Before you start
Partnerships are most common in certain professions – for example law, accountancy and farming. They’re easy to start and can be established with a partnership agreement between the partners. Before you start, make sure you have a clear idea of why you’re starting a partnership.
How to start
Becoming a partnership
Tell Inland Revenue if you’ve become a partnership. Partnerships must have an IRD number for paying the business’ income tax and GST.
A partnership and its partners pay tax differently. Each partner pays tax on their income using their own individual IRD numbers.
Register the partnership for GST if your turnover will be more than $60,000 a year.
You can also get a New Zealand Business Number (NZBN), which any business in New Zealand can have. Using it will speed up your interactions with government, suppliers, customers and other businesses.
Partnership agreements
Partners usually have an equal share in a partnership, unless their partnership agreement states otherwise. Entering a partnership legally binds you to your other partners. It’s a good idea to have a partnership agreement to set out the rules all partners will agree to follow for the business.
Things to put in a partnership agreement include:
- how much each partner puts into the business
- what property is included in the business – for example, intellectual property, client lists, premises
- how partners will get their income
- what each partner will do day to day
- how to resolve disputes
- what happens if a partner dies or wants to leave
- how you could sell the business.
Partnership agreements can be complicated documents. It’s a good idea to get legal advice when creating or changing a partnership agreement.
Register with government agencies
When you start a business or become self-employed, you’ll need to register with a number of government agencies to use their services and meet legal and tax obligations.
Staff
You may start with just partners working in the business, but you might want to hire people once your business begins to grow.
If you hire staff, you must register as an employer with Inland Revenue.
A business with staff has obligations:
- to government – for example, handling ACC and tax
- to its employees – for example, health and safety and legal employment agreements.
Anti-money laundering rules
You might need to meet rules to detect and prevent money laundering and the financing of terrorism if you’ll be doing one or more of these tasks:
- managing money or assets for clients
- providing trust or company services
- selling real estate
- providing conveyancing services
- handling large amounts of cash.
These rules affect the records you need to keep and how you must identify customers.
Understanding your finances as a partnership
Tax
A general partnership doesn’t pay income tax: it distributes the partnership’s income to the partners who pay tax under their own IRD numbers.
Each partner pays tax according to how much of the partnership they own. This is their shareholding. The bigger the shareholding, the more income they’ll get and pay tax on.
A partnership must have its own IRD number, and file its own tax return (IR7) every year.
Partners can take a salary or an hourly wage and have PAYE deducted from their pay like an employee, if this is stated in the partnership agreement. If PAYE is deducted from the partner’s salary or wage, they can claim the PAYE as an expense in their tax return.
General partnerships (rather than individual partners) claim any expenses the business incurs.
Expenses
Your partnership can claim back many of the costs of doing day-to-day business to help reduce its company tax bill. The more expenses you claim, the lower the tax will be, so it’s important to understand what you can and can’t claim for.
Keeping records
You must keep accurate and complete work records for at least seven years. Include banking information, proof of your income (including cash income), expenses and cashbooks.
Each partner can draw funds from business profits, as they need them for personal use, just like a sole trader. But make sure you keep a record of money taken from any work accounts for your living expenses. In your partnership agreement, you might decide to restrict how partners can withdraw funds.
ACC
When you start a partnership, each partner automatically gets ACC personal injury cover from day one.
You don’t pay for this until after you submit your first tax return.
What you pay will be based on your role in the partnership, so each partner might pay a different levy, depending on their activity – for example, one partner is a farmer, and the other partner does the books.
Limited partnerships
This is a type of partnership that shares similarities with both general partnerships and companies.
A limited partnership has limited partners, who are responsible for debts up to the amount they’ve invested in it.
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