Changing Your Business Structure From a Sole Trader to a Partnership

In Short

• Definition: A partnership involves two or more individuals running a business together, sharing profits, losses, and liabilities.
• Benefits: Transitioning to a partnership allows for shared responsibilities, diverse skill sets, expanded networks, and increased investment capital.
• Considerations: Establish a partnership agreement, register for a new ABN, and understand tax implications to ensure legal compliance.

Tips for Businesses

When converting from a sole trader to a partnership, draft a comprehensive partnership agreement outlining each partner’s roles, responsibilities, and profit-sharing ratios. Register for a new Australian Business Number (ABN) and update all business documentation to reflect the new structure. Consult a legal professional to navigate tax obligations and ensure compliance with relevant laws.

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Table of Contents

• What is a Partnership?
• Practical Steps to Converting From a Sole Trader to a Partnership
• Intellectual Property Considerations
• Tax Considerations
• Governing Legal Documentation
• Business Documentation
• Key Takeaways
• Frequently Asked Questions

When starting a business, it is common to begin under a sole trader structure. This is an affordable way of starting a business without the pressure of expensive reporting requirements, administrative burdens and lengthy legal documentation. However, it is common for sole traders to change their business structure into a partnership. While a sole trader structure offers simplicity, transitioning to a partnership can provide new opportunities for growth and resource sharing. This change requires careful consideration of legal, financial, and operational factors.

Some common reasons sole traders may choose to restructure include:

•  the business has grown and taken a different direction; or
• your business might be considering forging strategic alliances, which makes it beneficial to change to a partnership. 

The process for changing this structure and updating ASIC is relatively simple. This article outlines practical steps to convert your sole trader into a partnership.

What is a Partnership?

A business partnership is an association or group of individuals who conduct a business together and share its profits and losses. Depending on your location, different state or territory legislation will govern your partnership. Unlike a corporate structure that limits the liability of its owners, each partner is liable for the business’s conduct. 

There are three primary types: 

1. general partnerships (GPs): where all partners have equal management responsibilities and unlimited liability;
2. limited partnerships: where partners’ liability is capped at their contribution amount, and they typically serve as passive investors; and
3. incorporated limited partnerships: which require at least one general partner with unlimited liability while other partners maintain limited liability. 

Partnerships are attractive for their relatively simple and cost-effective setup, minimal reporting requirements, and shared management structure. However, they do come with specific obligations, including:

• partners must obtain a tax file number (TFN) and Australian business number (ABN);
• lodging annual partnership tax returns with the ATO;
• managing their own superannuation arrangements; and
• register for GST if turnover exceeds $75,000. 

It is also important to consider that while partnerships don’t pay income tax directly, each partner is taxed individually on their share of the partnership’s net income.

Benefits of a Partnership

Changing your business structure from a sole trader to a partnership can have many benefits. For example, a partnership structure allows you to share the liability and workload amongst several individuals. It can also be a strategic way to grow your business by involving other parties who may have:

• additional skill sets; 
• networks;
• potential tax advantages through income splitting;
• broader business expertise and perspective; or
• capital for investment. 

Unlike a corporate structure, operating a business under a partnership does not limit your individual liability from the business. Partners are all liable as a group and individually for each other’s actions. However, a partnership can also operate as a limited liability partnership.

Risks to Consider

Before transitioning to a partnership, it’s essential to evaluate potential challenges:

• joint liability for business debts and obligations;
• potential liability for actions of other partners;
• complex decision-making processes;
• potential disagreements over business direction;
• need for clear exit strategies; and
• tax implications of profit sharing.

Practical Steps to Converting From a Sole Trader to a Partnership

The Australian Taxation Office (ATO) and the Australian Business Register (ABR) require you to update any changes in your business within 28 days. Note that you must transfer your business name to the ABR when changing the business structure. They will then give your partnership a new business number. Your partnership will also need its own tax file number (TFN) registration with the ATO. 

You must also declare any business capital you transfer into the partnership in your partnership’s tax return. If you decide to operate your business through a limited liability partnership, you must register this entity with the Australian Securities and Investments Commission (ASIC). 

Intellectual Property Considerations

When operating as a sole trader, you likely already registered a trademark or business logo under your name. The next step is to complete a Declaration Form from IP Australia so they can assign any trade marks to your new business. Assigning intellectual property from one party to another differs from other proprietary rights, such as licensing. An assignment effectively transfers the right to use the distinguishing mark or name and the right to profit from any of the goodwill attached to it.  

Once IP Australia approves the assignment, the transferee becomes the new owner of the trade mark. You should update any websites associated with the business to reflect the change in business structure.

Tax Considerations

Even though you must separately register your partnership with the ATO and lodge an annual tax return, a partnership structure does not have a separate legal personality. Any income shared amongst the partners will be taxed according to each partner’s marginal tax rate.

Additionally, you must note the capital position of the partnership in your partnership tax return. However, individual partners realise any capital gains or losses according to their interest in the business. 

As of 2024, partnerships must also consider:

• GST registration requirements if turnover exceeds $75,000;
• single Touch Payroll (STP) obligations if employing staff; and
• professional accounting advice for optimal tax structuring.

Governing Legal Documentation

While your partnership doesn’t need a partnership agreement, it is strongly recommended that you draft one. The partnership agreement acts as the governing document that details how you will share any profits and losses amongst the partnership. It also gives the partners a clear understanding of the terms of engagement and rules within the partnership. Suppose a dispute arises within the partnership, and there is no partnership agreement, or it does not have an adequate dispute resolution mechanism. In that case, the governing state or territory partnership legislation will apply.

Business Documentation

Once your structure changes, you will want to update your business’s promotional material to reflect its new or amended name. You must change any business-related commercial contracts you drafted when operating as a sole trader, including employment agreements, client agreements and supplier agreements. This ensures your contracts are legally binding between the correct parties. This includes any contracts that might be in place between an individual as a sole trader and another party such as a supplier or sub-contractor. 

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Key Takeaways

Changing your business structure from a sole trader to a partnership is an exciting step for your business. It is essential to know the people you will be conducting business with and how this new alliance will bring value to your business. This is particularly important with a partnership because each partner is individually liable for the actions of the partnership.

For more information on the partnership structure, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions