When you start a business there are several ways you can set it up and one of the easiest ways if you are working with two or more people is setting up as a partnership.
A partnership is defined as a group or association of people who carry on a business and distribute income or losses between themselves. For example, if you and a friend or family member decide to set up a business together, you might operate it as a partnership.
A partnership is relatively inexpensive to set up and operate. The partners share income, losses and control of the business.
A written partnership agreement is not essential for a partnership to exist but is a good idea. A partnership agreement should outline how income or losses will be distributed to the partners and how the business will be controlled.
A partnership agreement can help prevent misunderstandings and disputes about what each partner brings to the partnership, and what they are entitled to receive from the income of the business. This is particularly important for tax purposes if the profit or losses are not distributed equally among partners.
The partners in a partnership are not employees, but the partnership might also employ other workers.
Partners are responsible for their own superannuation arrangements. However, the partnership is required to pay superannuation for its employees.
Key features of a partnership
In a partnership business structure:
• income, losses and control of the business are shared among the partners
• the partnership has its own TFN and must lodge an annual partnership return showing all income and deductions of the business
• the partnership doesn't pay income tax on the profit it earns – each partner reports their share of the partnership income in their own tax return
• each partner pays tax on their share of the partnership profit at the individual tax rate and may be eligible for the small business tax offset
• the partnership must apply for an ABN and use it for all business dealings
• the partnership must be registered for GST if its annual GST turnover is $75,000 or more.
As a partner you can't claim deductions for money drawn from the business. Amounts you take from a partnership are not wages for tax purposes.
Is this the right set up for you? Clarify that with a tax and legal professional to ensure that you have the right set up for you and your business.