How to Start a Business in Australia – Choosing a Business Structure (Partnership)

In the last tutorial in this series, we looked at one of the four main business structures in Australiathe Sole Trader structure. Now it’s time to look at another business structure – the Partnership. 

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But before we go any further, I need to remind you that any information presented on this blog is solely for informational purposes only. I make no guarantee that any of the information on this blog is accurate or complete. I cannot be held responsible for any loss or damage caused by reliance on any of the information or advice provided on this blog. If you are serious about your business, please consult a solicitor, accountant, or business consultant for advice. This blog is NOT LEGAL ADVICE! Any use of the information here is SOLELY at your own risk.
For more information about this, please read my disclaimer.
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If you need a quick recap on what “business structure” actually means (and why it’s legally imperative!), make sure you take a look at my previous tutorial in this series. Then, once you’re ready, it’s time to look at Partnerships!

Partnership

In my previous tutorial in this series, I mentioned that the main underlying concept of operating as a Sole Trader was the fact that as a Sole Trader YOU (and ONLY you) are the business.

In many ways, a Partnership is similar – but the difference is that TWO or more people TOGETHER are the business. This is both the main strength, AND the main weakness.

The way the law likes to define a Partnership is “the relationship which subsists between persons carrying on a business in common with a view to a profit”. So in other words, YOU ALL own the business, YOU ALL are directly in control of everything, and all money the business makes belongs to ALL OF YOU JOINTLY (although all of these things can be modified somewhat through the use of a Partnership Agreement … more on that later).

But remember – just like with the Sole Trader business structure, with a Partnership the business is NOT a separate legal entity either (although from an accounting point of view you’ll want to treat your finances from your business separately from your other income, otherwise it just gets too messy).

Limits of a Partnership

By law, the size of a Partnership is not unlimited. Generally speaking, a Partnership is limited to between 2 and 20 partners. However, there are some interesting (and bizarre!) exceptions.

For example, according to the Corporations Regulations 2001 (Cth), a Partnership can consist of:

  • 50 actuaries, medical practitioners, patent attorneys, sharebrokers, stockbrokers or trademark attorneys;
  • 100 Architects, pharmaceutical chemists or veterinary surgeons;
  • 400 legal practitioners (God help us all …)
  • 1,000 accountants (need I say more …)

Now, let’s look at some of the advantages and disadvantages of setting up a business as a Partnership.

Advantages of a Partnership

Starting business as a Partnership can be almost as simple as starting off as a Sole Trader. Both these structures are the simplest ways to structure your business.

Advantages of forming a Partnership include:

  • It’s relatively easy to set up (I’ll tell you how shortly)
  • There is less paperwork (in comparison to business structures like Trusts and Companies)
  • It’s inexpensive
  • There is less government interference and regulation (at least in comparison to a Company)
  • It offers more privacy (in comparison to the reporting requirements of a Company)
  • There is less need for hiring lawyers, accountants, and other consultants (at least in comparison to a Trust or Company)
  • There is a broader management base (compared to that of a Sole Trader), which also means a wider pool of expertise, shared risk (which can be both good and bad…) and more sources of capital
  • There may be tax planning advantages (such as income splitting)

Obviously, the above are broad generalisations, but they should give you a good idea of why some people choose this business structure.

And just like a Sole Trader, in a Partnership you can still employ people (NOT partners though – partners CANNOT be employees of the business), engage other contractors, apply for financing (although this last part might be more difficult compared to a Company), and do many other things. Again, there is a lot you can do.

And when your business expands, you can always change the business structure more easily than if you had set up the business as a Trust or Company.

So, what’s the catch, I hear you say?

Disadvantages of a Partnership

Interestingly enough, the main strength of the Partnership structure (eg. having more than one person in control of the business) is  probably also the main weakness!

Why? Well,  each and every one of you (as partners) has control of the business. This also means that each one of you is an “agent” for the business. This is where the law of “agency” can become an issue.

Since all of you have authority as joint owners, each one of you can contract with a third party (without the knowledge of any of the other partners), and you will ALL then be bound to that contract, regardless whether the partner in question actually had the permission of the other partners.

Naturally, this means that each and every one of you face the very real prospect of becoming personally liable for a bad business decision made by any one of the other partners (even if you didn’t know about it!). In fact, one of the “features” of a Partnership is that all partners are “jointly and severally liable” for all debts and liabilities incurred by the business. A Partnership can, of course, make it easier to pay off such debts, since all partners take a share of this risk.

But what if we take the example mentioned earlier even further … what if one of the partners decides to pack it in, clean out the assets of the business, and then flee to Majorca? Well, that’s too bad for you and the other partners. The Partnership will still have all its liabilities to pay off, and the remaining partners will be liable to pay off your scumbag partner’s share of the debts too (unless you are able to track down and sue the absconding partner for his/her share of the debts).

And if we take this example EVEN further (please let me indulge myself here…), if your remaining partners decide to follow the excellent example set by the partner now living up the high life in Majorca, you will then be left holding the ball. Since as a partner you are jointly and severally liable, this now means that you will become personally liable for ALL the debts and liabilities of the entire Partnership (unless you can track down the other partners and sue them for their share of the problems)!

Anyone who wants to sue the Partnership won’t care where the other partners are, and they are under no obligation to follow that up. They can sue whoever they want – and they will probably sue the person who is easiest to get to. In other words, all partners are “jointly and severally liable” for any debts or liabilities the Partnership incurs. And, just like the Sole Trader business structure, as a partner in a Partnership you have unlimited personal liability if anything goes wrong with the business.

In fairness, the above situation can be controlled (to a limited extent) with appropriate insurance cover. Additionally, you CAN actually avoid personal liability altogether in a Partnership by becoming a limited partner. But more on that shortly.

Other disadvantages of forming a Partnership include:

  • Lack of continuity
  • Divided authority (can be a good thing or a bad thing)
  • Friction between partners, personality clashes, etc
  • Limitations on size (generally speaking the maximum number of partners in a Partnership is 20, but with some exceptions …)
  • Bankruptcy or death ends a partnership. Partnership must then be re-formed (which incurs costs, paperwork, and lots of time …)
  • If a partner absconds or dies, other partners are left with that partner’s debts and liabilities (as discussed above)
  • Transfer of ownership is difficult
  • Adding partners is difficult – generally requires the agreement of all partners
  • If a partner decides to dissolve a business, it may bring the Partnership to an end
  • If a partner wants to join or leave, all the partnership assets, etc may need to be valued (which is costly and time-consuming!)

Looking at the list above probably makes a Partnership seem like a very unappealing proposition. But it doesn’t have to be, and ESPECIALLY if you consider what is at the crux of most of the above negative points – a combination of lack of organisation, lack of communication, and – consequently – lack of trust.

A Partnership Agreement can be used to counter many of the above disadvantages, or at least make provision for what should happen if certain scenarios ever arise. More on Partnership Agreements shortly.

Limited Partnership

For the most part, this entire tutorial deals with Partnerships consisting of what the law calls “general partners”.

There is, however, provision to set up an alternative form of Partnership called a “Limited Partnership”. Unlike a general Partnership (which I have simply referred to as “Partnership” throughout this tutorial), a limited Partnership actually needs to be separately registered with your State’s Fair Trading Office/Business & Consumer Affairs department (almost every State/territory calls it something else, and it’s not uncommon for them to rename it every few years…).

A limited Partnership must consist of at least one general partner, and one limited partner. A Partnership (of any kind) can only have a certain maximum number of general partners in the business (which I will discuss shortly), but there are NO limits to the number of limited partners that can be involved in a limited Partnership.

To recap the differences between a general partner and a limited partner: a general partner is simply the type of partner I have referred to throughout this tutorial. Basically, a general partner is a full partner in the Partnership, and hence has managerial control and authority to act on behalf of the business. A general partner also has the personal liability issues mentioned earlier.

A limited partner, however, does not have such powers, or liabilities. A limited partner cannot take part in the management of the business, and generally has no authority to act on its behalf (although some of these things can be modified to an extent with a Partnership Agreement). But, more importantly, a limited partner has LIMITED liability (which counters a lot of the disadvantages mentioned earlier).

So, why would anyone consider a limited Partnership then?

For the most part, limited Partnerships are useful in situations where potential partners simply want to contribute capital and share in the success of the business (but without having control or authority in the business). In many ways, a limited partner is more like a passive investor in the business. They take a risk in providing the business with capital (eg. to help launch or grow the business), but if things go wrong they do not have the liability associated with general partners. If they did, this would not encourage investment!

The above is a really simplified explanation of limited Partnerships, but it hopefully gives you a general (or should that be “limited” – woohoo, lame pun!) idea of what limited Partnerships are.

There is also a more complex version of this kind of Partnership called an “Incorporated Limited Partnership” (where the Partnership actually becomes a separate legal entity like a Company), but I will not discuss that here. Anyone considering such an advanced structure will generally be doing so because they are considering a joint venture with another business (or businesses). And if that’s the case, you really should be arranging appointments with lawyers, accountants, and other business advisors right now!

Partnership Agreements

It is nice to think that your word alone is good enough to form the trust required to run a Partnership. But let’s face it – a written document that CLEARLY outlines all important aspects in this sort of relationship will ALWAYS be a better option. It’s a simple risk management strategy. Remember – statistically, there is a STRONG possibility that something will eventually go wrong. And when that happens, you’ll be kicking yourself if you didn’t have that initial agreement set down on paper!

So think of a Partnership Agreement as a form of a protection … a form of insurance for ALL of you in the Partnership.

Yes, drafting a good Partnership Agreement DOES take time. It will also most likely require the services of a lawyer (did I just hear you groan …?) or other business consultant. So it will probably also cost a bit to get right. You DON’T have to use the services of a lawyer, etc to draft a Partnership Agreement – but since it will probably be used in some sort of legal context eventually, it’s probably a good idea to use a lawyer from the very start.

Remember, though, that a Partnership Agreement isn’t actually compulsory (unless you’re forming an Incorporated Limited Partnership – which I am not covering in this tutorial). Should you wish to proceed without a Partnership Agreement, then you can.

HOWEVER, realise that in the absence of a written Partnership Agreement, the law will consider you all to be EQUAL partners in the business (both from a management perspective, and also from a profit/loss and liability perspective). This might become especially problematic if profits are to be distributed in a certain way that isn’t intended to be equal.

So, what sorts of things can be included in a Partnership Agreement?

Elements of a Partnership Agreement

A typical Partnership Agreement may include some of the following key items:

  • Names and addresses of all partners
  • Nature and purpose of the Partnership business
  • Name of the Partnership business
  • Business address
  • Start date and duration of the Partnership
  • Capital to be contributed to the Partnership by each partner
  • How profits and losses will be shared among the partners
  • Arrangements for Partnership salaries/drawings/income
  • Managerial roles of each partner
  • Any limitations on the authority of each partner in making decisions or signing financial and legal documents
  • How decisions will be made by the Partnership
  • Agreement to engage certain consultants, such as a lawyer, accountant, or other business advisor in certain matters
  • Accounting details for the Partnership
  • Details of bank accounts for the Partnership
  • Provisions for the death, bankruptcy, or retirement of a partner
  • Provisions under which partners can change or assign their interest in the Partnership
  • Provisions for dispute resolution between partners
  • Provisions for the addition of new partners
  • Provisions for the dissolution of the Partnership (including the method of valuation and distribution of assets, etc)

The above is a summary of some of the key elements a Partnership Agreement should contain. Again, it is advisable to seek the services of a professional to assist with drafting such an important document. The last thing you want to find out when the proverbial hits the fan is that your Partnership Agreement has missed a key item, or is completely invalid from a legal point of view!

Should I Set Up My Business As a Partnership?

Obviously, only you and your potential partners can know that. I cannot advise you on what YOU should do. This tutorial is not intended as a full guide to the features of operating a Partnership, but hopefully it gives you some idea about what to look out for.

Additionally, WHO you partner with will be crucial. You need to approach this with your sharpest business mind, and base your decision on more than just “friendship”. There are many examples of friends falling out soon after setting up a Partnership. Some of this might simply be attributed to a lack of thought and discussion between the partners beforehand. They may have just assumed that since they are friends and get along, that this will automatically transfer to the serious business relationship that is a Partnership. But it generally won’t. A Partnership is a completely different type of relationship.

So basically you need to TRUST your partners, and you need to be on the “same page” regarding your goals for the business. Sounds simple, but it is often overlooked in the rush of enthusiasm at the beginning. Remember – running a business properly is a hard slog.

If, however, you CAN find partners to work with that you can trust, and that you have had serious discussions with about forming a Partnership, then you also need to make sure that the advantages of setting up as a Partnership outweigh both the disadvantages, and also the advantages of running other business structures (eg. such as a Company).

There are, no doubt, other issues you will probably need to ponder too (depending on your individual circumstances and also the industry you want to operate in). But hopefully the above gives you a useful starting point.

So, How Do I Set Up a Partnership Then?

First of all, you need to decide if you want to run the Partnership business under just the names of all the partners (eg. “Adam Wozniak, John Smith, John Citizen, Joe Cool, and Joe Sixpack”), or whether you want an actual business name (eg. “Super Duper Abracadabra Solutions”…).

If you want to run your business under the personal names of all the partners (with NO other additions), all you need to register for is an Australian Business Number (ABN) for the actual Partnership (eg. one ABN for ALL the partners together, rather than individual ABNs like you would have as a Sole Trader).

APPLYING FOR an Australian Business Number (ABN) for the Partnership

Regardless of whether you decide to run the Partnership business using the personal names of all the partners, or whether you register a business name, you will still need to obtain an Australian Business Number (ABN) for the Partnership.

To obtain an ABN, you will need to apply for it through the ATO. Thankfully, these days you can obtain an ABN in about 30 minutes without even leaving your computer. Click here to apply for an ABN. But just make sure you and your partners have agreed on how you will fill out these types of applications.

APPLYING FOR a Partnership Tax File Number (TFN)

The Partnership will also need its OWN Business Tax File Number (TFN) – unlike a Sole Trader, who uses his/her own personal TFN.

For the Partnership, this means that all partners will still have their own personal TFN for their own personal individual income tax return, but the Partnership as a whole will have its own TFN on top of that. Yes, this means that in addition to lodging your own personal tax return, the Partnership itself will have to lodge its own, separate tax return too. Woohoo!

But note that a Partnership in itself is not liable to pay income tax or PAYG installments. Instead, the individual income (and share of profits/losses) you, as a partner, make from the Partnership will need to be included in your own personal income tax return. THAT is how tax is paid on income generated by the Partnership.

So to reiterate – the Partnership itself does NOT get taxed, and that’s because it is NOT a separate legal entity (unlike a Company business structure).

That means that come tax time any income you make through your Partnership is counted together with your own personal individual income (so that means it is lumped in with income you make from other sources too – such as a job you might have on the side). By default, the law will assume that all Partnership income/profits/losses will be split equally among all partners, but it doesn’t necessarily have to be so. This is one of many areas where a proper Partnership Agreement can be useful, as mentioned earlier.

To obtain a Business TFN for your Partnership, you can do it online while you are applying for the ABN. Click here to apply for a Business TFN. Again, make sure you and your partners have agreed on how you will fill out these types of applications.

Registering a Business Name

If you want to operate under an actual business name (rather than the personal names of all the partners), then you MUST register the business name in your particular State.

UPDATE: In May 2012, a new national business names system commenced, replacing the old State system. This actually makes the process easier (and cheaper) than ever. The administration of all business names Australia-wide is now handled by the Australian Securities & Investments Commission (ASIC). To begin the business name registration process, just click here.

If you intend on operating your business in multiple States, then you will need to register your business name in every State where your business will be operating.

Registering a business name in one State generally costs about $150 for 3 years. Naturally, if you intend on registering in more than one State, these costs will begin to add up quickly.

To find out more about the costs and paperwork required, please visit the relevant State office and look for “Business Names”:

Some notes to remember about registering a business name though:

  • You can’t register a business name that is already registered in your State
  • You can’t register a business name that is already taken as the name of a registered Company
  • You can’t register a business name that is already registered as a Trademark (eg. “Coca-Cola”, “Google”, etc)
  • Even if the business name partly contains the personal names of some of the partners, you STILL NEED TO REGISTER A BUSINESS NAME. Eg. although you wouldn’t have to register “Adam Wozniak, John Smith, John Citizen, Joe Cool, and Joe Sixpack”, if you decided to call the business something like “Wozniak and Partners”, then you MUST register a business name. This is the part that MANY people get wrong!
  • Registering a business name is more about consumer protection than it is about protection for your business. In other words, registering a business name does not, in itself, necessarily give you any legal rights to your business name. It gives you less rights than registering your business as a Company, and it gives you even less rights than registering your business name as a Trademark. Basically, a business name has NO legal status in itself.

Despite all of this, registering a business name can be very quick and affordable. And there is a LOT less paperwork required compared to other business structures (such as a Company).

Once you have obtained an ABN, Business TFN, and registered your business name (if applicable), you need to ensure that the Partnership ABN is actually linked to the business name. By default, it might not be. To link the Partnership ABN to the business name, telephone the ATO on 13 28 66.

What if I Don’t Want to Operate as a Partnership?

So those are the basics of structuring a business as a Partnership in Australia. Naturally, it’s important that you also consider the merits of the other three major business structures (and especially if registering as a Partnership does not appeal to you – it’s definitely not for everybody!). It’s important that you consider your options carefully.

Remember, selecting a business structure is NOT an optional step if you want to ensure your business has been set up PROPERLY and LEGALLY. Some groundwork now will save you a whole lot of potential headaches in future. Besides, having a business structure makes your business look more professional and reputable.

In the next tutorial in this series, we will be looking at another type of business structure – Trusts (a structure which holds property in trust for its beneficiaries). If you’re interested in reading about the Sole Trader business structure instead, then make sure you check out the previous Sole Trader tutorial.

UPDATE: Please note that due to an overwhelming number of email enquiries and blog comments over time, I’ve had to disable all contact methods. I am unable to offer any further assistance or advice. If the above article hasn’t answered all your questions, I encourage you to look through the archived comments below. You’ll find frequently asked questions there. Thanks.

Related articles:

  1. How to Start a Business in Australia – Choosing a Business Structure (Trusts)
  2. How to Start a Business in Australia – Choosing a Business Structure (Sole Trader)

30 thoughts on “How to Start a Business in Australia – Choosing a Business Structure (Partnership)

  1. What a helpful article, finally someone took the time to put it all together in an easy to understand article. This article really helped my to understand partnership structuring.

    Cheers

  2. it is really helpful.
    and i have a question, if we form a partnership, do we need to provide the financial statement of partnership to ATO when we do our individual tax?

    • Hi,

      From what I understand, the Partnership needs to lodge its own, separate tax return, which the ATO then assesses. But the Partnership doesn’t pay tax itself – only the individual partners do on their share of the Partnership income (which you would submit on your own, personal tax return).

      Nonetheless, you need to provide both.

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  4. This is very useful resource for someone thinking to start a new business in Australia as a Partner

  5. I’m impressed with this informative and helpful post. This gives me a grasp idea more about business partnership in Australia. Thanks!

  6. Thank you very much for your helpful post.
    I have a question for you: let’s say you start a partnership for the start-up phase… then you understand that the business is going well and decide to re-structure and move into a company or trust. How hard is it, and what steps are included?

    Thanks!

    • Hi Frankie,

      Thanks for your comments.

      Unfortunately, I can’t advise on the specific steps required to re-structure a Partnership and move to a Company or Trust. Needless to say, it’s not the simplest thing to do, which is why it’s extra important to consult an accountant or lawyer before you think about doing this. No doubt there are all sorts of implications involved in the re-structuring.

  7. I don’t totally understand the tax part with partnerships..

    For example, say there are 2 partners, both have jobs earning say $40,000 a year before tax, both have there own bank accounts. They form a partnership for some extra money on the side, so they start a business account. So now both partners need to put money in the business account to get things started. Say $5000 each.

    Now if it was the end of the financial year at this point, do the partners now each have a taxable income of $35000? Then they just get taxed on the other $5000 whenever it gets payed back into there personal accounts?

    Or do the partners get taxed on $35,000 + half the business income which in this case is the extra $5000, so its a $40,000 taxable income still?

    Thanks.

    • Hi Jas,

      That’s a tough question, and I’m afraid I’m not in a position to advise on it. I would suspect that, considering the business hadn’t really started yet, the $5,000 is really still part of your personal income. Otherwise you’d have people siphoning off as much money towards their “Partnership” as possible so as to avoid paying tax.

      Having said that, it’s best you see an accountant or lawyer for your specific circumstances.

  8. Hi Adam

    Really informative blog you have…helped me to understand quite a lot. Just one thing that confuses me. If I want to start a business as a partnership in the name of my Wife & Myself but just our initials say “T&K Partners” but then I want a bank account & a name to the outside world which is different say “Advanced Mechanics”, do I register both names as business names but only register for ABN & Tax File numbers etc for the “T&K Partners”? Does it work in this way that we would be T&K Partners “trading as” Advanced Mechanics? And if so, how does a bank then treat the name of the associated bank account. Can we still open a business account called “Advanced Mechanics” where we do all our business thru that name with the T&K Partners actually administrating / owning the income assets of the business called Advanced Mechanics? I am a bit lost here….Any advice would be sincerely appreciated.

    Thanks in advance

    Tim

    • Hi Tim,

      Wow – that sounds like a complicated arrangement!

      First, you need to ask yourself why you want to have multiple business names in the first place. Is it actually necessary?

      Secondly, if you want to continue with that, it will most likely require registering multiple business names so that you can “trade as” whatever your choice ends up being.

      Thirdly, regarding the bank account, if you have a business name certificate, I can’t see why a bank would refuse to allow you to open an account with its name.

      Lastly, remember that should you decide to operate your business using two different trading names, it’s still ultimately just the one business on paper. Unless you decide to use some additional types of business structures, such as trusts and pty ltd companies, etc.

      Anyway, hope the above info helps you get started. In your particular situation, it’s probably worthwhile to have a chat with an accountant or lawyer before you make your decision. Additionally, a free consultation with an adviser from your local Business Enterprise Centre might help too – http://www.becaustralia.org.au/

      Best of luck with it all!

  9. This blog has some interesting info. I am really impressed with your efforts and really pleased to visit this post. Keep up the Good work going!! Thanks

  10. Hi Adam,

    Thanks for the amazing post!!!!

    I waiting for the next one How to Start a Business in Australia – Choosing a Business Structure (Company)

    Because currently me and my other two friends want to open business and we are confused whether to choose Partnership or Company structure.

    One more question if we decide on company structure and if we want to operate under an actual business name then what are the condition and whether we have to register in each state or we can register the name across Australia, Also how much it will cost to register company name?

    Thanks & Regards

    Pratim

  11. Wow, thanks Adam – I’m just setting up an internet marketing business with my partner after working as a sole trader for several years, this article was exactly what I needed to read, thanks for taking the time to put this together in such clear and straightforward language.

  12. Hi Adam

    Is it possible to set up a partnership if one of the partners lives outside of Australia and is not an Australian?

    Judi

  13. Hi Judi,

    That’s potentially a complicated area – so it’s probably worthwhile for you to have a chat with an accountant or lawyer.

    Additionally, a free consultation with an adviser from your local Business Enterprise Centre might help too – http://www.becaustralia.org.au/

    Hope that helps.

  14. Hi There

    Thank you for the information. I too have a questions for you if you wouldnt mind answering.
    I am looking at doing some contract work from home and set up as a partnership with my husband. One question is roughly how much does it cost to set up a partnership, 2. Roughly how much would it cost to get a tax return done for the partnership. 3. My husband works full time… Are we able to set the partnership up at 90% for me and 10% for him for tax purposes?

    TIA
    Nicole

  15. Hi Nicole,

    Thanks for reading.

    In your particular circumstances, it would be best to discuss this with a lawyer/accountant as soon as you can. The above article is only meant as a general guide.

  16. Hi Adam,

    Thanks very much for a really well written article. Very helpful.

    Before I go to meet with my accountant/lawyer I’d appreciate your take on what I’m trying to achieve.

    I have setup a unit trust with a couple of others to build online business solutions and we are looking to take on a developer for a specific project on a profit share basis. We’re keen to retain management control whilst shielding him from any financial liability (especially capital and to a lesser extent sweat equity). Is this the kind of arrangement for which a Limited Partnership is designed?

    Any advice you can offer before we start the clock ticking in 6 minute billable hours would be greatly appreciated.

    Regards,
    Jesse.

  17. Hi Jesse,

    Thanks for reading.

    My blog is only intended to provide general information. You’re best off speaking to a lawyer/accountant about individual circumstances, especially ones as serious as that.

    Money spent on a lawyer/accountant at this stage of the process will be money well spent.