My New Business - Partnership or Company Structure?

Hi all,

I know I should be seeking advice from an accountant/lawyer etc, but for what it's worth, may I please get some guidance from you lot?

My mate and I are looking to start a new business in the hospitality industry. We both work Full Time (in the corporate sector), and this business is more of a side-business.

We see potential in this and there's a gap in the market for this, though, we don't see ourselves committing ridiculous hours into this business.

We are both young, only 20 years old. First time stepping into this side of the business world so it's certainly a bit daunting.

What questions can I answer for you all that will help me determine if a Partnership, or a Company structure is most suitable for us.

Thanks in advance all!
Unistudent1

Comments

  • Check with an accountant :)

    However a company / pty ltd structure with both of you as share holders would be more flexible down the track (for example bringing in more shareholders, fund raising, or selling your/his share, etc). It also allows you to retain profit within the company. Costs a bit more though to maintain.

  • +1

    An accountant will advise regarding tax minimisation.

    An average lawyer will advise on risk exposure and asset protection.

    A good lawyer will provide what an average lawyer will and additionally advise and provide you with a solution as to when things go wrong between you and your mate.

    Or you go on the cheap and get discounted docs online and totally waste your money and time :)

  • +1

    I chose a company for my part-time business, because if I end up with an unhappy customer and they sue me, they can take the assets of the company without bankrupting me personally or taking my home. In a partnership, you are both personally liable for any liabilities of both yourself and your partner. eg your partner causes harm, even if accidentally, to someone, that person might sue both of you.

    Think about whether this is a concern for either of you. If so, a company is probably better. If not, then things like tax might come into it, but my advice is don't make tax your most important decider when you are starting out. If the business becomes really profitable down the track, you can always switch structures if tax does become more important.

    Checkout some of the links on the ASIC web site and on business.gov.au. Even if you end up using a lawyer or accountant, doing some background reading will allow you to ask better questions instead of paying for their time to explain the basics to you.

  • Definitely create a company and avoid a partnership at all costs. It's one of the cardinal rules they teach you in first year commerce/business courses at the University of Melbourne.

    Companies have a "Limited" or "Ltd" at the end of their name to signify limited liability - any losses incurred by the company will be limited only to the company structure and not to the owners or shareholders. If the company goes bust then owners and shareholders only lose what they had put in to the company, their personal finances are safe.

    Partnerships do not enjoy the same luxury, if you incur significant losses then you and your partners will be personally liable to repay any debts which can potentially end up in you selling your house and personal possessions and eventually declaring bankruptcy.

    I still remember my first year economics lecturer telling us about how lifelong friends can turn on each other when partnerships fall apart as they'll argue and hire lawyers to try and pass on the losses to their other partners if things go bad.

    • "I still remember my first year economics lecturer telling us about how lifelong friends can turn on each other when partnerships fall apart…"

      Companies/Shareholders fall apart as well. Ever tried to get rid of a shareholder who no longer wishes to contribute to the company/business relying on a standard constitution? With a two shareholder company, Courts will view it akin to a partnership.

      There is no one answer, what you gain from limiting liability you lose in increased costs and then the burden of director duties. A good partnership agreement will have an exit strategy. A good company setup will have a "good" shareholder agreement (good = not an online or discounted generic document). The cost would be outside these guys startup costs from reading the OP.

      Everyone wants to scrimp on upfront costs, not appreciating that such costs will solve problems at 1/10th of the costs dealing with a dispute. Bit like travel insurance, get away with it until you find yourself in need it. The value of a document is how it deals with the circumstances of the given situation, a generic feel good document (and sometimes not even being cheap) is a waste of paper and ink most times.

      • ATD noting the success rates of startups - is there a case for scrimping on upfront costs - especially for a first venture?

        Anyway, OP - I decided to go with the company structure for my online clothing store - mainly for limited liability, tax rate being lower than my personal income tax rate, and to have the option of easily selling a chunk of the business. My mate who's a chartered accountant advised on the setup - and it was about $1k in upfront costs.

        My first venture was a partnership structure which was cheap and easy to set up. The business went no-where but we learnt a few things. I guess it depends how well you trust the person also - I was working with a lifetime family friend.

        • +1

          @ aussiemillion

          If someone spoke to me about not wanting to spend money on the basis of doubt concerning the success, I would tell them to reconsider the business. There is always a level of context that has to be applied, so there is no one absolute answer. Also, the problem is not failure but success.Think of all the time and energy creating market identity and the lost $$ if it then goes pear shape after it starts to become successful.

          Also don't get sucked into believing you get a lower tax rate, as soon as you apply money personally, its income and applied at your personal tax rate. In saying that, I accept there are tax minimisation strategies that can be employed to reduce your personal rate. As for limited liability, that gets washed away as soon as you have creditors/trade accounts.

          In relation to trust, I've seen people who have been lifetime friends since school and use the words trust and then see it dissolve very quickly. I've dealt with Directors who knew better but put things off and now dealing with the (expensive) consequences. The common theme in business disputes from my observation can be put down to one thing, greed, in its various guises.

          Anyway, for the OP, there is simply not enough info to answer the question being asked (not that I'm advocating to disclose that publicly). Start slowly and as cheaply as you want to but as soon as you sense a little bit of success happening, reconsider your structure and safeguards. But at that time there is no guarantee you are going to agree what those safeguards will be. The best advice is if you can do it alone, do it that way.

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