Partnership or a Company?
Apr 08, 2021
One of the first steps of setting up your business will be to decide on a business structure. There are 4 main types of business structures to choose from and each has advantages and disadvantage. In this article we'll take you through two types of structures; Partnership and Company.
Both structures should be considered carefully as they have different consequences for:
- Potential personal liability
- Control over business
- Taxation obligations
A partnership agreement is used for a partnership structure and a shareholders agreement is used for a company structure.
Difference between Partnership and Company:
A partnership structure is where 2 or more people run a business together as partners. Partnerships are easy to set up and dissolve, with fewer costs and compliances required compared to a company.
However, in a partnership the business does not have a separate legal identity and is not separate from its partners. This means that you could be liable for your partner’s mistakes.
On the other hand, a company is where one or more people set up a business which has an entirely separate legal identity and the directors have limited liability.
In a company, the shareholders are the owners and the directors run the company.
Running a company offers more protection from potential risks compared to other business structures.
While deciding which business structure is best for your business, you should consider the advantages and disadvantages of each.
Here’s a quick glance into both structures:
| Partnership | Company |
|---|---|
| A partnership is when 2 or more people agree to run a business as partners. There is no separate legal entity from the partners. Although, the business will have its own ABN and TFN. The partners distribute income and losses between themselves. Profits are distributed between partners and added to the personal tax return of the partners. |
A company is a separate legal entity. A company will have an Australian Company Number (ACN). A company is taxed a company tax rate which is generally lower than most people's marginal income tax rates. |
| Pros: | Pros: |
|---|---|
| ▪ It’s easier to set up. ▪ It’s also easier to dissolve |
▪ Members have limited liability and are not personally liable for the company’s debts (except in limited circumstances such as a breach of director’s duties). ▪ Easier to raise funds and capital |
| Cons: | Cons: |
|---|---|
| ▪ All the partners have personal liability ▪ Partners are liable for the decisions of other partners. ▪ If a partner dies the other partners are liable for that partner’s debts and liabilities. |
▪ It’s more expensive to set up. ▪ There are more compliances and admin work to follow. |
| Management | Ownership |
|---|---|
| ▪ All partners can participate in the management in a partnership which can make decision-making hard due to personal disputes and differences. ▪ Limitations on size - maximum number of partners is twenty (with some exceptions). ▪ Transfer of ownership/business name is difficult. |
▪ Separation of ownership and control. ▪ Easy to transfer ownership by selling or transferring shares to another party. ▪ A company can easily survive the death or departure of members. |
Should we have a written agreement in place?
Irrespective of the business structure, an arrangement must be agreed upon within the company or partnership to ensure it can run smoothly and profitably with minimal conflict or confusion between the partners and shareholders.
A partnership agreement is designed to document the relationship of the partners and set out the fundamental terms of the relationship. These terms may typically include:
- Purpose of the partnership.
- Rights, responsibilities and obligations of the partners.
- How profits and losses are divided.
- The life span of the partnership.
A shareholders’ agreement is similar to a partnership agreement and it is used to govern the relationship of the shareholders of a company. Generally, a shareholders’ agreement will cover the following terms:
- Appointment of directors.
- Voting rights.
- Shareholders’ rights and obligations including dividend payments.
- Capital and operating expenditure.
- Pre-emptive rights.
- Dispute resolution procedures.
A written agreement is important so that everyone is clear about what their
responsibilities are, what the terms of the agreement are and what the procedures are if there was any conflict or in the event that one of the parties dies.
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