Different Business Structures: Part 3: Partnership
- Arnold Shields
- Oct 19, 2009
- 2 min read
Updated: Jun 24
A partnership is a common business structure in Australia where two or more individuals (up to 20) operate together with the goal of earning a profit. Partnerships can trade under individual names or register a business name.
In general partnerships, all partners are jointly responsible for the business and its liabilities. In a limited partnership, there are passive investors who do not take part in the day-to-day operations and whose liability is limited to the extent of their investment.
Unlike a company, a partnership is not a separate legal entity. This means the partnership itself does not pay income tax. Instead, each partner is taxed individually on their share of the net partnership income. However, all partners may be personally liable for debts incurred by any partner—even without the other’s consent—unless the partnership is structured as a limited partnership.
Advantages of a Partnership Structure
Access to CGT Concessions – Partnerships can access the 50% CGT discount and small business concessions.
No Division 7A Issues – Partners can lend to the business without triggering tax under Division 7A.
Offset Losses – Business losses can be used to offset other income.
Flexible Entry and Exit – It’s relatively simple to admit new partners, and rollover relief may be available for trading stock.
Cost-Effective Setup – A partnership is inexpensive to establish and operate.
Simple to Understand – Straightforward governance and structure.
Working Capital Flexibility – Easy refinancing of working capital.
Asset Protection via Trusts – Where trusts act as partners, asset protection may be enhanced.
Disadvantages of a Partnership Structure
No Access to FBT Salary Packaging – Partnerships can't offer salary packaging benefits to partners.
Personal Services Income Rules – Apply to certain income types, limiting deductions.
Non-Commercial Loss Rules – May restrict the use of losses against other income if the business is not commercial in nature.
Double Tax Risk on Capital – When a partner exits, there may be double taxation on working capital.
Unlimited Liability – Partners are personally liable for debts (unless limited partnership).
PAYG Complexity – PAYG instalment calculations can be complex.
No Deduction for Super Contributions Interest – Borrowing to make super contributions isn’t deductible.
Substantiation Requirements – Partners must meet specific record-keeping obligations for some expenses.
Final Word
A partnership is a flexible and cost-effective business structure, but it carries significant personal liability and complex tax implications. It’s important to carefully consider whether a partnership is right for your situation and seek professional advice.
Disclaimer:
The information provided in this article is general in nature and does not constitute personal financial, legal or tax advice. While every effort has been made to ensure the accuracy of this content at the time of publication, tax laws and regulations may change, and individual circumstances vary. Dolman Bateman accepts no responsibility or liability for any loss or damage incurred as a result of acting on or relying upon any of the information contained herein. You should seek professional advice tailored to your specific situation before making any financial or tax decision.
