A partnership is a business structure in which the business is owned and operated by two or more business partners. In a partnership, management of the business is shared. Unlike as a sole trader, all partners are responsible for the debts and losses of the business. This means one partner can be liable for debts incurred by another partner. In boring legal speak, this is called ‘jointly and severally liability’.
Much like a sole trader, this business structure is easy and inexpensive to set up. A partnership also has very low ongoing costs. A partnership must have its own unique Australian Business Number (ABN) and Tax File Number (TFN). Partners may run the business under a trading (business) name.
Partnerships can save money on tax savings as each partner pays tax on their share of the partnership income, rather than the total income received by the partnership. Partners also own and operate the business, meaning partners have full control of the business. Each partner is also responsible for their own superannuation contributions. However, we recommend that partners make regular contributions to help save for retirement.
To complicate matters further, partnerships can be other entities and not just individuals. But, if that is the case – we’d definitely recommend you get in touch with your legal and accounting advisors.
Partnerships do have some reporting requirements. If the business has an annual income of over $75,000, it must be registered for GST.
A business partnership should have a partnership agreement. This sets out the terms of the partnership and deals with issues of retirement, appointing new partners, and how to resolve disputes.
A partnership may also have an up to a $200 setup fee depending on which state or territory your business office is located in.
To help you understand if a partnership is right for your business, we have provided a table of advantages and disadvantages below:
- Simple to start the business
- Low set up costs
- Save money on the business’s income tax
- Workload and responsibilities are shared between the partners
- Partners have full control of the business
- Partnerships do not need to disclose financial records to the public
- Changing the legal structure is relatively simple
- Partners can be liable for the debts of other partners
- Must lodge an annual partnership tax showing income of each partner, tax deductions and expenses incurred
- No asset protection. A partner’s personal assets may be seized to pay off business debts (even if the debts are as a result of a business decision from another partner)
- The partnership must be registered for GST if the annual income is over $75,000
Bolter can provide advice and help set up your partnership.