A partnership involves two or more people (up to 20, with some exceptions) going into business together with a view to making a profit. In Western Australia, partnerships are governed by the Partnership Act 1895.
There are two types of partnership – general and limited.
A general partnership is where all partners participate to some extent in the day-to-day management of the business.
A limited partnership is one formed by up to 20 people. It has at least one general partner who controls the company’s day-to-day operations and is personally liable for business debts, and passive partners called limited partners.
A limited partner contributes a defined amount of capital to the business, but is not otherwise liable for its debts or obligations. The Department of Commerce has administrative responsibility for the Limited Partnerships Act 1909 in Western Australia.
- Simple and inexpensive 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.
- More opportunities for tax planning (such as income splitting between family members) than that of a sole trader.
- Relatively easy to dissolve the partnership or to resign and recover your share.
- Partners are not employees. Superannuation contributions and workers’ compensation insurance are not payable for partners.
- A partnership is not a separate legal entity. Each partner is fully responsible for debts and liabilities incurred by other partners – with or without their knowledge.
- 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, 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 the share of net partnership income each receives.
TIP: A formal partnership agreement is an important tax document if profits and losses are not distributed equally amongst the partners.
For more information regarding tax obligations for partnerships visit the ATO website.