What is a partnership?

Whether a partnership exists is a question of conduct: shared decision-making, a joint bank account, shared profits and mutual obligations all point to one, even without a formal document. That is what separates it from a sole trader working alone. Partners contribute capital, labour or expertise, share the profits and losses, and accept joint responsibility for the business's obligations.

There are three common forms. In a general partnership every partner can take part in management and each carries joint and several liability for partnership debts; it is common for professional practices and small trading businesses. A limited partnership has at least one general partner with full liability and one limited partner whose exposure is capped at their agreed capital contribution, provided they stay out of management. An incorporated limited partnership is a registered statutory vehicle whose limited partners have capped liability, and it is taxed as a company rather than as a flow-through partnership.

A general partnership does not pay income tax itself. It obtains an ABN and lodges an annual partnership tax return, and each partner includes their share of the net profit in their own individual or company return and pays tax at their applicable rate. Tax is assessed on the allocated share of profit, not on the cash drawings a partner takes during the year, so the accounts need to reconcile the two. Limited and incorporated limited partnerships are treated differently: the corporate limited partnership rules generally tax them as companies, with flow-through treatment only for registered venture capital partnerships such as a VCLP or ESVCLP.

If annual turnover exceeds the GST threshold the partnership must register for GST and lodge Business Activity Statements. If it employs staff it takes on PAYG withholding and superannuation guarantee obligations, although partners who are not employees are generally not entitled to super guarantee payments themselves. The ATO's partnership guidance has the detail.

Because a general partner's personal assets are on the line, insurance and paperwork matter. Professional indemnity, public liability and key person insurance can reduce personal exposure to claims arising from the business. A written partnership agreement sets out capital contributions, profit and loss shares, management authority, decision thresholds, drawings, dispute resolution, and what happens when a partner retires, dies or becomes bankrupt, which is where most partnership disputes start.

Lenders often ask general partners for personal guarantees, so partners commonly look at how business borrowing is separated from personal obligations. Asset finance and business loans are the usual options for growth capital. A partnership is simpler to set up and run than a company, and profit is taxed once in each partner's hands at their own rate, rather than at the company rate with franking credits attached to later dividends. Raising capital is harder, though, because a partnership cannot issue shares. If limited liability, outside investors or estate planning become important, a company or trust may suit better.