Partnership
Ask yourself what growth goals can a partnership help you achieve that you could not do alone.
WHAT IS PARTNERSHIP
A partnership is a business structure made up of 2 or more people who distribute income or losses between themselves. For example, if you and a friend or family member decide to set up a business together, you might operate it as a partnership.
A partnership is relatively inexpensive to set up and operate. The partners share income, losses and control of the business.
The partners in a partnership are not employees, but the partnership might also employ other workers.
Partners are responsible for their own superannuation arrangements. However, the partnership is required to pay superannuation for its employees.
Key features
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 & disadvantages
Consider a partnership if the number of people involved is small (up to about 20) and limited liability is not necessary.
Advantages of a partnership include that:
- 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 particular 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 that:
- 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.
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