94 Accounting: Business Reporting for Decision Making
3.4 Definition and features of a partnership
LEARNING OBJECTIVE 3.4 Define the term ‘partnership’ and discuss the main features of a partnership.
A partnership is an association of two or more persons or entities that carry on business as partners, and
share profits or losses according to the ownership structures outlined in the partnership agreement. The
association of two or more persons enables the sharing of ideas and also brings together individuals with
different skills, knowledge and talent.
As with a sole trader, a partnership is easy and cheap to establish. Individuals do not have to complete
any additional paperwork to form an ordinary partnership. However, they must fulfil the same regis-
tration requirements as any new business, for example, applying for an ABN and registering the busi-
ness name. As with sole traders, there are no formal requirements for partnership financial statements,
although many partnerships use MYOB or QuickBooks to assist in report preparation. The partnership
does not pay separate taxation; however, the partnership will lodge an annual partnership income tax
return to the ATO showing the partnership’s income and deductions for the period. This return will also
disclose each of the partners’ income for the period and this amount will be taken into consideration for
each partner’s individual tax return. Partners are responsible for all the liabilities of the business.
Each Australian state has its own Partnership Act. For example, New South Wales is bound by the Partner-
ship Act 1892 (NSW), Victoria is bound by the Partnership Act 1958 (Vic) and Western Australia is bound by
the Partnership Act 1895 (WA). The differences between states lie in the terms of the partnership and in areas
such as dissolution of the partnership and rights of remaining partners if the partnership dissolves.
A partnership is suitable for many small and medium-sized businesses, and is common in the areas of
law and accounting.
The partnership agreement
While the owners of a partnership are not legally required to have a written partnership agreement, it
is important that the partners draw up such an agreement to record the details of the partnership. The
partnership agreement should include details such as the name of the partnership, and the contribu-
tions of cash and other assets to the partnership made by each partner. It is especially important to set out
the profit and loss sharing agreement, as there could be different contributions in terms of capital, skills
or workload by each partner, and this should be reflected in the allocations of profit and the amounts that
the partners can each withdraw. There are several different methods of sharing profits or losses. They
include sharing according to each partner’s capital contribution to the business, splitting profits or losses
equally between the partners, or sharing them based on salary requirements. If there is no partnership
agreement, then the law assumes that all profits or losses will be shared equally between the partners.
The partnership agreement also provides details about responsibilities such as workload, positions in
the business and decision making. For example, one of the partners may be responsible for the book-
keeping activities of the business, another may be involved in marketing, and some partners may be
more suited to serving customers. The partnership agreement should also set out the rights of each of the
partners, detail the entry procedures for new partners into the partnership, and stipulate what happens
when a partner dies or leaves the partnership.
3.5 Advantages and disadvantages of a partnership
LEARNING OBJECTIVE 3.5 Discuss the advantages and disadvantages of a partnership.
Outlined below are the main advantages and disadvantages of partnerships for the potential business
person.
Advantages
As is the case with sole traders, there are several advantages to partnerships. Like sole traders, partner-
ships are relatively easy to set up, and are not required to prepare financial statements in accordance with