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Going into a business partnership with some friends or associates can be a great way to get a business up and running, but how do you know if it’s the best choice for your situation? You need to be fully aware of what a partnership involves and how it differs from a company structure. Additionally, you’d need to familiarise yourself with the Partnership Act and any recent amendments applicable in 2025. For a broader understanding of the legal requirements when starting your business, check out our guide on business structure choices.
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What is a Business Partnership?
Put simply, a partnership is a business structure where two or more people join forces to make a profit. It’s a simple and cost-effective way to structure your business, particularly for new ventures in 2025. It is governed by the Partnership Act 1892 No 12 (NSW) (the Act), though it’s important to note that each state now has its own updated legislation.
There are three primary types of business partnerships.
Types of Partnerships
General Partnership
The first type of partnership is a general partnership. In this arrangement, all partners are treated equally under the law.
Each partner is equally responsible for the business, regardless of differing roles, and each has unlimited liability for any debts incurred. This means that if the partnership accrues debt, creditors can pursue any partner’s personal assets to recover the owed amounts—for instance, seizing a car or other personal property.
While general partnerships are simple to establish and have low start-up costs, the downside is the significant personal risk involved. It’s highly advisable to formalise your arrangement with a written agreement to clearly outline each partner’s responsibilities and profit-sharing arrangements.
You will need an ABN and must register for GST if your annual turnover exceeds $75,000. In a general partnership, the business itself does not pay tax; instead, each partner pays tax on their share of the profits.
Limited Partnership
A limited partnership involves one to 20 ‘general’ partners who actively run the business and are liable for all partnership debts, alongside an unlimited number of ‘limited’ or silent partners who contribute funds but do not participate in day-to-day operations.
This structure must be registered with the NSW Fair Trading. Although a written agreement is not compulsory, having one is strongly recommended to establish clear terms of involvement and profit distribution.
Incorporated Limited Partnership
An Incorporated Limited Partnership is designed for higher-risk ventures where the business’s assets are legally separate from those of its partners. However, it requires at least one ‘general’ partner with unlimited liability to ensure accountability for debts.
This structure can attract investors, such as venture capitalists, by offering protection for limited partners while maintaining a defined management framework. For a broader comparison, you may also wish to review our discussion on company versus partnership structures.
Benefits Of A Partnership Over A Company Structure
At first glance, a partnership might resemble a company, but there are clear differences. A limited company structure shields shareholders by removing personal liability from directors, yet it also incurs higher start-up costs and imposes strict reporting and legal compliance requirements.
Partnerships benefit from lower regulatory overhead and greater privacy, allowing you to concentrate on building your business rather than on administrative reporting. Moreover, partnerships are relatively flexible; adjusting the structure as your business grows is simpler and more cost-effective. For insights on modifying your business framework, take a look at our article on business structure considerations.
In a partnership, every partner is involved in decision-making and shares in the profits, ensuring that everyone is equally invested in the business’s success. For couples in business, income splitting can also offer tax benefits, as each partner pays tax on their individual share of the profits.
On the flip side, the joint liability for debts can lead to friction if disagreements over business decisions arise. Establishing clear responsibilities and setting up robust internal dispute resolution mechanisms from the outset—ideally through a comprehensive Partnership Agreement—can help mitigate these risks.
Key Elements Of The Partnership Act
The Partnership Act sets out the rules governing partnerships in NSW. Keep in mind that other states have their own versions of the Act, so it’s wise to verify the relevant legislation in your jurisdiction.
- Section 19 allows for the variation of a partner’s rights and duties by mutual consent.
- Section 24 outlines many foundational rules, including:
- Equal sharing of capital, profits, and losses among partners
- The right of every partner to participate in running the business
- No entitlement to remuneration solely for managing the business
- The requirement for unanimous consent before introducing new partners
- Majority rule for ordinary business decisions (while significant changes require full consensus)
- Interest on excess contributions is fixed at 7% per annum
- Mandatory maintenance of partnership books at the business address, accessible to all partners
- Section 25 protects partners from being unilaterally expelled, unless previously agreed upon.
- Section 30 restricts partners from engaging in any competing business activities.
- Section 31 limits an assignee’s role in the partnership to earning profits without influencing management.
- Part 2, Division 4 details the dissolution procedures for non-incorporated partnerships—a topic we explore further below.
- Part 3 governs limited and incorporated limited partnerships, including the requirement for a written Partnership Agreement and rules for consent and majority decisions in routine business matters (as specified in section 68).
- Part 3, Division 3 sets out registration rules, including naming requirements for limited and general partners.
Dissolution Of A Partnership
Part 2, Division 4 of the Act sets out the procedures for dissolving partnerships (excluding incorporated limited partnerships).
Generally, unless otherwise agreed, a partnership may be dissolved by:
- Expiration of a fixed term or the completion of a particular venture
- One partner giving notice of dissolution to the others
- Bankruptcy or death of a partner, or actions resulting in the charging of a partner’s assets for debt recovery
- If continuing the business operations becomes unlawful
- If the court determines that dissolution is just and equitable due to breach, incapacity, or sustained losses
It’s highly advisable to establish a Partnership Dissolution Agreement that outlines the distribution of assets, liability release, and procedures for winding up the business. This document can be invaluable in preventing protracted disputes if the partnership needs to be terminated.
What Else Do I Need To Know?
When it comes to taxation in 2025, here are some key points to consider:
- You must lodge a partnership tax return each year with the Australian Taxation Office (ATO).
- Each partner requires a separate tax file number (TFN).
- Partners are taxed individually on their share of the partnership’s income.
- You must register for GST if your annual turnover exceeds $75,000.
While it is not legally mandatory to have a formal Partnership Agreement for general or limited partnerships, it is highly recommended. A clear, documented agreement helps prevent misunderstandings and provides a framework for resolving disputes.
It’s also wise to incorporate a dispute resolution clause in your agreement to help manage any conflicts that may arise. Regularly reviewing and updating your partnership terms to align with current legal best practices is crucial, especially as your business evolves in 2025. Our team at Sprintlaw can assist you with reviewing and updating these agreements to ensure they remain robust and compliant.
Remember, a well-drafted Partnership Agreement is not only a legal safeguard but also a strategic roadmap for your business’s future growth. As the regulatory landscape evolves, staying proactive and informed will help safeguard your partnership and support long-term success.
Whether you’re looking to establish a comprehensive Partnership Agreement, reassess your business structure, or navigate potential disputes, Sprintlaw offers expert advice tailored to your unique needs.
Reach out to our team for a free, no-obligation chat at team@sprintlaw.com.au
or call 1800 730 61.
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