Partnerships or companies: Which are better?

 

Choosing the right structure is an incredibly important part of starting your own small business. Once you’ve narrowed down your choices, you may be left with selecting either a partnership or a company, but which is better?

The answer depends on your unique business development strategies and current circumstances, so here is a brief overview of the advantages and disadvantages of each structure.

What are the pros and cons of partnership structures?

As the name suggests, a partnership is a structure whereby at least two people (but up to 20 in Victoria) enter into an ongoing business relationship.

Partnerships are currently on the decline, with Australian Bureau of Statistics (ABS) data showing a 3.8 per cent drop in this type of business structure between June 2015 and June 2016.

The pros and cons of partnerships are:

Pros

• Easy set-up: Starting your own small business partnership is relatively simple in comparison to a company.
• Better privacy: Partnerships provide more financial reporting privacy.
• Simple to run: The ongoing administration and maintenance of the business are usually easier in a partnership than a company.

 Cons

• Unlimited liability: You are jointly and severally liable as a partner. This means your personal assets could be at risk from mistakes that other partners make.
• Decision-making problems: Coming to an agreement can be difficult for two partners, let alone 20. This could create strategic stalemates.
• Less formal: Partnerships do not require a written agreement (although they are highly recommended), which could cause conflict in the future.

So, are companies better than partnerships in Australia? Not necessarily.

What are the pros and cons of company structures?

Companies have members, otherwise known as shareholders, who own the business. Meanwhile, directors run the company on a day-to-day basis.

A sole trader can set up a one-person business as both the sole director and member. ABS stats revealed a 4.4 per cent increase in companies between June 2015 and June 2016.

The pros and cons of a company are:

Pros

• Flexible expansion: Companies are more scalable, as there are fewer restrictions on introducing shareholders, directors and partners.
• Limited liability: Shareholders usually have limited exposure to claims or legal action taken against a company.
• Better finance opportunities: A company is a more recognised and reliable business structure to investors, lenders and suppliers.

Cons

• Higher costs and maintenance: You are likely to incur higher set-up and operational expenses as a company. Setting up your own company is also more complex.
• Additional regulations: Companies face more stringent regulations under the Corporations Act 2001 and other legislation.
• Less control: Business founders usually cede some control to management boards, CEOs and other executives. Some founders have even been ousted from their own companies.

These are just some of the pros and cons associated with partnerships and companies in Australia. Please contact WMC Accounting for a mode in-depth discussion about setting up your own business.