A partnership involves two or more people going into business together with a view to making a profit. In Western Australia, partnerships are governed by the Partnership Act 1895.
The most common type of partnership entered into by small business owners is a general partnership, where all partners participate to some extent in the day-to-day management of the business.
Advantages of a partnership
- Simple to set up.
- Minimal reporting requirements.
- Shared control and management with other partners.
- A partner’s share of the business’s tax losses may be offset against other personal income, subject to certain conditions.
- Relatively easy to dissolve the partnership.
- Partners are not employees. Superannuation contributions and workers’ compensation insurance are not compulsory for partners.
- Easier to obtain finance as you are not relying on one person's income or assets.
Disadvantages of a partnership
- A partnership is not a separate legal entity. Partners are personally liable for the debts incurred by the partnership, meaning there is no asset protection.
- Potential for disputes over profit sharing, administrative control and business direction.
- Changes of ownership can be difficult and generally requires a new partnership to be established.
Other factors to consider
Before entering into a partnership it is advisable to have a lawyer prepare a formal agreement outlining:
- each partner’s role and level of authority
- each partner’s financial contribution
- a procedure for resolving disputes
- a procedure for ending or resigning from the partnership.
It is important to have a formal agreement because personal liability is unlimited for each partner.
You will be held liable for any shortfall if the business fails and a partner can’t afford to pay their share of any debts. You are also jointly responsible for any debts your partner incurs on behalf of the business, with or without your knowledge.
If there is no agreement in place, each partner is deemed to own equal shares of each asset.
For more information read our publication: Partners in business
A partnership doesn’t pay tax on its income. Instead, each partner pays tax on their share of the partnership’s net income. Partners may also be required to pay PAYG instalments, in the same way as a sole trader. Individual tax rates apply to a partner who is an individual (a person). They do not apply to a company or trust.
TIP: A formal partnership agreement is an important tax document if profits and losses are not distributed equally amongst the partners.
Visit the ATO website for more information regarding tax obligations for partnerships.