Are Partnerships Dead?

Are Partnerships Dead?

There is an old saying, ‘the only ships guaranteed to sink are partnerships’. While I don’t prophesise the doom of every partnership in existence, I will say that generally there is a better way.

There are two main disadvantages when you establish a partnership, firstly in asset protection terms there is none, if your partnership becomes financially liable, regardless of who is responsible, your assets (ie your home) will be claimed by creditors. Secondly, when dealing with income distribution there is no flexibility to allow you to access tax strategies to legally minimise the amount of tax you pay.

When deciding to establish a business it is important to consider the upfront costs as well as the downstream effects of the decision you make. For those who have little idea of the various ways to structure a business in Australia I recommend that they visit: www.innovation.gov.au/smallbusiness/legalhelp

Each structure has different levels of regulation and complexity as well as cost to both establish and administer. It is never too late to change an existing structure and it is sensible to review when making a major decision , a significant change or growing to a point where tax effectiveness or asset protection becomes more important.

Generally, when asked how to structure a business or investment vehicle I recommend that some form of a Trust is established. A trust is neither a standalone entity such as a pty ltd company, nor is it you trading as yourself as in a Sole Trader or Partnership arrangement. A trust is a ‘manufactured’ relationship between a Trustee who holds and manages property (assets, income, IP etc) and a single or multiple beneficiaries. Often a trustee is also a company.

There are many benefits of trusts as well as significant limitations and responsibilities. When a trust is established a trust deed is created that outlines the purpose, property and rights and obligations of the trust.

There are a number of types of Trust which generally determine the way that income is distributed and the way that property is dealt with. The main types are discretionary, fixed, unit and hybrid trusts.

Trusts can provide a business structure with:

  • Asset protection,
  • tax planning advantages (such as income splitting, wages versus drawings and even securing social security payments for family members), and
  • flexibility when buying and selling property

However they are the most complex of any small business structure and are the most prone to ‘getting it wrong’.

Trusts are the one structure where good quality professional and specialized advice is imperative. This advice needs to consider both the legal considerations and the business and financial objectives of the client. I strongly recommend that your Commercial Lawyer and Accountant are consulted concurrently and that all parties communicate effectively and openly to ensure that your circumstances, goals and future plans are accommodated into your structure for today.

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