Everything you need to know about a partnership in business

Starting a partnership can be a smart way to share responsibility, skills and business costs. It offers flexibility, simple setup and a clear profit-sharing structure. However, it also comes with risks, such as unlimited liability in general partnerships and potential partner disputes.[ez-toc]

A quick guide to understanding a partnership

A partnership is a business structure where two or more people share ownership, profits and responsibilities. Unlike a company, a partnership is not a separate legal entity, so partners are personally liable for debts of the business. It is easy to set up, cost-effective, and offers shared control. Choosing the right partner and a clear partnership agreement can help avoid disputes.

What is a partnership and how does it work?

A partnership is a legal business structure where two or more people share ownership, responsibilities and profits. A partnership is not a separate legal entity like a company. Instead, the partners are personally responsible for the debts of the business.

Why businesses choose a partnership

Many small and medium-sized businesses choose partnerships because they are simple to set up and cost-effective. A new partnership requires fewer legal formalities than a company and offers more flexibility in the management of the business.

How partnerships compare to other business structures

Choosing the right business structure depends on factors like liability, taxation and decision-making control. Below is a comparison of a partnership, sole trader and company.StructureLegal statusLiabilityTaxationControlSole traderOperates under owner's namePersonally liable for all debtsReports all income in personal tax returnFull controlPartnershipNot a separate entityPartners are personally liableEach partner pays tax on the share of the net incomeShared controlCompanySeparate legal entityLimited liabilityPays tax on profits and may pay dividendsDirectors manage operations

How a partnership works

• Partners may contribute money, skills or assets to run the business.
• Each partner must include their share of the net partnership income in their personal tax return.
• Partners are jointly responsible for debts, unless it is a limited partnership where some partners’ liability is limited to the amount they invest.

A partnership is a business structure that suits people who want to operate a business together while sharing risk and responsibility. Understanding the advantages and disadvantages can help decide if it is the right choice.

Types of partnerships: general vs. limited partnerships

A partnership can take different forms depending on how partners share control and liability. Choosing the right type depends on business goals, risk tolerance and legal requirements.

General partnership (GP)

A general partnership is the most common type. All partners share control and responsibility for the operation of the business. They also share the debts of the business.Key features:

• Each partner must take part in the day-to-day running of the business.
• Partners are personally liable for all debts.
• If a partner pays tax, they do so on their share of the net income.
• The partnership can be dissolved and a new one formed if a partner leaves.

Best for: Small businesses where all partners want equal control and responsibility.

Limited partnership (LP)

A limited partnership has two types of partners:

1. General partners – manage the business and have unlimited liability.
2. Limited partners – invest in the business but do not take part in management. Their liability is limited to their investment.

Key features:

• General partners make all business decisions.
• Limited partners cannot be involved in the management of the business.
• Limited liability applies only to limited partners.

Best for: Investment firms or businesses where some partners may only want to fund the business.

Incorporated limited partnership (ILP)

An incorporated limited partnership is a special type of partnership with limited liability for all partners except one. At least one general partner must have unlimited liability for the debts of the business.Key features:

• Provides limited liability for most partners.
• Requires registration with the Australian Business Number (ABN).
• Used mostly by high-risk businesses like venture capital firms.

Best for: High-risk businesses that need investment funding.Legal requirements for ILP's can be more complex than other partnership arrangements and have different requirements depending on the state or territory. Seeking legal advice can help you choose the best business structure for your purpose.

Comparison of partnership types

TypeManagement controlLiability exposureCommon use casesGeneral partnershipShared by allUnlimitedSmall businessesLimited partnershipGeneral partner onlyLimited for investorsInvestment firmsIncorporated limited partnershipLimited for all partnersLimitedHigh-risk venturesEach partnership structure offers different levels of control, risk and legal obligations. Choosing the right one depends on the purpose of the business.

How taxation works for partnerships

A partnership itself does not pay income tax. Instead, individual partners report their share of the net partnership income in their tax return. This makes taxation in partnerships simpler than in companies, but each partner is personally liable for their tax obligations.

Key tax obligations for partners

Partners must meet several tax responsibilities. These include:

• Reporting income – Each partner must declare their share of the net income in their individual tax return.
• Lodging a tax return – The partnership must lodge a separate tax return each year. This return reports the partnership’s income but does not calculate tax.
• Paying tax – Each partner pays tax based on their individual tax file number and income bracket.
• Registering for GST – If the partnership’s annual turnover is $75,000 or more, it must register for Goods and Services Tax (GST).
• Keeping records – A partnership must keep records of income, expenses, debts and other financial details for at least five years.

Comparison of taxation across business structures

StructurePays tax directly?Tax return required?GST registration required?LiabilitySole traderNo, owner pays taxYes, personal tax returnYes, if turnover is $75,000+Owner is personally liablePartnershipNo, partners pay tax on their shareYes, separate tax return requiredYes, if turnover is $75,000+Partners are personally liableCompanyYes, pays tax on profitsYes, company tax return requiredYes, if turnover is $75,000+Limited liabilityA partnership’s tax obligations depend on the individual partners and how much income they receive. Understanding these rules ensures partners meet legal and taxation requirements.

Choosing the right partner for your business

The right partner can help a business grow and succeed. The wrong one can cause conflict, financial strain and even business failure. Choosing a partner requires careful thought about skills, investment and values.

What to look for in a business partner

A good partner should bring value to the business. Consider the following factors before making a decision:

• Skills and expertise – A partner should have complementary strengths. If one partner excels at sales, the other might focus on operations.
• Financial contribution – A partner’s investment affects their ownership percentage. More funds mean more control over the business structure.
• Work ethic and values – Partners must share a vision for the business. A mismatch in values can lead to conflict.

Red flags to watch for in a business partner

A bad partner can cause serious problems. Look out for:

• Lack of financial transparency – A partner who hides income, debts or losses can be a risk.
• Poor decision-making history – Past business failures or bad financial choices may signal trouble.
• Misaligned business vision and goals – If one partner wants to expand while the other prefers to limit growth, conflicts can arise.

A partnership is a legal commitment. A clear partnership agreement helps set rules and avoids disputes. Seeking legal advice before entering a new partnership is a smart step.

How to set up and manage a partnership effectively

Setting up a partnership requires planning and organisation. A well-managed partnership reduces conflict, financial risk and legal issues.

Step-by-step guide to establishing a partnership

1. Choose the right structureDecide if a general partnership, limited partnership or incorporated limited partnership suits the business purpose. Each structure has different liability rules and management requirements.
2. Register the business and apply for an ABNA partnership must register a business name and apply for an Australian Business Number (ABN). If the partnership’s income exceeds $75,000, it must also register for GST.
3. Open a business bank accountA separate bank account keeps partnership assets organised. It ensures all income, expenses and debts are recorded properly.
4. Draft a partnership agreementA partnership agreement outlines:
   • Profit-sharing terms
   • Roles and responsibilities of each partner
   • Exit strategies if a partner leaves
   • Liability for the debts of the businessA clear agreement prevents disputes and protects partners from unexpected losses.

If you are seeking a simple profit-share arrangement instead of a partnership, Business Kitz Profit Share Agreement Template can help get you started.

Best practices for managing a partnership

• Communicate openly – Hold regular meetings to discuss business decisions and solve problems.
• Define roles – Each partner must know their responsibilities to avoid confusion.
• Use dispute resolution strategies – Include a clause in the partnership agreement for handling disputes fairly.

A well-structured partnership improves efficiency, reduces risk and ensures long-term success.

Understanding liability and risk in partnerships

A partnership can bring growth and financial success, but it also carries risk. The level of liability depends on the type of partnership chosen.

Liability limits in different partnership types

• General partnership – General partners are personally liable for all debts of the business. If the business cannot pay its debts, creditors can claim the partners’ personal assets.
• Limited partnership – Limited partners’ liability is limited to the amount they invest. However, a general partner still has unlimited liability.
• Incorporated limited partnership – Most partners have limited liability, but at least one general partner remains personally liable for all debts.

Risk factors in partnerships

• Personal financial risk – In a general partnership, creditors can seize partners’ personal assets if the business incurs debt.
• Disputes between partners – Without clear rules, conflicts can arise over profit-sharing, decision-making and business direction.
• Unexpected losses – The partnership structure does not protect against business failure. If the business faces legal action or suffers financial loss, all general partners share the burden.

How to protect against liability risks

• Use a partnership agreement – A strong partnership agreement sets clear rules on profit-sharing, decision-making and responsibility.
• Get insurance – Business insurance can cover legal claims, property damage and unexpected losses.
• Choose the right structure – A limited partnership or incorporated limited partnership offers some protection for certain partners.

A partnership is a legal commitment. Partners should seek legal advice to understand liability, risk, and protection options before forming a new partnership.

The importance of a well-drafted partnership agreement

A partnershipagreement is a legal document that outlines the rules and responsibilities of each partner. It helps prevent disputes, protects business interests and ensures smooth management. Without a clear agreement, misunderstandings can lead to financial loss or even business failure.

Key elements of a strong partnership agreement

A well-drafted agreement should cover:

• Profit-sharing terms – Define how partners share profits and losses. This can be equally or based on each partner’s financial contribution.
• Decision-making processes – Outline how partners make key business decisions. Include voting rights, day-to-day responsibilities and a clear management structure.
• Exit strategies – Set rules for when a partner leaves or if the partnership is dissolved and a new one is formed. Cover buyout terms, liability for the debts of the business and how assets are divided.

Example: avoiding legal disputes with a strong agreement

Sarah and James started a firm in marketing. They did not sign a partnership agreement, assuming they would always agree on business decisions. After two years, James wanted to limit operations, but Sarah wanted to expand. They disagreed on how to fund growth and who should have the final say in the management of the business.Without a clear decision-making rule, the partnership ended in a costly legal dispute. Had they signed an agreement, they could have followed a set clause for resolving conflicts.A partnership agreement protects partners, assets and the future of the business. Seeking legal advice before starting a new partnership is a smart step.

How and when to pay partnership-related taxes

Partners in a partnership must pay income tax on their share of the net business earnings. The partnership itself does not pay tax, but it must report its income to the Australian Taxation Office (ATO).

When and how partners pay tax

• Each partner pays tax on their individual share of the partnership income.
• The tax rate depends on the partner’s total income, including earnings from other sources.
• If a partner earns above the threshold, they must pay income tax in instalments through the Pay As You Go (PAYG) system.
• Partners can reduce their tax burden by claiming deductions for business expenses, losses and contributions to superannuation funds.

How to set aside tax payments

• Estimate tax obligations – Work out how much income tax is due based on expected earnings.
• Keep funds separate – Set aside a portion of business income regularly to cover tax payments.
• Use an accounting system – Track income, expenses and tax obligations throughout the year.
• Seek professional advice – A tax accountant can help with tax planning and reporting.

Business Activity Statement (BAS) for GST-registered partnerships

A partnership must lodge a BAS if its annual turnover exceeds $75,000. The BAS reports:

• GST collected from sales.
• GST credits claimed on purchases.
• PAYG instalments for income tax.

Partners must lodge the BAS quarterly or monthly, depending on ATO requirements. Staying on top of tax obligations helps avoid penalties and ensures smooth business operations.

How to lodge necessary legal documents for your partnership

A partnership must meet certain legal requirements to operate lawfully. Proper registration, licensing and record-keeping help avoid fines and disputes.

Legal compliance steps

1. Register the partnership
   • Apply for an Australian Business Number (ABN) through the Australian Business Register (ABR).
   • If using a business name, register it with the Australian Securities and Investments Commission (ASIC).
   • Obtain a Tax File Number (TFN) for the partnership.
2. Apply for necessary licences and permits
   • The required licences depend on the industry, business structure and location.
   • Common permits include food handling, construction and professional trade licences.
   • Check local council regulations for zoning and operational requirements.
3. Ensure compliance with state and federal law
   • Follow state partnership laws and industry regulations.
   • If hiring employees, register for Pay As You Go (PAYG) withholding tax and superannuation obligations.
   • If turnover exceeds $75,000, register for Goods and Services Tax (GST).

Record-keeping obligations and audit preparation

Obligations include, but are not limited to, the following:

• Maintain records of income, expenses, tax returns and financial transactions for at least five years.
• Keep a separate bank account for partnership assets to track financial activity.
• File tax and legal documents by ATO and government deadlines.
• Prepare for potential audits by keeping all receipts, invoices and financial reports consistent and well-organised.

Following these legal steps will help the partnership remain compliant and minimise the risk of incurring penalties. Some industries and partnership types may have stricter reporting requirements. Seeking legal advice can help partners meet their obligations with confidence.Business Kitz can help you streamline your document management systems. Access over 100 document and agreement templates in our Document library, securely store important contracts in our Document vault and more! Sign up for a free account today.

Advantages and disadvantages of partnerships

A partnership offers flexibility and shared responsibility, but it also comes with risks. Understanding the pros and cons helps partners decide if this business structure suits their needs.

Pros of partnerships

• Easy to establish and manage – A partnership requires fewer legal formalities than a company. The setup process is simple and has lower costs.
• Shared financial and operational responsibilities – Partners combine funds, skills and expertise to operate a business more effectively. This reduces workload and allows for specialised management.
• Tax benefits compared to corporations – A partnership does not pay tax on business income. Instead, each partner pays tax on their share of the net income at individual tax rates. This can be lower than the corporate tax rate.

Cons of partnerships

• Unlimited liability in general partnerships – Partners are personally liable for the debts of the business. If the business incurs debt, creditors can claim the partners’ personal assets.
• Potential for disputes among partners – Differences in decision-making, work ethic or financial contributions can cause conflict. A partnership agreement helps limit disputes.
• Business continuity challenges if a partner exits – If a partner leaves or passes away, the partnership is dissolved, and a new one may need to be formed. This can disrupt business operations.

Comparison of pros and cons

AdvantagesDisadvantagesSimple and low-cost setupPartners are personally liable for debtsShared financial investmentDisputes can arise over management decisionsTax benefits for partnersBusiness may need restructuring if a partner exitsGreater access to skills and expertiseProfit-sharing may cause conflictsA partnership can be a strong business structure, but it requires trust, planning and clear legal agreements to manage risks.

Feedback from business owners: real experiences with partnerships

Many business owners choose a partnership to share responsibility, skills and costs. While some partnerships thrive, others face challenges that test their management and structure. Learning from real experiences helps new partners make informed decisions.

Common challenges and solutions

1. Unequal workload

• Some partners may contribute more effort, leading to frustration.
• Solution: Set clear roles and expectations in a partnership agreement. Regular meetings help track workloads and ensure fairness.

2. Disputes over financial decisions

• Partners often disagree on spending, investments or profit distribution.
• Solution: Create a financial plan that outlines spending limits, profit-sharing and reinvestment strategies.

3. Exit and succession issues

• If a partner leaves, the partnership is dissolved, a new one may need to be formed. This can disrupt operations.
• Solution: A partnership agreement should include an exit strategy that covers buyouts, debt responsibility and business continuity.

Lessons from successful partnerships

• Trust and communication are key – Open discussions prevent conflicts and keep all partners aligned.
• Defined roles improve efficiency – Successful partnerships assign responsibilities based on skills and expertise.
• Legal agreements protect the business – A clear partnership agreement prevents misunderstandings and ensures fairness.

Many business owners say that a partnership works best when partners share the same vision, respect each other’s skills and plan for long-term success.

Frequently asked questions about partnerships

How does a partnership lodge a tax return?

A partnership must lodge a separate tax return each year to report its income and expenses. The partnership itself does not pay tax. Instead, each partner includes their share of the net business earnings in their individual tax return.

What does limited liability mean in a partnership?

In a limited partnership, a general partner manages the business and has unlimited liability, while a limited partner is an investor whose liability is limited to their investment. An incorporated limited partnership offers limited liability to most partners except at least one general partner, who remains responsible for all debts.

What law applies to partnerships in Australia?

Each state and territory has its own partnership laws. These laws outline partners’ rights, responsibilities and how disputes are handled. A partnership agreement helps ensure compliance with the appropriate laws.

Can a partnership use income splitting?

Yes, a partnership allows income splitting, as each partner reports their share of the net earnings separately. This can help reduce tax liability, depending on each partner’s total income and tax bracket.

How should a partnership schedule tax payments?

Partners should schedule tax payments through the Pay As You Go (PAYG) system. Setting aside money regularly ensures they can pay tax when due. Seeking advice from a tax professional is often appropriate for managing obligations.

Can a partnership provide services to a client?

Yes, a partnership can provide services to a client in various industries, including law, accounting, healthcare and consulting. Each partner shares responsibility for service quality, client relationships and legal compliance.

Can a partnership take on additional partners?

Yes, a partnership can add an additional partner if all existing partners agree. The partnership agreement should outline how to introduce new partners and adjust profit-sharing, responsibilities and decision-making.

Can a partnership have direct control over its finances?

Yes, a general partnership allows all partners to have direct control over financial decisions. In a limited partnership, only the general partner manages finances, while limited partners act as passive investors.

Is a partnership the right choice for your business?

A partnership can offer shared responsibility, financial benefits and a simple structure, but it also comes with risks. Choosing the right partner, setting clear roles and having a strong partnership agreement is the key to success.Before starting a partnership, consider:

• Liability – General partners are personally liable for debts. A limited partnership can reduce risk.
• Financial commitments – Each partner must contribute fairly and share profits as agreed.
• Legal and tax obligations – A partnership must register, lodge tax returns and follow state and federal laws.

A clear partnership agreement helps prevent disputes and protects business interests. Use Business KitzDocument creator to fast-track your business agreement development. Seeking expert legal and tax guidance also ensures your partnership stays compliant and set up for long-term success.Sign up to Business Kitz for free today!Disclaimer: This content is intended to be used for educational and informational purposes only. Business Kitz does not offer legal advice and cannot guarantee the accuracy, reliability, or suitability of its website content for a particular purpose. We encourage you to seek professional advice from a licensed professional and verify statements before relying on them. We are not responsible for any legal actions or decisions made based on the information provided on our website.Unless expressly stated otherwise, all content, materials, text, images, videos and other media on this website and its contents are the property of their respective copyright owners.