Starting a partnership may be a high-yielding decision whether you are in the business game or setting your sights on a new business
A partnership business structure is an incorporated business with 2-20 owners. The individual owners work together to achieve the business’s goals, sharing responsibility and profits.
In a partnership, control or management of the business is generally shared. A partnership is not a separate legal entity, so you and your partners are liable for all debts and obligations of the business. A formal partnership agreement is standard but not essential (it is a recommended course of action).
The specifics of partnership laws will vary depending on your state or territory.
There are two types of partnerships – general and limited. A general partnership is where all partners are equally responsible for the day-to-day management of the business.
Whereas a limited partnership has at least one general partner who is responsible for controlling the day-to-day operations and is liable for the debts and obligations of the business.
The passive partners in this type of partnership are called limited partners. Limited partners generally contribute a defined amount of capital, and their liability is limited to the amount of capital that is contributed.
Consider the following advantages and disadvantages before starting or joining a partnership:
A partnership structure is easy and inexpensive to set up. Unlike operating as a sole trader, there is increased opportunity for income splitting, more capital available and higher borrowing capacity.
Working as a team can also provide more perspective than working as an individual. High-performing employees can also be made partners.
From a tax perspective, partnerships do not need to pay taxes on their income. Each partner pays tax on the share of the net partnership income they receive. Paying superannuation is the responsibility of each individual partner, as partners are not considered employees.
Additionally, there are limited external regulation and reporting requirements.
Removing partners is generally straightforward. The only condition is that at least two partners are left in the business. If a partner wishes to resign from the partnership, it is relatively simple to dissolve the partnership and recover their share.