions (SG) and Workers' Compensation insurance are not compulsory for business partnerships.
- Easier to obtain Finance as you're not relying upon a single person's income or personal assets as loan security.
Disadvantages
- A Partnership is not a separate legal entity.
- A Partnership is not designed to protect the partner's individual assets.
- A general partnership brings with it an unlimited personal liability.
- All Partners are personally liable for the debts incurred by the partnership – legal and illegal – meaning there is no personal asset protection.
- There's always a potential for dispute between Partners over profit-sharing, administrative control, and the general direction of a business.
- Changes in partnership ownership can be difficult and generally require a new partnership to be established.
- Death and retirement don’t automatically absolve Partners from existing debts and other liabilities of the partnership.
A special note about Unlimited Liability Risks
- Under a General Partnership, you will be held jointly liable for any shortfall if the business fails or one Partner can't afford to pay their share of any debts.
- You are also jointly responsible for all and any debts your partner incurs on behalf of the business; whether legal or illegal, whether with or without your knowledge.
- If there is no documented partnership agreement in place, each Partner is deemed to own equal sharers of each asset.
Pro Tip: Create a Partnership Agreement before entering into a partnership that outlines amongst other things, each partner's: role and level of authority, financial contribution, whether personal assets be used for loan security, a procedure for dispute resolution, a procedure and an agreement for ending or resigning from the partnership and the level of personal liability is agreed to for each partner.
One more key thing to think about is protecting your business and or your business partners in the event something happens to you. Life insurance for your business can be personally or corporately owned and provides a one-time, tax-free payout for your business if you die.
How we can help
Partnerships have unique unlimited risks that need to be managed to protect each partner and their families, from the partnership business.
Contact us for a confidential chat about your needs.
Frequently Asked Questions Partnerships
How is a Partnership taxed?
Unlike a company, partnerships and not taxed. You and your business Partners pay tax separately on the profits made through the partnership. Each Partner gets their income based on the percentage interest in the partnership. They then add that income to their personal tax returns.
What is the difference between a Partnership and a Joint Venture (JV)?
- A partnership shares profits or losses between themselves. For example, if a two-person partnership made $500k in profit, each share would be in accordance with the partnership interests for 2 people - 50/50.
- A joint venture shares the output.
- For example, if person A runs an electronic waste collection business and person B run a precious minerals extraction business, then person A gets the waste for recycling while person B gets to extract the components holding precious metals.
- Unlike a partnership, each party retains its own separate identity.
- Joint ventures are more likely to be short-term for a single or isolated transaction, whereas a Partnership can carry on an ongoing business
Can Partnerships be a combination of companies, humans, and trusts?
Partners are only either 'humans' or 'companies' only.
Related: Business types we work with
- Sole Traders – Tradies, Entrepreneurs, side gigs, and Solo business owners
- Partnerships – Multiple people working together to do something interesting
- Company & Multi Owner Businesses – Australia's most popular small business structure
