Consider a partnership if the number of people involved is small (up to about 20) and limited liability is not necessary.
There are 3 main types of partnerships:
- General partnership (GP) – is where all partners are equally responsible for the management of the business, and each has unlimited liability for the debts and obligations it may incur.
- Limited partnership (LP) – is made up of general partners whose liability is limited to the amount of money they have contributed to the partnership. Limited partners are usually passive investors who don’t play any role in the day-to-day management of the business.
- Incorporated Limited Partnership (ILP) – is where partners in an ILP can have limited liability for the debts of the business. However, under an ILP there must be at least one general partner with unlimited liability. If the business cannot meet its obligations, the general partner (or partners) become personally liable for the shortfall.
In a partnership business structure:
- income, losses and control of the business are shared among the partners
- the partnership has its own TFN and must lodge an annual partnership return showing all income and deductions of the business
- the partnership doesn’t pay income tax on the profit it earns – each partner reports their share of the partnership income in their own tax return
- each partner pays tax on their share of the partnership profit at the individual tax rate and may be eligible for the small business tax offset
- the partnership must apply for an ABN and use it for all business dealings
- the partnership must be registered for GST if its annual GST turnover is $75,000 or more.
As a partner you can’t claim deductions for money drawn from the business. Amounts you take from a partnership are not wages for tax purposes.
Advantages of a partnership include:
- two heads (or more) are better than one
- your business is easy to establish, and start-up costs are low
- more capital is available for the business
- you’ll have greater borrowing capacity
- high-calibre employees can be made partners
- there is opportunity for income splitting, an advantage of importance due to resultant tax savings
- partners’ business affairs are private
- there is limited external regulation
- it’s easy to change your legal structure later if circumstances change.
Disadvantages of a partnership include:
- the liability of the partners for the debts of the business is unlimited
- each partner is ‘jointly and severally’ liable for the partnership’s debts; that is, each partner is liable for their share of the partnership debts as well as being liable for all the debts
- there is a risk of disagreements and friction among partners and management
- each partner is an agent of the partnership and is liable for actions by other partners
- if partners join or leave, you will probably have to value all the partnership assets, and this can be costly.
Individual states and territories govern partnership laws. Read about the partnership laws in your state or territory.
ACT – Partnership Act 1963
NSW – Partnership Act 1892
NT – Partnership Act 1997
QLD – Partnership Act 1891
SA – Partnership Act 1891
TAS – Partnership Act 1891
VIC – Partnership Act 1958
WA – Partnership Act 1895