When you decide to work for yourself, one of your first choices is how to organise your business. Last week, the sole proprietor approach was considered. This article looks at the why and how you may set up a partnership.
A business partnership involves two or more people agreeing to share the ownership and management of a business. The partners share the funding of the business, and its profits and liabilities.
A written partnership agreement is not required by law but highly recommend for all partnerships. When the agreement between the partners is captured in writing and executed by the partners, disputes and changes in the partnership can be handled appropriately. An executed partnership agreement is a legally enforceable contract even although it may not be registered with the Corporate Affairs Office.
A partnership agreement normally includes:
• how the business is funded – these clauses set out what money and in-kind resources each partner will contribute and how any expertise and/or management may be valued;
• the management decision-making process – these clauses set out how the management of the business will be organised and the decision-making voting weight of each partner;
• the rights and responsibilities of each partner;
• how the profits of the business will be distributed; and
• the rights and responsibilities of the inheritors of each partner.
Unless the partnership agreement provides otherwise, if one or more partners joins or withdraws the partnership ends. So, the partnership agreement typically contains clauses which set out the process for the continuity of the partnership in such an event.
Once the annual profit of the business is distributed to the partners according to the partnership agreement, each partner is required to include their portion as part of personal income for the year and to pay any taxes due. Where there is an operating loss that is distributed, each partner can set the loss against any other personal income in their tax reporting.
A partnership has the advantage that the liability of the partnership is shared by all the partners as compared to the sole proprietor who bears the liability alone. However, the problem is that in both cases the liability of the business is unlimited.
Sharing of the funding of the business allows partners to raise more funds, in-kind resources or expertise as may be needed. However, this sharing then usually means that the decision-making about the business may also be shared. The sole proprietor, on the other hand, can run the business as he likes.
Because the partnership organisation is more complex, it pays to have solid legal and tax advice in establishing the agreement. In that way, there tends to be higher cost in establishing and maintaining a partnership.
The partners may also choose to register a business name. In the case of partnerships of professionals like attorneys at law and accountants, the surnames of the partners may form the name of the business. Yet, the business name chosen cannot be misleading.
Using their names in the business name by professionals can serve as a powerful brand for a professional business. It says that the professionals are willing to put their name to their service and are willing to accept full liability for it.
There is greater opportunity for the successful continuity of the business when it is organised as a partnership. Suitably profiled partners may be recruited and invited to join the partnership at appropriate times according to the provisions in the governing agreement.
Next, let’s consider the business as a company.