Partnerships
A partnership shares much in common with the sole trader, because the business is not “separate” from the individuals who conduct it. One States’ Partnership Act defines a partnership as “the business relationship which subsists between persons carrying on business in common with a view to profit.”
The creation of a partnership ordinarily involves the contribution of the capital or foundation of the business, i.e. property, money, skill of labour by the partners.
In the normal partnership, the liability of members is unlimited. Liability extends to their private property as well as to the partnership assets. Under law, partners are jointly (together) and severally (individually) liable for the debts incurred in their business.
They are liable for all debts and obligations of a contractual nature incurred by the partnership. The word “all” is highlighted to emphasize that the liability is not simply for the proportionate share held. Many a partner has found him/herself meeting 100% of the debts because his/her other partners were incapable of contributing.
A partnership name (if other than the partner’s own names) must be registered under the Business Names Act – e.g. you can trade as Will John and Mary Helen Jones without registering that name, but if you wish to trade as “W.J. & M.H. Jones Florists” then that name must be registered.
A partnership needs its own tax file number and uses it when lodging its annual partnership income tax return. A partnership is not a separate legal entity and doesn’t pay income tax on the income earned by the partnership. Instead, the taxable income or loss of the partnership is distributed annually to the partners in proportion designated by the partnership agreement (or if no agreement, then equally between the partners.) The partners are therefore liable individually for personal income tax on their proportion of income and would include their share of income in their annual personal income tax return.
As with a sole trader, partnerships cannot claim a deduction for money partners ‘draw’ Amounts taken regularly from a partnership business, and regarded by some as their ‘wages’, are not wages for tax purposes and are not tax-deductible.
A partnership can be created simply by several people simply conducting a business for profit because a formal contract, written or oral, is not essential. It is strongly recommended however, that a written Partnership Agreement be entered into, with the help of a Commercial Solicitor.
There are certain income tax advantages in having your business operate through a Partnership especially if it is one in which a husband and wife could be bona fide business partners.
More Information
Additional information is available to download in our business papers area of the site filed under the Business Entities section.
Need Assistance?
The business structure you choose will have an impact on the way you are taxed, ongoing costs and asset protection. This is one area you will want to speak to an accountant about before you jump in.
If you would like to discuss options for your business, please contact us on (02) 4390 4156 for a completely free, informative and confidential consultation.
ATO Booklet
The Australian Tax Office have produced a short booklet titled, Choosing the Right Business Structure.
Sole traders, partnerships, trusts and companies are covered in the publication along with a short overview of the advantages, responsibilities and super obligations of each.
It’s important you understand these advantages and responsibilities as they may affect:
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- the way tax applies to your business
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- protection of your assets
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- your operating costs
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- how other businesses deal with you.
Download Choosing the right business structure
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This information is for guidance only and is not intended as specific advice to any reader. Professional advice should be obtained before acting on any information contained herein. The publisher accepts no responsibility for loss occasioned to any person or organisation as a result of action or the refrain of action as a consequence of the contents of this publication.