You’ve taken the leap of faith and decided to either take on a business partner or buy into an existing pharmacy as a partner. In this two-part series of our pharmacy blog we will discuss the ins and outs of business partnerships.
So, what is a partnership?
From a legal standpoint, a partnership is not a separate legal entity; rather it is simply an arrangement between people to earn income jointly.
The tax legislation defines a partnership as either
(a) as an association of persons carrying on a business with a view to profit, or
(b) a situation where two or more people are in receipt of income jointly.
Why choose a partnership structure?
There are a number of structures including companies and trusts which can allow a number of people to own a share in a business. So why choose this particular structure?
• Free to establish – just need to register with the ATO (TFN, ABN, GST, etc.).
• Simplicity – income and expenses are pooled, the net profit is then passed out to the individuals and they pay their respective taxes.
• Ongoing fees – typically accounting fees for a partnership are less than those for a company or a trust for example.
• Income splitting between the partners.
• Partnership agreement can provide some degree of flexibility with regards to the income splits between the partners.
So far so good, but what are the negatives?
• Partners are jointly and severally liable – this means that any single partner can enter into a deal or incur debt on behalf of the partnership, and therefore, on behalf of other partners.
• A partnership structure, generally speaking, provides no asset protection.
• Tax can be higher than in other structures because there is no way of sheltering income – the entire net profit must be distributed to the partners each year which can result in the partners paying tax rates above 30%, something that can be minimised if an alternative structure is used.
• Partner joins or leaves? This will mean the old/existing partnership ends and a new one forms which can throw up legal as well as tax issues to consider.
Knowing your partner
Now that we have discussed the legalities, let’s talk about your partner. As with every relationship we undertake, you need to know your partner. Specifically you need to know that you both want the same things and that you are aligned in your beliefs and motivations.
Business relationships are usually built on mutual respect and trust and a feeling of being able to conquer the world as a partnership. So how do you maintain this state of mind knowing that choosing a business partner is often more difficult than choosing a spouse.
1. Do your homework before entering into a partnership
A successful business partnership should be based on the complementary strengths, talents, personalities, and experience of the prospective partners. Thoroughly scrutinizing your prospective partners in advance and developing a comprehensive written partnership agreement will improve your odds of having a successful, long-term business partnership.
2. Partnerships between friends
It is important for you to maintain a separation between business and personal relationships. That way, you can both have frank and open discussions about difficult business decisions, goals, finances—discussions that a close personal relationship can make difficult.
3. Unequal commitment among partners
Businesses take huge financial and personal commitments. In a partnership this burden can be shared, therefore reducing your individual pressures. However you are also dependent on the contributions of other partners. Their ability and willingness to make the same level of personal or financial sacrifices needs to be considered early on to avoid the rise of resentment and conflict.
A partnership based on one partner making a larger financial contribution and the other partner(s) promising to make up the difference in "sweat equity" might sound reasonable in theory, but can be difficult to quantify and describe in a partnership agreement
Unequal contribution among partners may not present a problem if understood in advance (and fully articulated in the partnership agreement), but otherwise, it's likely to lead to strife among partners.
Written by our Senior Account Executive Priya Narsing
