Starting a business with another person can bring valuable skills, capital, industry contacts and shared momentum. It can also create uncertainty around control, profit sharing, tax, personal exposure to debts and what happens if one person wants to leave.
A partnership can be a practical structure for Australian entrepreneurs, particularly where two or more people want to operate a business together without establishing a company at the outset. The key is to treat the formation process as more than an ABN application. Clear commercial arrangements, accurate registrations and disciplined record-keeping give the business a far stronger foundation.
Is a partnership the right structure for your business?
A partnership involves two or more people or entities carrying on a business together and sharing income or losses. For tax purposes, the definition can also extend to people jointly receiving income, so it is important not to assume that shared ownership automatically has the same legal and tax outcome as a business partnership.
For many small businesses, a partnership may suit where the owners want to combine their efforts directly and keep the structure relatively straightforward. Partners can contribute different things, such as cash, equipment, intellectual property, customer relationships, specialised skills or time.
However, a partnership should be chosen deliberately, not simply because two people decide to work together. In an ordinary partnership, partners can have personal exposure to the debts and obligations of the business. The risk profile may be very different for a low-cost consulting business than for a construction, hospitality, retail or professional services business with employees, stock, leases or substantial borrowing.
Before proceeding, consider:
– who will be partners, including whether they will be individuals, companies or trustees;
– what each partner will contribute at the start and over time;
– whether the business will borrow money, sign leases or enter major supply contracts;
– whether the business will employ staff;
– whether personal assets may be exposed if the business cannot meet its obligations;
– whether the business may eventually need investors, a sale process or succession planning; and
– whether a company or trust structure may better suit the longer-term plan.
A partnership is not automatically the cheapest or easiest option once all tax, legal, banking, insurance and administration requirements are taken into account. The right structure depends on the commercial circumstances, not just the expected income in the first year.
Start with a frank discussion between prospective partners
Many partnership problems begin before the business even starts. Partners may agree broadly on the idea but have very different expectations about workload, decision-making, money and risk.
Before registering anything, have a detailed discussion and record the key commercial decisions. It is easier to negotiate these matters when everyone is optimistic than when the business is under financial pressure.
Important topics include:
– the purpose and scope of the business;
– each partner’s role, responsibilities and expected time commitment;
– initial cash contributions and whether further contributions can be required;
– ownership of equipment, stock, branding, intellectual property and client lists;
– authority to sign contracts, borrow money or make significant purchases;
– the process for approving budgets and major decisions;
– how profits and losses will be shared;
– whether partners can take regular drawings from the business;
– how business expenses will be approved and reimbursed;
– what happens if a partner becomes unwell, dies, retires, divorces or wishes to sell their interest;
– whether a partner can operate another business or compete with the partnership;
– how disagreements will be managed; and
– what happens if the partnership must close or sell its assets.
It is particularly important to separate ownership from effort. A partner who contributes most of the start-up capital may expect a larger share of profits. Another may contribute less cash but perform most of the day-to-day work. Neither approach is inherently wrong, but the arrangement should be explicit.
A business can become a partnership without a formal written agreement in some circumstances. That does not mean relying on an informal understanding is a sensible approach. A carefully prepared agreement can reduce uncertainty and give the partners a workable process when circumstances change.
Put a tailored partnership agreement in place
A partnership agreement is the operational rulebook for the owners. It should be prepared with legal advice and aligned with the business’s tax, accounting and commercial arrangements.
There is no universal agreement that suits every business. A professional services partnership will usually need different provisions from a trade business, online retailer or family-operated enterprise.
At a minimum, a well-drafted agreement should address the following areas.
Ownership, capital and profit sharing
The agreement should identify each partner and their ownership interest. It should also record what each partner contributes, whether in cash, assets, labour or intellectual property.
Profit-sharing arrangements should be unambiguous. This includes deciding whether profits and losses are shared in the same proportions and how adjustments will be handled if one partner contributes additional funds or does not meet agreed responsibilities.
Management and decision-making
Define who can make ordinary operational decisions and which matters require all partners to agree. Common examples of major decisions include taking out finance, entering a commercial lease, hiring senior staff, purchasing expensive equipment, admitting a new partner or selling the business.
Without agreed boundaries, a disagreement about a single contract or expense can quickly become a dispute about control.
Drawings, remuneration and reimbursements
Partners are not employees of the partnership. Amounts a partner takes from the business are generally not wages for tax purposes, and a partner cannot simply treat drawings as a deductible wage expense of the partnership.
The agreement should set out how partners can access funds during the year, how drawings are recorded, and how the business will deal with partner expenses. It should also address whether a partner receives a management allowance or other entitlement, noting that the tax treatment should be reviewed carefully before payments are made.
Entry, exit and dispute processes
A business relationship needs a plan for change. The agreement should deal with a partner leaving voluntarily, becoming incapacitated, breaching obligations, facing insolvency or passing away.
It should also explain how a departing partner’s interest will be valued, who can buy it, how payments will be funded and what restraints or confidentiality obligations may apply after departure. A practical dispute-resolution process can help partners address issues before they become expensive legal disputes.
Complete the business registrations and set up the records properly
Once the structure and agreement are settled, the partnership needs the right registrations and operating systems.
A partnership has its own tax file number and should apply for an ABN for its business activities. When applying for the ABN, the partners’ details need to be accurate and consistent with ATO records. The partnership should also keep its ABN details current if addresses, associates or registrations change.
If the partnership will trade under a name other than the full personal names of all partners, it generally needs to register a business name. A business name registration is not the same as registering a company, and it does not create exclusive intellectual property rights. Consider separate trade mark advice if brand protection is important.
Where an existing sole trader business becomes a partnership, do not assume the sole trader’s ABN, business name, bank account, contracts and registrations can simply continue unchanged. A move from sole trader to partnership may require a new ABN and updates to invoices, supplier accounts, payment platforms, insurance policies and contractual documents.
A sound set-up checklist should include:
1. Applying for the partnership’s TFN and ABN.
2. Registering the business name where required.
3. Opening a bank account in the partnership’s name.
4. Setting up accounting software with appropriate access controls.
5. Establishing a clear chart of accounts for sales, expenses, assets, liabilities, capital contributions and partner drawings.
6. Recording each partner’s opening capital account and any loans made by partners to the business.
7. Reviewing insurance needs, including public liability, professional indemnity, workers compensation and asset insurance where relevant.
8. Checking industry licences, local council approvals and state or territory registrations that apply to the business activity.
9. Updating customer contracts, supplier agreements, lease documents and finance arrangements so they reflect the correct entity.
Keeping business finances separate from personal spending is essential. Each partner should avoid using the business account as a personal wallet. Clear records make BAS preparation, year-end accounts, profit distribution and dispute prevention substantially easier.
Understand the tax, GST and superannuation position from day one
For income tax purposes, the partnership lodges an annual partnership tax return showing its income, deductions and the distribution of net income or loss between the partners. The partnership itself does not generally pay income tax on its net income. Instead, each partner reports their share in their own tax return and is personally responsible for any tax payable on that share.
This means partners should not focus only on the cash they withdraw. A partner may be taxable on their allocated share of partnership income even if the cash remains in the business to fund stock, equipment, debt repayments or working capital.
The partnership may also need to register for GST. Registration is required when GST turnover reaches the applicable threshold, currently $75,000 for most businesses and $150,000 for non-profit organisations. Taxi, limousine and ride-sourcing services have separate GST registration requirements, and a business may also choose to register voluntarily in some circumstances.
If the partnership registers for GST, it will generally need to issue compliant tax invoices, account for GST on taxable sales, claim input tax credits where eligible and lodge BAS statements. The accounting system should be configured correctly from the beginning, as reconstructing GST records later can be time-consuming.
If the partnership employs workers, it may need to register for PAYG withholding, report wages and withhold tax where required. It must also meet superannuation obligations for eligible employees.
Partners are responsible for their own superannuation planning. A partnership’s obligation to pay super generally relates to eligible employees, not to the partners simply because they work in the business. That distinction is important when forecasting cash flow and planning personal retirement savings.
Plan for changes before they happen
A partnership is not static. People’s priorities change, businesses grow, relationships evolve and unexpected events occur.
For example, two friends may form a partnership to operate a design studio. One manages client delivery full-time, while the other contributes funding and handles administration around other commitments. The business begins well, but after a period of growth the funding partner wants to reduce involvement and sell their interest.
If the agreement clearly covers valuation, notice periods, client confidentiality, business name updates, asset ownership and buy-out terms, the transition may be manageable. If those matters were never discussed, the partners may face a costly dispute at the same time the business needs stability.
Changes in partners can also affect tax registrations, the ABN record, business name registration, bank authorities, insurance and contracts. Depending on the nature of the change, the business may need to update records or transfer registrations rather than simply remove a name informally.
Bringing assets into a partnership, moving assets out, admitting a new partner or changing the business structure can also have tax and duty implications. Duty rules vary significantly between states and territories, particularly where land, valuable business assets or certain entity interests are involved. It is worth obtaining advice before documents are signed or assets are transferred.
Build a partnership that can withstand practical pressures
The strongest partnerships combine shared ambition with clear systems. The partners should know how decisions are made, what financial information they will receive, what they can draw from the business and how disputes will be addressed.
Regular partner meetings can help keep expectations aligned. A short monthly review of sales, cash flow, outstanding debts, upcoming tax obligations, staffing issues and major decisions can prevent misunderstandings from becoming entrenched.
General information only: This article is not personal financial, legal or tax advice. Partnership structures and obligations depend on the facts, the governing agreement and the relevant state or territory rules. Speak with a registered tax agent, accountant or legal adviser, such as, about your specific circumstances before forming or changing a partnership.
A partnership can be an effective way to build a business with the right person, provided the commercial and compliance foundations are in place. If you are considering a new partnership, or moving from sole trader to partnership, can help you work through the tax registrations, accounting systems and practical financial considerations for your situation.