A partnership is a great way of running your business with someone who is like-minded, where you can both enjoy your business’s success. However, beyond making sure you have everything set out in a partnership agreement, you should also understand how you will be taxed for the income you receive.
Running your business as a partnership involves different tax obligations to operating as a sole trader or a company. In this article, we’ll outline the different tax considerations you should make if you’re considering establishing a partnership.
1. You’ll need a new Tax File Number (TFN)
Even if you or your partner/s have your own Tax File Numbers (TFNs), you will need to apply for a new one. You will also have to lodge an annual partnership tax return. This will declare your profits, losses, deductions and other business activities for the financial year.
2. Your profits will be split between you and your partner/s
Partnerships are organised so that each partner gets an equal share of the profits. This means that whatever money your business brings in, it will be divided equally amongst the partners. This is also one of the reasons why having a partnership agreement is crucial – so that each partner is on the same page and understands their responsibilities.
3. Your share of profits will be taxed individually
Even though you and your partners will share equally in your business’s profits, you will be taxed individually. This means that your earnings from the partnership will come directly to you, and you’ll have to then declare it on your individual tax return.
4. You’ll have to register a business name for your partnership
If you want your business to trade under a name other than the surname and first initials of each partner, then you’ll have to register a business name. Trading under a business name will give you the opportunity to brand and market your products, as well as create some distinction between the partners and the business itself.
Example
Jen Morgan and Paul Wilson are lawyers who have decided to start a partnership. They intend to name their firm ‘Morgan & Wilson Partners’. The legal name of the partnership however, is ‘Morgan, J. and Wilson, P.’. If they wish to trade legally as Morgan & Wilson Partners, they will have to register their business name.
5. You will not be considered an employee of the partnership
Even though you may be receiving income from the partnership, you will not be considered an employee of it. This also applies even if the partnership will be employing other workers. Similarly, you will be responsible for your superannuation arrangements. This means the partnership cannot pay your superannuation entitlements, and you will have to either have a Self-Managed Super Fund (SMSF) pay super through another employer.
Running your business as a partnership allows you to share your business’s success with others. However, it’s important to bear in mind that partnerships differ significantly from companies, and even sole trader structures. If you’re not sure which structure best suits your tax needs, it is worth consulting with a business lawyer.
