A Guide to the Different Types of Partnerships
There are different types of partnerships through which you can structure your business. Find out about the different types of partnerships here.
A partnership is a common business structure involving two or more people. Importantly, the laws applicable to a partnership differs between each state. The relevant laws in NSW is the Partnership Act 1892 (the Act), which defines a partnership as the relationship between between persons who are carrying on a business in common with a view to profit. The Act outlines three types of partnerships:
- A normal partnership
- A limited partnership
- An incorporated limited partnership
This article will explain these different types of partnerships, including the distinct characteristics and requirements of each in NSW. For more information or advice, it might be worth contacting an accountant or business lawyer.
A normal partnership is the most common and only type of partnership that does not require registration. It is appropriate for multiple people looking to run a business together using a simple structure.
It does not require a written agreement to be formed. Rather, determining whether a normal partnership exists will depend on various factors such as whether partners share business profits and whether property is owned by partners together.
Each partner is jointly responsible for the business’ obligations such as its debts. In terms of tax obligations, the partnership needs to lodge a tax return annually, and each partner must pay tax on their respective share of income for that year.
A limited partnership is one of two types that need to be registered with the NSW Department of Fair Trading. Although not required, it is beneficial to create a written partnership agreement.
The point of difference with a limited partnership is that there must be at least:
- One “general partner” who plays an active role in the management of the partnership. However, general partner(s) are also responsible for all of the debts of the partnership.
- One “limited partner” who plays a passive role in the management of the partnership. Limited partner(s) are also only responsible for a limited amount of the debts of the partnership.
There can only be up to 20 general partners in the partnership. However, there are no restrictions on the amount of limited partners in the partnership.
In terms of tax obligations, certain limited partnerships are taxed as a separate legal entity.
Incorporated limited partnership
An incorporated limited partnership is one of two types that need to be registered with the NSW Department of Fair Trading. It is set up as a company and is normally used for venture capital investment purposes.
Like a limited partnership, an incorporated limited partnership also involves general partner(s) and limited partner(s). There can only be up to 20 general partners in the partnership. There are also no restrictions on the amount of limited partners in the partnership.
However, limited partners are not responsible for the debts of the partnership. Instead, the general partner(s) are personally responsible for any failure of the partnership to meet its obligations.
To access specific tax concessions, the incorporated limited partnership can be registered under the Venture Capital Act 2002 (Cth). If so, however, they may be taxed like a normal partnership.
You can find more information about incorporated limited partnerships here.
Samuel is a Legal Tech Intern at Lawpath, working as part of the content team. He is currently in his penultimate year of a combined Bachelor of Business and Bachelor of Laws degree at the University of Technology Sydney. He is primarily interested in commercial law.