Scenario
Fred and Jane desire to purchase a small business and they have heard that there may be some advantages in operating that business via a partnership business structure as opposed to say a company or trust or other structure. Fred and Jane seek the advice of their business lawyer for further guidance.
Guidance
Partnerships are governed by the Partnership Act 1892 (NSW). This is state based jurisdiction and the rules are specific to New South Wales alone. A partnership comprises 2 or more persons (may be legal entities) that operate a business with a common view to profit.
Partnerships are generally inexpensive to set up. It will need to apply for its own ABN, Tax File Number, GST Registration and it will lodge its own tax return each year.
A Partnership does not have to be equal in the equity interest that each partner may have ie. Fred may have 40% interest and Jane 60%. Working and non-working partners may agree to a partners salary (being a profit distribution) for those working partners prior to any general distribution of profits in accordance with equity interests at year/period end.
Whilst a partnership must lodge a tax return it does not of itself pay income tax as the profits (or losses) are distributed to the partners in accordance with their equity interest in the Partnership. It is important to note that tax losses are distributed to partners in the event of a loss and that partner may make use of that loss in their own tax return where subject to applicable tax loss rules. (tax losses in companies and trusts are in effect quarantined within those entities until such a time as profits are realized to offset the loss).
Fred and Jane are strictly advised to have their partnership agreement in writing as it will save much time, effort and cost if there is a dispute at later time.
Fred and Jane will share in profits and losses in accordance with their partnership equity and such agreements as made. Fred and Jane will be joint and severally liable for the debts of the partnership at all times and this embodies the essential notion that a Partnership is built on the utmost trust of each partner to the other partner(s) at all times.
In the event the Fred and Jane use a trading name different to their own personal names then they must register that trading name with Department of Fair Trading NSW.
Fred and Jane are well advised to respect each other at all times and always communicate with each other in relation to their thoughts in relation to the business and indeed any personal or management issues that might arise that are associated with the business.
Further information: Blackwell Short Lawyers, your local Business Enterprise Centre, Partnership Act 1892 (NSW)