This article series explores the differences between a sole trader, partnership, a company and a trust.
The is the second instalment of a 4 part series on business structures.
The main practical differences between the business structures involve risk, the ability to share pre tax and post tax income, asset protection/legal ownership, WorkCover insurance for owners and how personal super contributions requirements apply. We also need to take into account the ATO’s personal services income rules, anti avoidance and alienation of income provisions.
The key points of this business structure can be described as follows:
Part 2. Partnerships
- The owners are the business and will trade under their own names or a registered business name
- A formal partnership agreement is common, but not essential.
- Business transactions are run through partnership bank accounts
- Need to keep accounts for the partnership and produce a tax return for the partnership with profits/losses distributed to the owners
- Partnership profits/losses included in the partners personal tax return
- The owners cannot employ themselves so they cannot pay themselves wages or take out WorkCover insurance covering themselves.
- Similarly, as they are not employees, the superannuation contribution guarantee requirements and fringe benefit tax do not apply to the owners.
Easy to set up and change but there may be legal costs for a partnership agreement
A Tax return is required for the Partnership and a Partnership Schedule in completed in the partners’ personal tax returns
Standard GST and, if employing staff, PAYG withholding requirements apply.
Minimal ATO concern as low risk and all pre tax income goes to the owner
The owners are personally liable for all the debts incurred by the business and there are potentially no limits on this liability, as a partnership is not a separate legal entity.
Partners often go for many years without making the minimum super contributions they would have made as an employee working for someone else.
Relies on your clients covering you for WorkCover under their policies (employees of the business need to be cover by the partnership’s business WorkCover policy).
Generally in first couple of years, no income tax is withheld, so the partners needs to be good with managing money so as to not get caught with a large tax bill in year 2.
No income sharing capability with family other than for direct labour for work actually performed at commercial rates.
Capital Gains Tax provisions apply if decide to incorporate down the track.