A partnership business structure is a legal arrangement in Australia where two or more people or entities run a business together to make a profit.
Unlike a company, a standard partnership is not a separate legal entity. This means the partners share the profits, but they are also personally liable for any business debts.
Types of Partnership Structures in Australia
There are four main types of partnership structures in Australia. Choosing the right legal framework depends on your mutual business goals and how much personal liability you are willing to accept.
General Partnership (GP)
In a general partnership, all partners are equally responsible for the day-to-day management of the business.
According to Australian law, general partners face unlimited liability. This means your personal assets are at risk if the business cannot pay its debts.
Limited Partnership (LP)
A limited partnership consists of at least one general partner (who has unlimited liability and manages the business) and one or more limited partners.
In contrast to general partners, a limited partner’s liability is strictly capped at the amount of capital they invested in the business.
Incorporated Limited Partnership (ILP)
An Incorporated Limited Partnership (ILP) is a special type of partnership that actually forms a separate legal entity. Primarily used for high-risk venture capital or private equity projects, this structure offers greater liability protection but comes with strict regulatory compliance requirements.
Family Partnerships
A family partnership functions exactly like a general partnership, but two or more of the partners are related. This structure is typically utilized by family-owned small-to-medium enterprises (SMEs) to pool family resources and benefit from revenue splitting for tax purposes.
Advantages and Disadvantages of a Partnership
Forming a partnership allows you to use the resources, capital, and skills of multiple people. However, trust is super important in a partnership and you have to trust your partners due to the shared financial risks.
You can find a comparison table below that outlines the key pros and cons:
| Pros of a Partnership | Cons of a Partnership |
|---|---|
| Minimal setup costs and limited yearly reporting requirements with the ATO compared to a company. | In a general partnership, you are personally liable for the business debts of your partners. |
| Easier to raise working capital and secure financing by pooling financial resources. | Disagreements between partners can cause operational delays and disputes. |
| Profits and losses can be offset against other personal income, such as an investment property. | You cannot claim tax deductions for money drawn directly from the business. |
| You can negotiate profit shares based on capital investment via a tailored partnership agreement. | CGT is payable each time a partnership changes membership or is dissolved. |
Partnership Tax and Liability Explained
A partnership business structure has its own dedicated Tax File Number (TFN) and lodges a yearly partnership tax return, but it does not pay income tax itself. Instead, it features pass-through taxation where tax obligations are passed directly to the individual partners.
Pass-Through Taxation And GST Thresholds
Once the partnership tax return is assessed by the ATO, profits and losses are divided among the partners based on their agreement. Each partner then adds their share to their individual tax return. Additionally, if the partnership generates an annual turnover of $75,000 or more, it must register for the Goods and Services Tax (GST).
Superannuation and Employees
Because partners are not considered employees of the business for tax purposes, each partner must manage their own personal superannuation contributions. However, if the partnership hires staff, you must meet standard employer requirements. This includes collecting PAYG tax, paying payroll tax, and making employee super contributions.
Personal Services Income
If your partnership involves industry professionals like medical doctors, financial advisors, or engineering consultants, you are generating income directly from your skills. The ATO classifies this as Personal Services Income (PSI). Consequently, this income is treated as your individual income, which limits the types of tax deductions you can claim.
Unlimited vs. Limited Liability
A critical risk factor associated with general partnerships is joint and several liability. This means that each partner is 100% responsible for all business debts. For example, if your partner defaults on a business loan or makes a poor financial decision, creditors can legally pursue your personal assets to cover the entire debt.
How to Set Up a Partnership Business Structure
Setting up a partnership is highly straightforward compared to incorporating a company. To build a strong foundation and ensure compliance, follow these essential setup requirements.
Apply for an ABN and TFN
If you are operating an enterprise as a partnership, you must register with the Australian Taxation Office (ATO). You need to apply for a unique Australian Business Number (ABN) and a business Tax File Number (TFN) to legally trade and file your partnership tax returns.
Register a Business Name (ASIC)
If you operate the business under a name other than the exact personal names of all partners, you are legally required to register that business name with the Australian Securities and Investments Commission (ASIC).
Draft a Formal Partnership Agreement
Even if you are going into business with a close friend or family member, drafting a formal Partnership Agreement with a solicitor is crucial. This document dictates how profits and losses are shared, who handles day-to-day operations, how disputes are resolved, and what happens if a partner wishes to leave.
How Much Can You Borrow as a Partnership?
Your unique business structure directly affects how lenders assess your borrowing capacity. Lenders will look closely at your personal income share and the overall financial health of the partnership to determine your serviceability.
Self-Employed Partnerships
Your income will be assessed similarly to any other self-employed business. You and your business partners must provide individual personal tax returns, alongside the overall tax return for the partnership.
Lenders will generally add back certain expenses like depreciation and one-off costs. If you struggle to prove your income through standard documents, a low doc loan may be a viable alternative.
Law Firm Partners
Law firm partners typically receive a base salary along with a designated share of the firm’s profits, usually paid quarterly or annually as dividends.
Generally, lenders will use 100% of your base income and 80% of your partnership profit share. For firms operating internationally, currency fluctuations may impact the final percentage lenders accept.
Speak to a Commercial Mortgage Broker
While we cannot provide legal or tax advice, the experts at Home Loan Experts specialize in securing commercial finance. Whether you want to purchase a new commercial property, expand your operations, or navigate the complex lending requirements of a partnership structure, we can help.
With our extensive lender relationships, we are uniquely positioned to negotiate larger Loan to Value Ratios (LVRs) and reduced interest rates for your partnership.
Call us on 1300 889 743 or complete our free assessment form today to speak with a commercial property loan specialist.
Frequently Asked Questions
Do partnerships pay income tax in Australia?
No, a partnership business structure itself does not pay income tax. Instead, it utilizes pass-through taxation. The business files a partnership tax return, and the profits or losses are distributed among the partners, who then report their respective shares on their individual tax returns.
Does a partnership need an ABN?
What is the main difference between a partnership and a company?
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