Insights from a Tax Accountant: Understanding Partnership Business Structure
In our ongoing series of reviews on business structures, we now focus on the partnership business structure, particularly from the perspective of a tax accountant.
Partnerships are relationships between partners carrying on a business in common with a view to profit. This differs from a joint venture, where the venturers share gross income rather than net profit and incur their own expenses in deriving their gross income. A partnership is not a separate legal entity; partners are assessed individually on their profit share. Effectively the partnership is not taxed in its own hands but acts as a conduit through which the profit travels to be taxed in the partners’ hands. The partners in a partnership can be any entity (i.e. company or trust) or individual.
What are the advantages & disadvantages of this structure?
- One of its standout features is its simplicity to establish. Entrepreneurs can get started with minimal fuss and paperwork.
- Cheap to set up, with the only initial costs being registering a business name if required and drawing up a partnership agreement.
- Maintaining a partnership proves to be cost-effective in the long run, especially when compared to other business entities. Partnerships are not subject to the regulatory requirements imposed by Corporations Law, further reducing compliance expenses.
- Losses made by partnerships are not stuck in the entity. They can be distributed to the partners.
- There is some flexibility in income splitting, with different notional salaries for each partner.
- A 50% CGT discount is available to partners if the asset is held for over 12 months.
- Access to CGT small business concessions is available if the partners are individuals or entities with access.
- No tax ramifications of taking profits out of business (as with companies) as the profits are deemed to be received by the partners each year whether drawn or not.
- Partners are jointly and severally liable for the debts of the partnership. One partner can end up paying all the partnership debts if the other partners cannot meet them. In that regard, other assets held by the partner separate from the business are available to meet the outstanding debts of the partnership.
- Succession planning can be a bit more complicated with the possibility of a new partnership in some circumstances, with new registrations and statutory requirements needed once a new partner is admitted.
- If large profits are earned, the profits will be taxed at the highest marginal tax bracket (i.e. 49%) unless the partner is a company.
Partnerships stand out as an exceedingly popular and valuable structure for a business. It is simple, cheap to run and ideal for small businesses with little risk. Companies or trusts may be more relevant for larger businesses with prevalent risk exposure. Notably, when it comes to accessibility, partnerships shine as the most readily attainable entity, providing entrepreneurs with a straightforward path to tap into the coveted Capital Gains Tax (CGT) small business concessions. These concessions represent a crucial advantage, particularly for fledgling businesses seeking to navigate the complexities of taxation and secure their financial foothold in the competitive business landscape.
If you have any questions in relation to the above, feel free to reach out and contact us.
*Correct as of October 2014
*Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.