Partnership

A partnership involves two or more people (but no more than 20, with some exceptions) going into businesses together in order to make a profit.

In most cases a partnership will need to register a business name with the Australian Securities and Investments Commission (ASIC) unless it uses the surnames of all the partners involved.

Partners share all business assets and liabilities

A partnership is a relationship, not a separate legal entity. Each partner jointly owns all the business assets and liabilities. It's vital that each partner knows their rights, responsibilities and obligations.

Seek the help of a qualified professional to prepare a written partnership agreement.

The agreement should also state each partner's role and level of authority, their expected financial contribution and a clear procedure for dispute resolution and dissolving the partnership.

This is important because personal liability is unlimited for each and every partner in the business.

If the business fails and your partner can't afford to pay their share of any debts incurred, you will be held liable for the shortfall. You are also jointly responsible for any debts your partner incurs, with or without your knowledge.

Where there is no agreement in place, each partner is deemed to own equal shares of each asset as prescribed by the Partnership Act 1895 (WA).

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The advantages and disadvantages of a partnership

Advantages

  • Simple and inexpensive to set up.
  • Minimal reporting requirements.
  • Shared management/staffing responsibilities.
  • More opportunities for tax planning (such as income splitting between family members) than that of a sole trader.
  • A partner's share of the business's tax losses may be offset against other personal income, subject to certain conditions.
  • Combined skills, experience and knowledge can provide a better product/service.
  • Relatively easy to dissolve or exit and recover your share.
  • Access to capital.
  • Partners are not employees. Superannuation contributions and workers' compensation insurance are not payable on partners profits or drawings.

Disadvantages

  • Potential for disputes over profit sharing, administrative control and business direction.
  • Joint and several liability of partners. This means that each partner is fully responsible for debts and liabilities incurred by other partners - with or without their knowledge.
  • Changes of ownership can be difficult and generally require a new partnership to be established. 

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What's next...

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