A partnership can be carried on by two or more individuals or entities – a partnership occurs when the business is carried on by the individuals or entities together, with the intention to share profits.
In most cases the profits are split equally, however it is possible to come to an agreement for a disproportionate split of income (ie: where one partner works in the business more than the others, they should be remunerated accordingly – see the reference to wages below).
Of importance to note is that a partnership, while a separate entity, does not pay income tax in its own right. A partnership must distribute its income (or loss) according to any agreement and it is the partner who is responsible for payment of any income tax.
The benefits of operating as a partnership include:
- they are easy to set up, the only registrations required are for a Tax File Number, Australian Business Number and Business Name (if applicable) – although a formal agreement is recommended
- as it is the partners who pay income tax, there is the possibility of “splitting” income within a household
- management expertise may be increased where there is more than one individual, as it is likely each will have their own areas of speciality
- it is easier to take annual leave or sick leave when there is a partner to rely on, and;
- pooling financial resources and increased borrowing power can assist the business to grow
Disadvantages of operating as a partnership include:
- each partner in a partnership has unlimited liability
- partnerships often change as a result of death or bankruptcy which can cause disruption to the business and may have capital gains tax consequences
- there is a danger of disagreement between the partners, and;
- each partner is an “agent” of the partnership and can act on behalf of the partnership without the agreement of the other partners
One area that often confuses people when discussing partnerships is that of wages. A partnership can pay wages to staff who are not a partner in the partnership, but since individuals cannot employ themselves, a partnership cannot pay wages to a partner – they get their remuneration through the distribution of profits only.
If you’d like to discuss your partnership business, please complete the Contact page.