So you’re thinking of starting a business. There are a range of different ways that this can happen, but you have to first consider what is in your best interests.
If you’ve discussed your plans to start-up your business with friends or family you will often get offers of a partnership. Although this could end up being a great asset for you and your future business, it could also end up being detrimental. That’s why you must first consider how a business partnership works against other types of business structures.
A business partnership is simply a method in which to operate your business, the same as you would a sole trader, trust or company. A partnership is made up of two or more people, with each partner having ownership of the business and, in turn, personal liability.
Like any business structure, there are benefits to a partnership. These include being simple to set up and run, with less reporting and operating requirements than a company (resulting in less fees). As well as this, there is shared control and management over the business, which will potentially ease stress and reasonability for each individual partner. And finally, as partners are not considered employees, no superannuation contributions or workers compensation payments are legally required.
Yet, with all of these benefits, there are of course disadvantages. The main disadvantage of a partnership is that they are not a separate legal entity. This means that each partner has full responsibility for any debts or liabilities incurred by the partnership. This can also include debts that were not agreed upon by both partners. A result of this is often a dispute, which is another disadvantage to a partnership structure. The most common topic behind these disputes are profit-sharing, administrative control and the direction of the business.
Another disadvantage to a partnership lies in its tax reporting. This is because a partnership doesn’t pay tax on its income. Instead, each partner reports any income received from the partnership as personal income.
With all of these disadvantages, it may be worth considering a different structure for your business- despite how convincing your friends and family may be. However, if you can’t be swayed from your decision, it’s best to have a proper partnership agreement in place to protect each individual.
A partnership agreement should be more than just some dot points on a scrap piece of paper you found lying around; it should be a fully legal document prepared by a solicitor. Within this agreement, a range of topics about your business and the partnership should be covered. The topics that should be included are each partner’s role and level of authority, each partner’s financial contribution and the contributions of capital that are to be made. By having these outlined in an agreement, disputes can be avoided and legal action can be taken if any conditions aren’t being followed.
If you’re still stuck on how to properly set-up your business, contact the business consultants at iBusiness Group today: 1300 587 985.