Different Business Structures: Part 3: Partnership

A partnership is formed when two or more people (up to 20) go into business together with a view to making a profit. They may operate under their own names or with a registered business name. Limited partnerships involve passive investors who are not involved in managing the business.

A partnership is not a separate legal entity and does not pay income tax on the income earned by the partnership. Instead, each partner pays tax on their share of net partnership income. In a partnership, liability is also unlimited (unless you are in a limited partnership) and extended to debts incurred by a partner without the knowledge or consent of the other partner.

Advantages of Partnership

• Can use 50% discount method to calculate capital gains.
• Can use CGT small business concessions.
• Can lend without tax consequences i.e. no Division 7A
• Losses can be offset against other income
• Easy to admit partners and trading stock and rollover relief is available
• It is inexpensive to set up or run
• Easily understood
• Can refinance working capital
• If trust used as partners, asset protection can be gained.

Disadvantages of Partnership

• From an income taxation perspective, partnership cannot utilize FBT salary packaging
• Personal Services Income Rule apply.
• Non-commercial loss rules apply.
• Possible double taxation of working capital when partners leaves partnership
• There is unlimited liability
• PAYG calculation can be complex
• Cannot claim interest on borrowings to make superannuation contributions
• Substantiation rules apply for certain expenses

Other articles in this series:

• Sole Trader
• Company
• Unit Trust
• Discretionary Trust

This article has been prepared for the purposes of general information and guidance only. It should not be used for specific advice or used for formulating decisions under any circumstances. If you would like specific advice about your own personal circumstances please contact our office.