Going into business with someone means that you have to balance the pros and cons of working with them. How can you protect yourself if things go badly? How can you best take advantage of things if they go well?
Similarly, which business structure you choose might determine the tax you are liable to pay, how you can best protect your assets, and your ongoing costs. It’s best to spend time working out the appropriate structure before your business relationship starts.
The two most commonly used business structures for people going into business with one another are companies and partnerships.
The main advantages of a company are:
- A company has the ability to protect your assets
- It is its own ‘legal entity’, meaning that it has the same rights as a legal person in that it can sue, be sued and incur debt
- A company’s owners can limit their personal liability and will generally not be liable for the company’s debts, which means you don’t personally face as large a threat in having your own assets called in to pay for costs that may have been incurred by your business partner
- You can sell shares in your company to other people, which makes investment in your business far more appealing.
However, there are also some disadvantages to a company, including:
- A company can have higher establishment and running costs than other types of business structures
- You will either need to know or employ someone who can inform you of your of your obligations and how to comply with them under the Corporations Act 2001
- The money earned by the company belongs to the company and its shareholders. This can become particularly frustrating where there is an equal division of shares between yourself and another person and you consider the other person is not bringing in as much business or contributing as much to the company. Disputes can be expensive to resolve.
A written shareholder agreement is the best protection against future disputes. You should take the time to iron out any contentious issues between you and your business partner before the company starts operations.
Partnerships are less common than companies, but under the right circumstances there are many benefits:
- Business losses are shared equally and in some circumstances partners can receive a capital gains tax discount when lodging their personal tax returns
- A well-drafted partnership agreement can allow you to explicitly detail your expectations and the consequences of non-compliance if a partner isn’t making a fair contribution
- Relative to other business structures, partnerships are simple and inexpensive to establish and have minimal reporting requirements
- As partners are not employees, superannuation contributions and workers’ compensation insurance may not be payable for partners, which means significantly less paperwork
- It can also be easier to exit by dissolving the partnership or resigning and recovering your investment.
As with all business structures, there are also disadvantages to a partnership structure, including:
- Unlike a company, a partnership is not a separate legal entity. This means each partner will be held fully responsible for the debts and liabilities incurred by other partners. The fact that you were not aware of these debts and liabilities will not be a good enough defence
- Changes in ownership can be difficult in some cases such as when one partner is resigning and another is taking his or her place. More often than not, this will require a new partnership agreement
- Disputes over partnership agreements often become litigious and, therefore, expensive.
It is important to seek legal advice early when you are considering going into business with a partner or partners. An experienced lawyer can help you work through the initial questions to establish which structure is best for your circumstances and then prepare the documents in a clear and concise way so as to assist your business into the future. They can also work closely with your accountant on taxation issues.
Remember to agree on the terms in writing before your business relationship starts.
Contact Partners Legal on 1800 333 143 to arrange an obligation-free 30-minute consultation.