Tom Willis is an award-winning marketing leader and Co-founder of Lawpath. Tom’s journey journey includes steering several entrepreneurial projects and addressing the unique challenges faced by small businesses. As the Chief Marketing Officer at Lawpath, Tom has been pivotal in shaping the company’s marketing strategy and business growth.
Introduction
Before getting started in business and more particularly a partnership, a great article to read Is a ‘Partnership’ Right for my Business? to determine whether that’s the path for you. A partnership in its simplest form is when 2 or more people co-operate the business and share the income. Partnerships have different tax implications to usual businesses and this article will focus on those.
Legal Requirements
When establishing a partnership there are numerous requirements that you need to take into consideration. We’ve outlined in these – How to Establish a Business Partnership.
There are different types of partnerships and each one has a slight change in the application of tax. The Australian Taxation Office (ATO) and Department of Industry, Innovation and Science give a brief outlines of Partnerships. Let’s have a quick look at what each type is, how they are formed and how tax applies to that structure.
Normal Partnership
Used when you plan to run a small business with a simple model. Partners have equal rights and responsibilities.
This type of partnership does not pay income tax on profit. Instead, each partner pays their own tax based on their income.
Limited Partnership
Used if you plan to have at least one limited and one general partner. The general partner is liable for the debts of the partnership but also takes a more active role in the partnership as a whole. Whereas the limited partner has liability for the debts of this type of partnership only to a limit but play a less active role.
Because this type of partnership must be registered as a separate legal entity it is taxed as a single entity.
Incorporated Limited Partnership
Used if a limited partnership wants to create a distinct company out of a few of its partners to gain venture capital. Each partner has no liability for the debts of the partnership or its general partners. Also, they cannot be active in the management of the partnership.
Must be registered with NSW Department of Fair Trading and if registered under the Venture Capital Act will be taxed similarly to that of a normal partnership explained earlier.
Reporting
Whilst the partnership income as a whole is taxed only once distributed to partners, the business still needs to lodge a partnership tax return to be compliant under Australian taxation laws. Consulting a Business Taxation Lawyer to assist with this lodgement will ease any concerns you may have.
If you’re ready to form a partnership, get started below with our partnership agreement. This will also include a further explanation of the distribution of tax and profits.
Get your binding partnership agreement in minutes.
Unsure where to start? Contact a LawPath consultant on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest legal marketplace.
