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A partnership is formed when two or more people go into business together with a view to making profit. A partnership is limited to between two and 20 partners, although the actual limit may vary among the states and territories and occupational groups, and can be a substantial number. For instance, the limit for a partnership of architects is 100. A partnership is not an entity in the way that a proprietary company is a legal person.
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The Business Victoria website provides general advice about partnerships which is, largely as follows:
As with sole traders, if the partners are operating under their own names there is no need to register their names with the Australian Securities and Investments Commission (ASIC) as a business name, but if they choose to trade under another name, they must register it.
A partnership must have its own Tax File Number (TFN), and usually an Australian Business Number (ABN) and lodges its own, separate tax return. There is also no legal requirement for a written partnership agreement to set out the legal terms governing the partnership and the partners’ relationship, although it is highly recommended that a document is prepared with legal assistance that sets out the full extent of the relationship between the partners.
When compared to a sole practitioner:
Advantages
- Partnerships are not expensive to set up and you provide access to shared capital.
- Knowledge, experience, skills and ability to take time off is pooled.
- There are certain tax benefits where the partners are in the same family, such as spouse/domestic partner.
Disadvantages
- As the business develops, personalities may clash and there may be disputes over administration and profit sharing (hence the value of a partnership agreement).
- Partners can be individually and collectively liable for the defaults of other partner(s), including professional negligence, and for all of the debts of the partnership. This can be avoided by incorporating a company to be the business entity rather than a partnership, but taxation, financial and accounting advice should be obtained before making a final decision as to the appropriate legal structure to be used to carry on a business.
- If a partner wishes to leave the business, it may require the other partner(s) to raise capital to buy that partner out. If they are unwilling or cannot do so, or do not accept that partner's suggested replacement, it can reduce that partner's options, again pointing to the value of a partnership agreement which sets out what is to be done.
Limited partnerships
Limited partnerships differ from conventional partnerships in that they are made up of general partners, who manage the business, and limited partners, who are passive investors in the business and do not contribute to its management. Limited partners are liable for financial debts in proportion to their investment.
The benefit of a limited partnership is that the business can attract capital investment. A limited partnership must be registered with the relevant state regulatory body . In the Australian Capital Territory and the Northern Territory, only incorporated limited partnerships are permitted, which are used primarily for high-risk venture capital projects. Limited partnerships and incorporated limited partnerships must be registered separately from the business name. General partnerships, also referred to as 'partnerships', do not need separate registration. For the registration of limited partnerships see:
- Victoria: Consumer Affairs Victoria
- New South Wales: Fair Trading NSW
- Queensland: Fair Trading QLD
- Western Australia: Department of Commerce WA
- South Australia: SA Business Information Hub
- Tasmania: Limited partnerships based in Tasmania must be registered with the Department of Justice (Tasmania) – Consumer, Building and Occupational Services.
The Australian Business Licence and Information Service (ABLIS) website provides information on how to register incorporated limited partnerships in the ACT and NT.
Partnership agreement
Although partnership agreements can be oral, it is recommended that a written partnership agreement be prepared with the input of all partners and after getting independent legal and accounting advice.
Some of the matters it needs to cover include:
- the nature of the business
- the role and authority of each partner and who has financial control of the partnership
- proportion of ownership of each partner and sharing of profits and losses
- each partner's liability to contribute funds
- the management of the partnership
- the manner of dissolution of the partnership
- the distribution of assets on dissolution
- the resolution of disputes between partners
- the death, bankruptcy, retirement of a partner.
For further information, see Acumen note Partners agreements.
Taxation
A partnership has its own Tax File Number (TFN), and usually an Australian Business Number (ABN) and lodges its own, separate tax return. Generally, each partner then adds their share of the profit (or loss) to their personal income tax for assessment by the ATO and will pay tax at the personal income tax rate. The Australian Tax Office (ATO) website provides a guide to income earned from a partnership.
The partnership may also be required to register for the Goods and Services Tax (GST). The ATO website has a guide on who must register for GST.
Disclaimer
This content is provided by the Australian Institute of Architects for reference purposes and as general guidance. It does not take into account specific circumstances and should not be relied on in that way. It is not legal, financial, insurance, or other advice and you should seek independent verification or advice before relying on this content in circumstances where loss or damage may result. The Institute endeavours to publish content that is accurate at the time it is published, but does not accept responsibility for content that may or has become inaccurate over time. Using this website and content is subject to the Acumen User Licence.