Partnerships — Definition, Setup, Tax & Liability

Updated 12 Mar 2026Content was accurate at the time of publication

What is a partnership?

A partnership (or business partnership) is a business structure where two or more people carry on a business together with a view to profit. The legal test focuses on whether the parties are carrying on business together and sharing profits. In practice, a partnership is often defined by conduct: shared decision-making, joint bank accounts, shared profits, and mutual obligations.

View a partnership as a commercial relationship: partners contribute capital, labour or expertise, share profits and losses, and accept joint responsibility for business obligations. The partnership itself is not a separate income tax-paying entity — profits flow through to partners who are taxed on their shares. Because partners can be personally exposed to business liabilities, clear agreement and governance are essential to reduce disputes and manage risk.

Types of partnerships

There are three common forms of partnership, each with distinct legal features:

General partnership

Two or more partners carry on business together.
Partners have rights to participate in management unless agreed otherwise.
Partners bear joint and several liability for partnership debts.
Common for professional practices and small trading businesses.

Limited partnership

At least one general partner (full liability) and one limited partner (liability limited to agreed capital contribution).
Limited partners typically must avoid management to retain limited status.
Useful when passive investors want limited exposure while management rests with others.

Incorporated limited partnership (ILP)

A statutory vehicle that combines partnership tax treatment with limited liability features for certain partners.
Requires registration and compliance with additional rules.
Used where limited liability protections are needed for specific investors or projects.

When choosing a type, weigh control, liability and investor expectations. Passive investors often prefer limited partnership arrangements; active owners may stay with a general partnership or consider a company structure if limited liability is essential.

Key elements of a partnership

A valid partnership typically involves these elements:

Number of partners: Minimum of two (check jurisdictional rules for any exceptions).
Capacity: Partners can be individuals, companies or trusts; a corporate partner brings corporate compliance obligations.
Partnership name and business name: You may trade under a partnership name or register your business name. Registration is required if trading under a name other than partners' personal names.
ABN and registration basics: Apply for an ABN and ensure each partner's TFN is available for tax reporting.
Partnership agreement: A written agreement is strongly recommended to set out profit shares, duties, decision-making, dispute resolution and exit mechanisms.

Practical items include a dedicated partnership bank account, bookkeeping and accounting systems, clearly documented capital contributions and licence/permit checks.

How partnerships are taxed and reported

Partnerships are a flow-through vehicle for tax: the partnership lodges an information return but does not pay income tax on profits. Each partner is assessed on their share of partnership income.

Key tax points:

The partnership must obtain an ABN and generally lodge an annual partnership tax return with the tax office.
Each partner includes their share of partnership net profit in their individual (or corporate) tax return and pays tax at their applicable rate.
GST registration is required if annual turnover exceeds the GST threshold — see ATO guidance. If registered, the partnership must lodge Business Activity Statements (BAS).
PAYG withholding and superannuation guarantee obligations apply if the partnership employs staff.

Numeric example (simple pass-through illustration)

Partnership net profit for the year: AUD 120,000 Partners: Alice (60% share), Ben (40% share)

Alice's assessable share = 120,000 × 0.60 = AUD 72,000
Ben's assessable share = 120,000 × 0.40 = AUD 48,000

Each partner reports these amounts on their tax return and pays tax at their marginal or applicable corporate rate. Drawings during the year are not taxed directly — tax is on the allocated share of net profit, not cash drawings — so maintain good accounting to reconcile allocations and cashflows.

Related operational compliance includes GST/BAS, PAYG withholding, payroll systems and superannuation. For detailed rulings, consult the ATO partnership guidance.

Legal obligations and liability

Legal obligations vary by partnership type but commonly include registration, record-keeping and employment compliance. Liability is a central consideration:

General partnerships: Partners have joint and several liability. Creditors can pursue one or more partners for the whole debt, with internal rights of contribution between partners.
Limited partnerships / ILPs: Limit liability of certain partners to their agreed contribution, provided limited partners do not engage in management. ILPs require formal registration and statutory compliance.
Registration/filings: register your business name where required; obtain ABN/TFN details; partnerships lodge partnership returns with the tax office.
Insurance: Recommended policies include professional indemnity, public liability, and key person insurance. Insurance can mitigate personal exposure where partners face claims arising from business activities.

Because personal assets can be at risk in general partnerships, carefully consider liability, insurance and whether an alternative structure (company or trust) better suits your needs.

Partnership agreement — what to include

A written partnership agreement reduces ambiguity and provides an enforceable framework for governance, profit distribution and exits. Below is a practical checklist with clause headings and wording prompts you can adapt.

Essential clauses

Name and business: "The partners will carry on business as [partnership name] for the purpose of [describe business]."
Term: "This partnership commences on [date] and continues until terminated under this agreement."
Capital contributions: "Each partner will contribute capital as set out in Schedule A. Additional contributions require unanimous consent."
Profit and loss sharing: "Profits and losses will be shared as follows: Partner A XX%, Partner B XX%."
Management and authority: "Partner A will manage daily operations. Major decisions (e.g., >AUD X, acquisitions) require unanimous/majority approval."
Decision-making and voting: "Each partner has one vote / votes are proportional to profit share. Deadlocks resolved by [mechanism]."
Partner duties and restrictions: "Partners must act in the partnership's best interests, avoid conflicts, and disclose related-party dealings."
Remuneration and drawings: "Partners may take drawings up to AUD X per month. Salaries to partners are/are not permitted and will be treated as drawings for tax purposes."
Financial reporting and audits: "Accounts prepared annually by a qualified accountant and presented within X days of year-end."
Dispute resolution: "Parties will follow negotiation → mediation → arbitration before court proceedings are commenced."
Admission, retirement and death: "Admission requires unanimous consent and completion of paperwork. On retirement or death, the departing partner's interest is valued per Schedule B and settled as set out."
Valuation and buy-sell mechanics: "Valuation to be by independent valuer within 60 days. Purchase price payable as cash/installments/loan with interest at [rate]."
Dissolution and winding up: "Events causing dissolution: agreed termination, insolvency, court order. Winding-up steps: settle liabilities, distribute surplus per profit share."
Confidentiality and non-compete: "Partners agree to confidentiality and a limited non-compete for X months within Y km of partnership operations."
Insurance and indemnities: "The partnership will maintain the following insurances: [list]. Partners indemnify each other only for willful misconduct."

Sample clause prompts are drafting aids and do not replace legal advice. Have a lawyer review the final agreement and consider a partnership agreement template only as a starting point.

Pros and cons of choosing a partnership

Pros

Simple to establish and operate with fewer formalities than a company.
Pass-through taxation can avoid double taxation.
Flexibility in profit sharing and management arrangements.
Well-suited for professional services and small trading ventures.

Cons

Personal liability for general partners — potential exposure of personal assets.
Raising capital is generally harder than via a company issuing shares.
Partner disputes can destabilise the business.
Transfer or exit of partners can be complex without strong agreement terms.

Compare these points with a company structure or a trust when evaluating long-term growth, investment and liability needs.

How to set up a partnership — step-by-step checklist

A concise checklist to follow when forming a partnership:

Decide partners and the appropriate partnership type (general, limited, ILP).
Agree key commercial terms (profit split, management, contributions).
Draft and sign a written partnership agreement (seek legal review).
Apply for an ABN and register the partnership with ABR; ensure partners have TFNs.
Register your business name if required.
Determine GST registration (check threshold) and register if required; set up BAS systems.
Set up payroll and superannuation systems if employing staff; register for PAYG withholding.
Open a dedicated partnership bank account; implement bookkeeping and accounting systems.
Organise necessary licences, permits and insurance (professional indemnity, public liability, key person).
If funding is required, assess finance options such as asset finance or https://emumoney.com.au/business/small-business-loans for growth capital.

This sequence helps ensure legal and tax compliance from day one.

Managing common disputes and risk mitigation

Disputes commonly arise over profit distributions, management control, unequal contribution or exiting partners. Practical mitigation steps:

Clear written agreement: Specify duties, decision thresholds and exit mechanics.
Regular reporting and meetings: Monthly financial updates and annual strategy reviews reduce surprises.
Independent accounting and audit rights: Allow transparent verification of accounts.
Alternative dispute resolution (ADR): Include stepwise negotiation → mediation → arbitration clauses to avoid costly court proceedings.
Buy-sell funding: Set valuation methodology and funding mechanisms (instalments, partner loans, insurance).
Key person insurance: Protects the partnership if a principal partner dies or is incapacitated.
Limit personal guarantees: Where possible, separate partner obligations from business debt or structure borrowing via https://emumoney.com.au/business/small-business-loans or other finance that minimises personal exposure.

When disputes escalate, neutral mediators and enforcing contractual ADR steps usually yield better commercial outcomes than litigation. For funding, assess finance options such as asset finance or other business loans for growth capital.

Ending or changing a partnership

Partnerships can end by agreement, expiration, insolvency, death or court order. Typical end/change processes:

Retirement or exit: Use buy-out mechanics in the agreement—valuation, payment terms and tax timing. Consider staged payments to preserve cashflow.
Death or incapacity: Agreement should specify whether the estate inherits the interest, buy-out rights, or compulsory sale.
Bankruptcy of a partner: Creditors may claim the bankrupt partner's rights; agreements commonly restrict assignment of partnership interests and provide buy-out options.
Dissolution and winding up: Settle liabilities (including employee entitlements), publish final accounts, lodge final partnership tax return and distribute residual assets per agreement.
Tax implications: Final tax positions must be reconciled, including capital gains events on disposal of partnership assets or interests. Partners file final returns reflecting distribution of profits up to dissolution.

Documenting procedures in the partnership agreement reduces friction and supports compliance with tax reporting.

When to consider a different structure

Consider switching structure when:

You need limited liability for owners and protection of personal assets (consider a company structure).
You plan to raise equity capital or attract outside investors.
You require tax planning flexibility or estate planning features (a trust may be relevant).
You anticipate rapid scale-up, franchising, or sale of the business.

If limited liability, investor-friendliness or complex governance is required, a company or trust may be more appropriate.

Key takeaways

A partnership is a flexible, relatively simple structure where profits flow through to partners for tax. The main risk for general partners is personal liability — consider insurance and alternative structures if liability is a concern. A clear, written partnership agreement addressing management, profit splits and exit mechanics is essential. Ensure ABN, GST, PAYG and payroll obligations are set up correctly from day one. For raising capital or limiting owner liability, evaluate company or trust structures.

FAQ

What is the minimum number of partners?

The minimum is two partners for a partnership. Some forms (e.g., ILP) have specific statutory requirements—check regulator guidance.

Can a company be a partner?

Yes. A company can be a partner, but that company must meet its own corporate compliance obligations and tax reporting.

Do you need a formal partnership agreement?

A written agreement is not always legally required to form a partnership, but it is strongly recommended to record rights, obligations and exit mechanisms.

Who pays the tax in a partnership?

The partnership lodges an information return, but each partner pays tax on their share of net partnership income in their own tax return.

How do I register for ABN and GST for a partnership?

Apply for an ABN and determine GST registration based on turnover thresholds; check ATO GST guidance.

Are partners personally liable for partnership debts?

In a general partnership, yes—partners are jointly and severally liable. Limited partnerships and ILPs provide limited liability for specified partners subject to rules.

Can I change the profit split later?

Yes, but changes should be recorded in a variation to the partnership agreement and reflected in accounting and tax allocations.

What happens when a partner dies?

The partnership agreement should specify buy-out terms or transfer arrangements. Absent agreement, partnership law and estate procedures apply.

Do partners need to pay superannuation?

Partners who are not employees generally aren't entitled to superannuation guarantee payments; however, if a partner is also an employee (remunerated), superannuation guarantee obligations may apply — check ATO guidance.

Is a partnership good for raising capital?

Partnerships can raise capital from partners or by debt, but they are less suited than companies for issuing shares to many external investors.