Partnership Structure

A partnership is an association of individuals or entities for the purpose of carrying on a business venture or business activity in common with a view to profit. Each partner is entitled to take part in the management of the partnership. For tax purposes, a partnership is an association of people who carry on business as partners or receive income jointly.

The maximum number of partners in a partnership is usually 20 but there are exceptions.

Advantages

Disadvantages

Other Tax Issues

Advantages

1. The advantages of a partnership are the same as for sole trader where the partners are themselves individuals. The one major difference between a sole trader and a partnership is that income may be more easily "split" between adult members of the family.

2. A partnership is not a separate legal entity and doesn't pay income tax on the income earned by the partnership. Instead, each partner pays tax on their share of net partnership income. As with sole traders, any losses from the partnership business will be available to the partner to reduce other income. Accordingly, profits and losses of the partnership are "brought back" into the individual partner's tax returns.

3. With appropriate drafting it is possible to structure a partnership agreement that allows flexibility for varying profits/losses between the partners on an annual basis.

4. The structure of a partnership allows tax preferred amounts (such as tax incentives and tax free capital gains) to be passed through the partners.

5. Partners are able to access the 50% CGT discount as they hold an interest in each partnership asset as an individual.

6. Unless otherwise stated in the partnership agreement, the capital of each of the partners can be increased or withdrawn from the partnership without restriction.

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Disadvantages

1. The most significant commercial disadvantage of a partnership is joint and several liability of partners. In other words, if any of the partners do not have enough money or assets to pay their share of a debt, the other partners may be liable.

2. There are some CGT disadvantages; in particular the law treats an individual partner's share in the partnership as representing a direct fractional interest in each and every asset of the partnership.

3. If there is a change in the membership of partners this will usually alter the partnership agreement unless the agreement stipulates otherwise. This means that there is no continuity of business when such a change occurs.

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Other Tax Issues

Tax File Number: A partnership needs its own tax file number and uses it when lodging its annual income tax return. This can be applied for on the ABN application form.

ABN: If the partnership is carrying on an enterprise in Australia, it may apply for an ABN and use this number for all the partnership's business dealings.

Who pays Income Tax: While the partnership doesn't pay tax, it does have to lodge an annual partnership income tax return to show all income earned by the partnership and deductions claimed for expenses incurred in carrying on the partnership business. The Tax return also shows each partners share of new partnership income. Partnerships are not liable to pay PAYG instalments. Instead, individual partners may be liable to pay PAYG instalments on their share of income from each partnership they are a member of.

Drawings: Partnerships cannot claim a deduction for money partners 'draw' from their business. 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.

GST: Partners may apply for GST registration for the partnership if it is carrying on an enterprise. This can be applied for on the ABN application form. A partnership is required to be registered for GST if its annual turnover is $75,000 or more ($50,000 or more prior to 1 July 2007).

Superannuation: Partners in a partnership are responsible for their own superannuation arrangements as they are not employees of the partnership. But a partnership needs to pay superannuation contributions for other employees of the partnership.

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if you would like more information on how to set your business up as a partnership, please complete and submit the Express Enquiry form on the top right hand side of this page and we will contact you to discuss your enquiry.  or call us on 1300 QUINNS (1300 784 667) or on +61 2 9223 9166 to arrange an appointment.