If you’re a business owner considering admitting a new partner to your business, it may be worth considering setting up a new entity.

Setting up a new entity (Company B) instead of directly admitting the new partner into the existing entity (Company A) can offer key protections and tax advantages under Australian tax rules. This approach isolates Company A’s historical liabilities and preserves its franking credit pool while enabling small business CGT concessions on the transferred goodwill.

Liability Protection

The new partner avoids exposure to Company A’s pre-existing debts, contingent liabilities, or regulatory issues (e.g., past tax disputes or payroll non-compliance), as these remain with the standalone original entity. Company B starts “clean,” with the new partner only responsible for its future operations, aligning with limited liability principles for companies under the Corporations Act.

Retaining Franking Credits

Franking credits (imputation credits from prior Company A tax payments) stay attached to Company A, which the existing owner retains 100% control over, allowing ongoing dividend franking without dilution by the new partner. Direct admission into Company A would share these credits proportionally, reducing the original owner’s benefit; ATO rules treat franking accounts as entity-specific, not transferable on restructuring.

Small Business CGT Concessions

Transferring goodwill from Company A to Company B triggers capital gains tax (CGT Event A1 (disposal)), but if a small business entity (aggregated turnover < $2 million or net assets X $6 million plus other qualifying rules, see https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/incentives-and-concessions/small-business-cgt-concessions, ), the owner qualifies for concessions like the 50% active asset reduction, 15-year exemption (if retiring), or retirement exemption up to $500,000 lifetime limit. Company B may be able to immediately qualify as a new small business entity for its operations.

Othere issues

There are a host of other issues to consider when admitting a new partner, including other tax issues, so treat this as an initial prompt for thought on how you want to go about admitting a new partner.

 

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