What is a Partnership?
A partnership is brought into existence when two or more people enter into an agreement, either verbally or under contract, to conduct business and share in the risks and profits. Partners are jointly and severally liable for the debts of the partnership, and any litigation brought against it.
Advantages
- Simpler structure (than a trust or company).
- Less compliance.
- Lower maintenance costs.
- Income can be split to take advantage of lower individual tax threshholds.
- Minimises workers compensation and superannuation obligations for partners.
- Capital gains taxed at the partner's level.
Disadvantages
- No asset protection - partners are personally liable, jointly and severally.
- Partnership splits income at the same ratio each year.
- Joint tenant partners cannot dispose of their interest separately.
- Tenants-in-common partners do not have any right of survivorship, ie the partnership ceases to exist when one of the partners dies.
Compliance Requirements
- ABN registration.
- Tax File Number application.
- GST registration - depends on turnover.
- BAS - monthly or quarterly (if registered for GST).
- Tax Return - yearly
- Financial records - Balance sheet and profit and loss.
General Comments
This type of structure is most suitable when two or more people are involved in the running of a business, and a more complex tax structure is not required. It enables the profits of the business to be split for tax planning purposes. The income tax is either paid at the end of the year after lodgement of income tax returns, or paid through an Income Activity Statement (IAS) during the year with an adjustment at the end of the financial year. The partners take drawings as opposed to wages and these drawings represent a distribution of the profits of the partnership.
As each partner is jointly and severally liable for the debts of the partnership, they should be mindful of asset protection. Public liability and other indemnity type insurances are recommended.
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