Partnerships in New South Wales are a kind of business arrangement carried on by a group of persons. It is carried on in common and with a view to profit. It works effectively like a contract between the parties. In New South Wales, the rules dealing with what kinds of partnerships can be created and how they are regulated are contained in the Partnership Act 1892. These rules allow three different kinds of partnerships to be created, being normal partnerships, limited partnerships and incorporated limited partnerships. Each has its own distinct treatment in certain respects. Normal partnerships are the only kind of partnership that does not need to be registered with the NSW Department of Fair Trading.
Normal partnerships are the most common kind of partnership and the simplest to create. For this reason, they are a suitable option for people who want to carry on business together in a simple structure (e.g. a business carried on by a husband and wife). They do not need to be registered with the NSW Department of Fair Trading, so whether a normal partnership exists is a question of fact that is determined by looking at factors such as whether the ‘partners’ share the profits out of their business, and whether the ‘partners’ hold property together (although this fact alone does not create a partnership). You do not have to have a written agreement to make a normal partnership, but if you plan to carry on the partnership under a business name, then that name needs to be registered. In a normal partnership, the partners are jointly liable for the debts and other obligations of the partnership. Each partner is an agent for the partnership, and can bind the partnership to certain obligations (e.g. entering into a debt). However, if a new partner is brought into the partnership, they are not liable for things done before they became a partner. For income tax purposes, a normal partnership does not pay tax as its own legal entity. Instead, each of the partners pay tax on their share of the income of the partnership.
Limited partnerships must be registered with the NSW Department of Fair Trading in order to be created. A written partnership agreement is not legally required, but it is better to have one. Unlike normal partnerships, limited partnerships must have at least one “limited partner” and one “general partner”, either of which may be a company. A “general partner” is liable for all the debts of the partnership but generally take a more active role in the partnership’s day-to-day affairs. Subject to an exception, a limited partnership can only have up to 20 general partners. A “limited partner’s” liability for the debts of a limited partnership is limited to a certain amount which is stated in the register kept by the NSW Department of Fair Trading; however, they generally play a less active role in conducting the partnership. They are not permitted to take part in the management of the partnership’s business and cannot bind the rest of the partners (e.g. by taking on debt). Most but not all limited partnerships are taxed as a separate legal entity.
An incorporated limited partnership is a special kind of partnership that is set up as a company distinct from its partners. It is generally used in companies that require “venture capital” (i.e. high growth start-up companies). They are required to be registered with the NSW Department of Fair Trading and can have an unlimited number of limited partners, but not more than 20 general partners. Unlike in a limited partnership, the limited partners in an incorporated limited partnership have no liability for the debts of the partnership or for the debts of the general partners. However, they still generally cannot take part in managing the business of the partnership. Interestingly, because most incorporated limited partnerships are set up for raising venture capital, they may be registered under the Venture Capital Act 2002 (Cth) (which is a necessary step to access certain capital gains tax concessions). If they are, they may not be taxed as a separate legal entity but instead similarly to normal partnerships.
Normal partnerships and limited partnerships will end on the death or bankruptcy of a partner. They may also end after a fixed term if they were only entered into for a period of time. Incorporated limited partnerships do not end on the death or bankruptcy of a partner because they are separate corporate entities. However, they can be “wound up” in accordance with the rules in the Partnership Act 1892.