Going into business with someone else is exciting. You’ve got complementary skills, shared ambition, and someone to split the load with. But a partnership is also one of the most legally and financially significant decisions you can make — and far too many people enter one without understanding what they’ve actually signed up for.
This is part two of our business structures series. If you missed part one on sole traders, it’s worth reading first — many of the fundamentals around tax, super, and liability apply here too, and partnerships share some important characteristics with the sole trader structure. This guide picks up where that one left off.
General advice only. This article is intended as a general overview and does not constitute financial, tax, or legal advice. Every business situation is different — before making any decisions about your business structure, tax obligations, or partnership arrangements, please consult a registered tax agent, BAS agent, or qualified legal advisor.
What is a partnership?
A partnership is a business structure where two or more people (or entities) carry on a business together with the intention of making a profit and sharing the results. Like a sole trader, a partnership is not a separate legal entity — the partners themselves own the business, share the income, and are personally responsible for its obligations.
Partnerships are common among professional practices (lawyers, accountants, doctors, architects), tradespeople going into business together, family businesses, and investment groups. They can be formed between individuals, companies, trusts, or a combination of all three.
2+ Minimum number of partners required
20 Maximum partners for most businesses (unlimited for professional practices)
5 yrs Minimum record keeping period from date of lodgment
Types of partnerships
Not all partnerships are the same. Before you register one, it’s worth understanding the two main forms:
General partnership
- Most common type
- All partners share equally in management and liability.
- Every partner has unlimited personal liability for the debts of the business — including debts caused by another partner.
- No special registration beyond an ABN and business name
Limited partnership
- Has at least one general partner (with unlimited liability) and one or more limited partners
- Limited partners’ liability is capped at their capital contribution.
- Limited partners cannot take an active role in management.
- Must be registered with ASIC — more complex to establish.
- Common in investment and venture capital structures
For most small businesses going into partnership together, a general partnership is the default — and that means understanding joint and several liability, which we’ll cover shortly.
Setting up a partnership
Partnership setup checklist
Apply for a partnership ABN — the partnership itself gets its own ABN, separate from the individual partners’ ABNs. This is what you use to invoice clients and register for GST.
Register a business name — if trading under a name other than the partners’ own names, register with ASIC. The partnership holds the business name, not the individuals.
Register for GST — the partnership registers in its own right if turnover exceeds (or is expected to exceed) $75,000 in a 12-month period.
Open a partnership bank account — essential. All business income and expenses should flow through this account, separate from partners’ personal finances.
Draft a partnership agreement — this is not legally required in most states, but it is strongly recommended. More on this below.
Check your state’s registration requirements — some states require additional partnership registration depending on your industry or structure type.
The partnership agreement — don’t skip this.
A partnership agreement is a written document that sets out how the partnership will operate, how profits and losses are shared, and what happens when things go wrong. It is not legally required in most Australian states — but it may be the most important document your partnership ever produces.
Without one, your partnership is governed by the default rules in your state or territory’s partnership legislation. These defaults are often fair, but they’re also inflexible — for example, in most states the default is an equal split of profits regardless of how much each partner contributes, which is rarely what people actually want.
What a good partnership agreement covers
Negotiate this before you start — not during a dispute.
- Profit and loss sharing— what percentage goes to each partner, and how often distributions are made.
- Capital contributions— who put in what at the start, and how additional capital is handled.
- Roles and responsibilities— who manages what, and how day-to-day decisions are made.
- Decision-making rules— what requires unanimous consent vs. a majority, and how disputes are resolved.
- Drawings and salaries— whether partners can take a regular salary or drawings, and how these are treated.
- Adding new partners— the process and conditions for bringing someone else in
- Exiting the partnership— what happens when a partner wants to leave, retires, becomes incapacitated, or dies.
- Dissolution— how the partnership winds up and how assets and debts are distributed.
- Restraint of trade / non-compete— what a departing partner can and can’t do afterwards.
The most common partnership mistake: Going into business with a friend or family member on a handshake deal, with no written agreement. When things change — and they will — there’s no document to refer to, and disputes become personal very quickly. Get an agreement in place before you start trading, not after.
How tax works in a partnership
A partnership does not pay income tax itself. Instead, the partnership lodges a partnership tax return each year — but this return is informational only. It calculates the net income (or loss) of the partnership and allocates a share to each partner according to the partnership agreement.
Each partner then includes their share of the partnership income on their own individual tax return, where it’s taxed at their personal marginal rate. This is fundamentally different from a company where income is taxed at the entity level first.
Two returns, not one. The partnership lodges a partnership return. Each partner also lodges their own individual tax return, including their share of partnership income. Both returns are required — missing one creates problems with the ATO.
Distributing losses
If the partnership makes a loss, that loss is also distributed to partners in proportion to their profit-sharing ratio. Partners can generally offset their share of the partnership loss against other personal income — subject to the non-commercial loss rules, which can limit this if the partnership doesn’t meet certain tests around income or activity.
Partnership income and the tax-free threshold
Because each partner is taxed individually, each partner gets access to the tax-free threshold (currently $18,200), their own marginal tax rates, and any applicable offsets. For a partnership with partners on different income levels, this can create meaningful tax advantages compared to a single sole trader earning all of the same income.
Superannuation in a partnership
Partners paying themselves super
Like sole traders, individual partners have no legal obligation to pay themselves superannuation from the partnership. The same principles apply — nobody is going to do it for you, and the long-term financial cost of not contributing through your working years can be significant.
Partners can make personal concessional contributions to super, taxed at just 15% inside the fund. As with sole traders, remember to lodge a Notice of Intent to Claim a Deduction with your super fund before lodging your tax return if you want to claim those contributions as a deduction.
Super for employees of the partnership
If the partnership employs staff, the partnership has a full employer SGC obligation — currently 12% — on wages paid to those employees. This is the same as any other employer. These contributions must be paid into eligible super funds at the time of processing payroll as they need to reach the employee superfund within 7 business days, and failure to do so results in the Superannuation Guarantee Charge.
Super when the partnership engages contractors
The same rule that applies to sole traders applies here: if the partnership engages a contractor whose work is wholly or principally for their labour — where the contract is for their personal skills and time rather than a specific outcome — the partnership may have an SGC obligation on the labour component of their invoices.
Missed this in Part 1? The “wholly or principally for labour” contractor super rule catches a lot of businesses off guard. If a contractor cannot subcontract their work, uses your tools and equipment, and is being engaged for their personal time and skills, you may owe super on top of their invoice — regardless of whether they have an ABN. We covered this in detail in the sole trader guide.
Liability — why partnerships carry serious risk
This is where partnerships differ critically from companies — and where many people get caught out. In a general partnership, each partner has unlimited joint and several liability for the debts and obligations of the partnership.
Joint and several means each partner is individually responsible for the full amount of any partnership debt — not just their proportional share. If the partnership cannot pay, a creditor can pursue any one partner for the entire debt, leaving that partner to recover their proportionate share from the others.
What joint and several liability actually means
A scenario most partnerships don’t plan for
Imagine you have a 50/50 partnership and your business partner enters into a large contract on behalf of the partnership without your knowledge. The contract goes wrong, the supplier sues for $200,000, and your partner has no personal assets.
Under joint and several liability, the supplier can pursue you personally for the full $200,000 — even though you had no involvement in the transaction. You’d then need to pursue your partner for their half through separate legal action, assuming they have anything to recover from.
Your personal home, savings, and assets are at risk — not just your share of the business.
You are liable for your partner’s actions. Any partner can legally bind the partnership — meaning commit the business to contracts, obligations, and debt — without the other partners’ consent. Unless your partnership agreement explicitly restricts this (and even then, third parties may not be bound by those restrictions), you are exposed to what your partners do in the course of the business.
Managing liability risk in a partnership
The right partnership agreement limits some internal risks — for example, by requiring consent from all partners above a certain dollar threshold. But it doesn’t protect you from third-party creditors who weren’t party to that agreement. Insurance and careful partner selection are essential.
Insurance to consider for a partnership
Public liability insurance — covers claims for personal injury or property damage caused to third parties in the course of the business.
Professional indemnity insurance — critical for any partnership offering advice, professional services, or design. Covers claims from clients arising from your work.
Business interruption insurance — covers lost income if the business cannot operate due to an insured event.
Income protection for each partner — if one partner is unable to work due to illness or injury, the impact on a small partnership can be severe. Each partner should consider their own income protection policy.
Key person insurance — covers the business if a key partner dies or is permanently incapacitated. Particularly important in small, skills-based partnerships where one person’s absence could threaten the whole enterprise.
Buy/sell insurance — used to fund a buyout if a partner dies or exits. Ensures the remaining partners have the funds to purchase the departing partner’s share without financial strain.
What happens when a partner leaves — or dies?
In most Australian states, under the default rules, the departure or death of a partner technically dissolves the partnership. This can have significant consequences — for the business, for clients, and for remaining partners — unless your partnership agreement deals with it explicitly.
A well-drafted partnership agreement will include provisions for:
- How a partner’s interest is valued on exit
- Whether remaining partners have the right to buy the departing partner’s share
- What happens to a deceased partner’s share (and whether it passes to their estate)
- How long the remaining partners have to buy out the exiting interest
- A mechanism for resolving disagreements on valuation
Without these provisions, the departure of one partner can bring a thriving business to a halt — or force a fire-sale of assets to satisfy competing claims from the departing partner’s estate.
Partnership vs other structures — a quick comparison
When a partnership makes sense — and when it doesn’t
Partnerships work well when…
- You and your partner(s) have complementary skills and shared values
- The business benefits from income splitting between partners on different tax rates
- You’re in a professional practice where partnership is the industry norm
- The business is in early stages and the lower cost of a partnership vs a company makes sense
- You want a simpler structure before potentially incorporating later
Coming up next in this series: companies. We’ll cover when it makes sense to incorporate, what the ongoing obligations look like, and the bookkeeping requirements that are significantly more demanding than either a sole trader or a partnership.
General advice disclaimer
The information contained in this article is general in nature and has been prepared without taking into account your personal objectives, financial situation, or individual needs. It is intended as an educational overview only and does not constitute financial, tax, legal, or professional advice.
Tax laws, superannuation rates, partnership legislation, and ATO requirements vary by state and change over time. While we have taken care to ensure the information is accurate at the time of publication, we recommend you verify current rules and thresholds directly with the ATO at ato.gov.au and seek legal advice regarding partnership agreements specific to your state or territory.
Before making any decisions about forming a partnership, entering into a partnership agreement, or making changes to an existing business structure, you should seek advice from a registered tax agent, BAS agent, or qualified legal advisor who can assess your specific circumstances.