Partnership in Business: What It Is, How It Works, and What to Watch Out For

Going into business with someone you trust feels like a natural next step — shared workload, complementary skills, split financial risk. But a business partnership is a legal and financial arrangement, not just a working relationship.

The structure you choose determines your tax obligations, your liability exposure, and what happens when things don’t go to plan. This guide covers everything you need to understand about business partnerships in Australia before you sign anything.

What Is a Business Partnership in Australia?

A business partnership is formed when two or more people carry on a business together with the intention of making a profit. In Australia, partnerships can have up to 20 partners and are governed by the relevant state or territory partnership legislation — in Western Australia, that is the Partnership Act 1895 (WA).

Critically, a general partnership is not a separate legal entity. As Consumer Protection WA confirms, a general commercial partnership is one in which all partners are equally responsible for the management of the business and each has unlimited liability for the debts and obligations of the business.

Unlike a company, the partnership cannot own property, enter contracts, or be sued in its own name — it is the partners personally who hold those rights and obligations.

The partnership must have its own Tax File Number (TFN) and Australian Business Number (ABN), separate from each partner’s individual TFN and ABN. It lodges its own annual tax return, but pays no income tax itself — more on that below.

Types of Business Partnerships in Australia

There are three types of partnership available in Australian law:

A general partnership is the most common structure. All partners actively manage the business and carry unlimited personal liability for the partnership’s debts and obligations — including those created by their co-partners.

A limited partnership includes at least one general partner (unlimited liability, manages the business) and one or more limited partners whose liability is capped at the amount they contributed. Limited partners cannot take an active management role without losing their liability protection.

In WA, limited partnerships must be registered under the Limited Partnerships Act 2016 (WA) with the Commissioner for Consumer Protection.

An incorporated limited partnership (ILP) is a separate legal entity — the most sophisticated form of partnership, used primarily for venture capital and private equity. It requires registration with both the ATO and the relevant state authority.

Here is how the three types compare:

For most small business owners going into business together, a general partnership is the default structure. Limited and incorporated partnerships are more common in investment, property, and venture capital contexts where passive investors need exposure without management responsibility.

How a Business Partnership Is Taxed in Australia

A partnership does not pay income tax. It lodges an annual partnership tax return with the ATO that shows the business’s total income, deductions, and how net profit or loss is distributed to each partner. That return is informational — the tax obligation sits with the individual partners, not the business.

Each partner includes their allocated share of partnership income in their individual tax return and pays tax at their personal marginal rate for 2025–26: 16% on income between $18,201 and $45,000, 30% between $45,001 and $135,000, 37% between $135,001 and $190,000, and 45% above $190,000 — plus the 2% Medicare Levy.

Importantly, each partner must declare their share whether or not they actually received the money. If profits were retained in the business rather than drawn out, they are still taxable in the year they were earned.

This pass-through structure differs from a company, which pays a flat 25% corporate tax rate on its own profits. Whether a partnership or a company produces a better tax outcome depends entirely on the partners’ individual income levels and how much profit the business generates. At higher profit levels, the company rate typically wins — but the right answer requires modelling your specific numbers.

For a direct comparison of company and partnership tax treatment, see our guide on sole trader vs company. For businesses considering a trust structure alongside or instead of a company, our trust vs company guide covers the trust angle in depth.

The Partnership Agreement: Non-Negotiable From Day One

Australian law does not require a written partnership agreement to form a partnership. But operating without one means the default provisions of your state or territory’s partnership legislation govern everything — profit splits, decision-making authority, what happens if a partner exits, and how disputes are resolved. In most cases, those defaults don’t reflect how you and your partner actually intend to run the business.

A well-drafted partnership agreement should cover:

• How profits and losses are divided: The legal default is an equal split, regardless of unequal capital contributions or time invested
• Each partner’s capital contribution and how additional capital is handled if needed
• Decision-making authority: Which decisions one partner can make alone, and which require unanimous agreement
• Roles and responsibilities: Who handles what, and what happens if a partner stops contributing
• Dispute resolution: Mediation, arbitration, or another agreed mechanism before legal action
• Exit provisions: Buyout terms, valuation method, notice periods, and restrictions on a departing partner competing with the business
• Death, incapacity, or bankruptcy of a partner: What happens to their share and whether the partnership continues
• Wind-up provisions: How the business is dissolved if the partnership ends

Getting this document right before you start trading is a fraction of the cost of resolving a dispute without one. At KSH Tax, we work alongside solicitors to help clients structure the legal and tax foundations of their partnerships correctly from the start.

Liability in a General Partnership: The Risk Most Partners Underestimate

Joint and several liability is the single most significant risk factor in a general partnership — and the one most commonly overlooked by new business partners.

It means every partner is personally liable for the full debts and obligations of the partnership, including those created by their co-partners without their knowledge or consent. If your partner enters a contract that goes wrong, takes out a business loan, or is successfully sued by a client, a creditor can pursue any individual partner for the entire amount owed — regardless of that partner’s profit share or involvement in the decision.

Your personal assets — home, savings, vehicle — are on the line for the full debt. Internal agreements about who is responsible for what offer no protection against external creditors.

This is the primary reason many Australian business owners ultimately move to a company structure once the business reaches meaningful scale. A Pty Ltd company creates genuine legal separation between the business and its owners. Our sole trader vs company guide covers exactly when that transition makes sense.

How to Set Up a Business Partnership in Australia

Setting up a general partnership in WA and across Australia involves these steps:

• Draft and sign a partnership agreement — engage a solicitor before registering anything else
• Apply for a partnership TFN through the ATO — the partnership needs its own TFN, separate from each partner’s individual TFN
• Apply for a partnership ABN through the Australian Business Register (ABR) at abr.gov.au — again, separate from individual ABNs
• Register a business name with ASIC if the partnership will trade under a name other than the partners’ legal names — see our guide on business name registration in Australia for the full process
• Register for GST if annual turnover is expected to reach $75,000 or more — the same threshold that applies to sole traders and companies
• Open a dedicated partnership bank account — personal and business finances must be kept completely separate
• If forming a limited partnership in WA, register with the Commissioner for Consumer Protection under the Limited Partnerships Act 2016 (WA)

If you’re unsure about the difference between an ABN and an ACN — the latter being specific to companies registered with ASIC — our ABN vs ACN guide explains both clearly.

Company vs Partnership: The Key Differences

The two structures are often compared but operate very differently:

• Liability: A company is a separate legal entity — shareholders are generally protected from business debts. In a general partnership, there is no such separation — partners are personally exposed for the full amount of any debt
• Tax: A company pays a flat 25% rate on profits (for base rate entities). A partnership passes income through to partners who each pay at personal marginal rates — which could be higher or lower depending on individual income
• Formality: A company involves ASIC registration, annual review fees ($329 from 1 July 2025), and more complex ongoing compliance. A partnership is simpler to establish but offers significantly less structural protection
• Longevity: A company has perpetual succession — it continues regardless of changes in ownership. A partnership technically dissolves when a partner leaves, dies, or goes bankrupt, unless the agreement provides otherwise

Common Mistakes Business Partners Make

These are the errors that create the most expensive problems in partnership businesses:

• Starting without a written agreement: ‘We trust each other’ is not a substitute for documented terms on profit splits, roles, and what happens when things change
• Unclear decision-making authority: When neither partner knows who owns a decision, nothing gets decided quickly, or everything becomes a conflict
• No exit plan: If a partner wants to leave or the business needs to wind up, arrangements made under pressure cost significantly more than those made at the start
• Mixing personal and business finances: Every blurred transaction creates accounting problems and draws ATO attention
• Neglecting superannuation: Partners are self-employed and responsible for their own retirement savings; many don’t prioritise this until it’s a significant problem
• Ignoring the tax lodgement calendar: The partnership lodges its own return, each partner lodges their own, and PAYG instalments may apply; missing deadlines attracts penalties

Frequently Asked Questions

What is a business partnership in Australia?

A business partnership in Australia is an arrangement where two or more people (up to 20) carry on a business together with the intention of making a profit. It is governed by state or territory partnership legislation and is not a separate legal entity — the partners hold all rights and liabilities personally. The partnership registers its own ABN and TFN, lodges an annual tax return for informational purposes, and distributes income to partners who each pay tax at their personal marginal rate.

How is a partnership taxed in Australia?

A partnership does not pay income tax itself. It lodges an annual partnership tax return showing total income, deductions, and how profit is allocated to each partner. Each partner then includes their share in their individual tax return and pays tax at their personal marginal rate. Every partner must declare their share whether or not they actually received the money — even if profits were retained in the business rather than drawn out.

Do I need a partnership agreement in Australia?

Legally, no — a written agreement is not required to form a partnership. But without one, the default provisions of your state or territory’s partnership legislation apply, which may not reflect your intentions around profit splits, roles, or exit arrangements. In practice, a partnership agreement is essential. The cost of having one drafted is negligible compared to the cost of resolving a dispute without one.

What is the difference between a company and a partnership?

The key differences are legal status, liability, and tax. A company is a separate legal entity — it can own assets, enter contracts, and be sued independently of its directors and shareholders, who enjoy limited liability. A partnership is not a separate entity — partners are personally liable for all partnership debts, including those created by their co-partners. A company pays a flat 25% corporate tax rate; a partnership passes income through to partners who pay at personal marginal rates.