Updated: Aug 8, 2019
Going into Business with a Partner? What business structure should you choose?
Choosing the right business structure is one of the most important decisions you'll make when setting up your new business. We've summarised below the main options available, highlighting the advantages and disadvantages of each.
It's very important to have the right structure in place from the start. If you decide to change
business structures in the future, you may have to pay capital gains tax and stamp duty.
It's equally important to have a written stakeholder agreement in place before the business
commences. This is to minimise the risk of a future dispute between you and your business partner. Most partners know how the partnership will start and run on a day-to-day basis but never consider how the partnership will end.
Partnership of Individuals
This is the riskiest structure as it provides no asset protection in the event of business failure or legal dispute. For this reason, we generally do not recommend this structure.
If you are comfortable with your business risk profile and don't want the added protection, this structure may be appropriate.
• Cheapest option to run from an accounting perspective.
• Can apply 50% Capital Gains Tax discount on sale of the business (if the business is owned for more than one year).
• Can apply the Capital Gains Tax Small Business Concessions (assuming all criteria is met).
• Commercial losses can be applied against employment and other income (assuming non-commercial loss provisions are satisfied).
• Each partner is jointly and separately liable for the total liability of the business.
Depending on insurance, there is no protection to the partners in the event of business
failure and a legal dispute.
• Limited or no ability to distribute profits to family members or related entities.
• No asset protection. Your personal assets are exposed to business creditors.
Company (owned by individuals or discretionary trusts)
This structure provides limited liability from business failure and legal disputes.
If you intend to sell the business then the company structure can be the most costly structure from a Capital Gains Tax perspective.
• Limited liability.
• Ease of administering in the tax system.
• Unable to apply the 50% Capital Gains Tax discount and difficulty in applying the Capital Gains Tax Small Business Concessions (in particular the 50% active asset discount). Therefore, each business partner can pay substantially more Capital Gains Tax on sale of the business in the future.
• If the company is owned by individuals, there is limited ability to distribute income to
• Business losses are quarantined in the company and cannot be distributed to beneficiaries (can only be applied against future profits made by the company).