A partnership of discretionary trusts is a more complicated form of a partnership than a partnership of individuals but it provides an added level of security. Like a simple partnership, this model is still an agreement where the members agree to share both the rewards and the consequences of a business, among other terms set out in the partnership agreement. The key difference is that if the partnership incurs debts which it cannot pay, it is the discretionary trusts that share the liability for the debt, not the individuals.
A partnership is defined as a relationship between persons carrying on a business in common with a view to profit. As such, the partners in a firm are those directly carrying on the business. Anyone able to enter into a contract is able to become a partner. It is also important to state that the partners share liability in the event that the firm incurs debts. The partners will be discretionary trusts (typically with company trustees), with a separate discretionary trust for each person who would otherwise be a partner.
While a partnership can be established through oral agreement or implied by conduct, most partnerships are created through a written agreement referred to as a partnership agreement. This agreement typically stipulates the conduct under which the partnership will be run and details which may be used to help settle a dispute at a later date. In addition to the partnership aspects, to establish a partnership of discretionary trusts, individuals need to create a discretionary trust for each founder. As such they will need to complete a trust deed to detail the terms of their individual trusts.
Individuals participating in the business will need to follow laws relating to their business field. For example, an electrician carrying on a business will need to be licensed. It is important that before starting any business, the founders are aware of these stipulations to avoid disputes later.
If the business is being carried on under any name other than that of the full name of its founders, then the name needs to be registered with ASIC. This is a simple and inexpensive process but still required in Australia.
An Australian Tax File Number (TFN) is a personal reference number for taxation purposes. While a TFN is not required for personal use, but the tax fees are substantially higher without one. Furthermore, without a TFN it becomes impossible to obtain an Australian Business Number.
Every business after July 2000 is required to have an Australian Business Number (ABN), which can be attained through the Australian Taxation Office (ATO).
If the business has a GST turnover of $75,000 or more a year in income, the they are required to register their business for GST.
Terresa and Susan are doctors working in a general practice together. They formed the practice a few years ago so that they could combine their specialisations and expand their client base. Combining their skill set was an easy decision, however, both Terresa and Susan were worried that they might be liable if one of them became the focus of a malpractice suit. The addition of discretionary trusts provides an added level of protection between each of them and the practice so that if the practice incurs debts, it is the trusts, not the individuals that are liable for what is owed. It also enables them to distribute income from the partnership through their discretionary trusts to members of their respective families who are on the lowest marginal tax ratesExample 2:
Jack and Scott are lawyers who have just resigned from their previous jobs at a law firm and have moved to a different state to start their own firm. They have elected to go with a partnership of discretionary trusts so that in the event that the firm is sued, they are both protected from incurring debts. Similar to medical practices, forming a partnership allows Jack and Scott to expand the expertise that the firm can offer. Structuring the firm this way means that they can grow their business at a stable rate.