Business Structures 101 - Partnerships
A Partnership business structure is when two or more partners start up and operate a business together. In a partnership, business partners receive income jointly and also share liabilities. Partnership business structure can be carried by as many as 20 partners. Responsibility, management and finances are shared between all partners and the share depends on whether the partnership is limited or general partnership. In partnership, each partner is responsible for profit, loss, debts etc even if you are not directly responsible for the occurrence. Who you partner with and how you share responsibility would depend on the type of partnership to choose for your partners.
The two types of partnership
In a General Partnership each partner is equally responsible for the operation and management of the business. General partnership also holds each partner equally liable for debts and loss.
A limited partnership limits some of the business partners whereas others remain general partners. Limited partners are not completely liable for the management of the business and as per the terms of the business, their liabilities and responsibilities are limited. At least one partner needs to be titled as a limited partner and one as a general partner.
How to Get Started with a Partnership Business Structure
First you will need to finalize a name for your business. Choose a business name that all the partners are on board with. Also, go for a name that will not require any change in the later stage, in case any partner decides to depart from the business. A thorough research before finalizing the name will be helpful to make sure that you don’t pick a name that’s already registered or trademarked. Once you have chosen a name for your business, you will need to register your business name. Registration and administration of all business names is handled by Australian Security & Investments Commission (ASIC). To register your business name click HERE.
Australian Business Number
To set up an enterprise as partnership you will have to register for an Australian Business Number (ABN) which would be used for all business purposes.
To operate a partnership business you need to have a business Tax File Number (TFN). This will be specific to your partnership enterprise which would be required at the time of filing for income tax return. This process is entirely different for Sole Traders, as they pay tax on their personal TFN. In Partnership, however, as an owner or a co-owner of the business you will need to lodge for personal tax return for the income and profit you make as well as lodge your partnership business tax return at the end of the year. You can apply for a business Tax File Number on Australian Business Number form at the same time. Click HERE to apply now.
Mentioned below are points on who pays income tax:
- Since a partnership is not a legal entity, it is not liable to pay tax on the income it earns however, the tax is paid by each of the partners on shared income and profit they make
- Partnership needs to lodge for annual partnership tax return
Goods and Services Tax
As an owner of a partnership business, you need to register for GST if your expected turnover is above $75,000. Goods and Services Tax also known as GST is a roughly 10% tax on most goods and services supplied all over Australia. Generally, businesses are supposed to include GST on the product in the price section. You only register for GST once, even if you have multiple business streams.
When to Register for GST
- Australian Taxation Office (ATO) suggests that if you have started a new business and expect your business to make more than $75,000 (that’s the business’ gross income not the profit), then you must apply for GST right away
- If you haven’t registered for GST and realize that your business will cross the $75,000 threshold then you must register for GST within 21 days
- If you have registered for GST and your turnover is under 75,000, you are still liable to include GST in your products as you have registered for GST
How to Register for GST
- If you are certain that your turnover will cross $75,000 then you can register for GST at the time you register for an ABN
- You can also register for GST through your tax agent
- Click HERE to get more information on other ways to register for GST
Factors to Consider Before Starting a Partnership Enterprise
- All partners are liable for any loss incurred by any other partner. This is especially a negative point for general partners who are equally responsible for all losses and debts
- Are you ready to get charged on a personal tax rate because as the business grows and profits your tax rate increases as well
- All decisions are to be made after discussing with all the other partners and if a single partner disagrees, the plan does not take place. Are you ready for joint management and decision making?
- Who you partner with, is the most important factor and your choice should be based on a sharp and like-minded partner than just partnering with a friend
Starting a business as partnership is relatively easy with minimum paperwork compared to a ‘Company’ business structure. In simple words, once you have registered your Business Name, an Australian Business Number and Tax File Number, you need to ensure that the TFN and the ABN is linked to your business name. To get more information on choosing the right business structure for yourself you can contact Australian Taxation Office (ATO) on 13 72 26.