Starting a business is a big step, and choosing the right business structure is one of your most critical decisions. The business structure you select will significantly impact various aspects of your business, including how you pay taxes, the level of personal liability you will face, and how you can raise capital.
Two of the most popular business structures in Australia are partnerships and companies, and they couldn’t be more different from one another. While those looking to start a business with someone else often choose partnerships, companies often prove popular for liability protection and tax benefits.
Understanding the differences between these two structures is crucial for a potential business owner looking to go into business with someone.
In this blog, we will compare the partnership structure and company structure in Australia, highlighting the key differences, advantages, and disadvantages to help you decide on the best structure for your business.
Why Should You Carefully Consider Your Business Structure?
New Australian business owners must choose the right business structure as it determines how the Australian Tax Office (ATO) will tax your business, how you’ll distribute your profits and losses, the level of personal liability each shareholder will face, and how you will manage the business.
As such, selecting the wrong structure can have significant consequences. For example, if you choose a structure that doesn’t offer asset protection, you could be personally liable for any debts or legal issues your business incurs.
On the other hand, if you choose a structure with high taxes or complicated reporting requirements, it can significantly impact your business’s profitability and growth
So, you must carefully consider your options and evaluate each structure’s advantages and disadvantages to ensure you select the structure that best aligns with your business goals, operational requirements, and long-term objectives.
Understanding a Partnership Business Structures
A partnership structure is a type of business where two or more individuals come together to run a business as co-owners, somewhat like a sole trader with multiple owners.
Partnerships are relatively easy to set up and run, making them a good option for new businesses looking to keep things simple and inexpensive.
However, one of the biggest drawbacks of a partnership is that each business partner is equally liable for the debts and obligations of the business. If one partner can’t meet their financial obligations, the other partners are responsible for covering their share of the debt.
Another aspect of a partnership to consider is that the partnership itself doesn’t pay tax, but rather each individual partner pays tax within their bracket. So, if you fall into a higher tax bracket, you might pay a significant amount of tax on your share of the profit.
And while this structure can work well for small businesses with low risk, it may not be suitable for businesses that expose themselves to greater liability. Additionally, partnerships may find it difficult to raise capital compared to other structures.
This is because partnerships don’t offer limited liability to their partners, and investors may prefer to invest in companies due to their better-defined legal structure and ability to issue stocks.
How Does a Company Structure Differ?
A company structure is a separate legal entity from its owners, providing a clear separation between the business and its shareholders.
And unlike a partnership, a company’s shareholders are not personally liable for the company’s debts or legal obligations. In other words, personal and business assets are completely separate. This asset protection is a significant advantage of a company structure, as it shields the shareholders’ personal assets from the company’s liabilities.
Additionally, companies can issue shares, which raises capital from investors to fund their operations and growth, making it easier to access new funding compared to partnerships. Companies also have clear management structures, with directors and officers responsible for making business decisions and managing the company’s day-to-day operations.
The ATO taxes a corporate structure differently from partnerships, instead applying a fixed tax rate. So, again, if you personally fall into a higher marginal tax bracket, it might make more sense to steer towards a business structure, such as a company, where you pay tax at a flat rate.
However, setting up a company structure can be more complicated and expensive than a partnership, requiring more legal and accounting work.
Partnership vs Company
We’ve given you a brief overview of what each structure looks like, but the table below will give you an outline of how they compare in terms of set-up costs, ongoing costs, liability and tax:
|Partnership business structure
|Initial start-up costs
|Individual states and territories govern partnership laws, but it’s free to register for a Tax File Number (TFN) and Australian Business Number (ABN). The only fee you’ll have to pay is to register your business name, which currently costs $39 for one year and $92 for three years
|Along with registering a business name, the cost of registering a company ranges from $538 – $650 depending on the type of company you choose to register.
|Annual administrative costs
|You have to renew your business name, which costs the same as the initial registration fee.
|You need to pay an annual review fee to ASIC, which ranges between $290 – $1,346 depending on the type of company you have registered.
|Similar to a sole trader structure, each partner is liable for their business debts.
|The company’s assets and liabilities are treated separately from your personal assets and liabilities – so business owners have limited liability.
|Each partner is responsible for paying tax on their share of the business profit at their income tax rate.
|A company pays tax on its earnings at a flat rate of 30%.
Which Structure Should You Choose?
Ultimately, deciding which business structure to choose will come down to what makes the most sense for you and your business.
Both partnerships and companies have their advantages and disadvantages, and the best choice will depend on various factors, including the size of your business, the level of risk you’re willing to take on, and your long-term goals.
It’s crucial to note that you shouldn’t decide based on this basic overview of information. Instead, you should seek professional advice from a qualified accountant, lawyer, or business advisor who can provide tailored guidance based on your circumstances.
A professional can help you understand the legal and tax implications of each structure, and they can help you make an informed decision that will set your business up for successful growth.
The choice between a partnership and a company structure is fundamental for many Australian business owners, with each structure offering its own advantages and disadvantages.
While partnerships offer an easy and inexpensive way to set up a new business, the lack of separation between the business and its owners exposes partners to more risks. On the other hand, companies offer better asset protection and capital-raising potential, but the process of setting up a company can be more complicated and expensive.
But the decision will ultimately determine what makes the most sense for you and your business venture.
If you’re unsure which business structure is right for you or need professional advice on other business matters, KNS Accountants and Business Advisors are here to help.
Our experienced professionals can provide tailored guidance to help you make informed decisions that will set your business up for a successful future.
Contact us today to schedule a consultation and see how we can help you achieve your goals.