What is a Partnership?
A partnership is a type of business entity in which partners (owners) share with each other the profits or losses of the business undertaking in which all have invested. Partnerships are often favored over corporations for taxation purposes, as the partnership structure does not generally incur a tax on profits before it is distributed to the partners (i.e. there is no dividend tax levied). However, depending on the partnership structure and the jurisdiction in which it operates, owners of a partnership may be exposed to greater personal liability than they would as shareholders of a corporation.
Advantages of Partnership
- Easy to set up
- More capital can be brought into the business.
- Partners bring new skills and ideas to a business
- Decision making can be much easier with more brains to think about a problem.
- Partners share responsibilities and duties of the business.
- Division of labour is possible as partners may have different skills.
Disadvantages of Partnership
- There is unlimited liability: All the partners are responsible for the debts of the firm and if the business goes bankrupt, all the partners will have to clear the debts even if they have to sell of their personal belongings.
- Disagreement among the partners can lead to problems for the business.
- There is a limit to the capital invested. Because of the fact that maximum 20 members are allowed, the business may find it difficult to expand after a certain limit.
- There is no continuity of existence. Partnership is dissolved if one of the partners die or resigns or becomes bankrupt.
Before starting a partnership business, all the partners have to draw up a legal document called a Partnership Deed of Agreement. It usually contains the following information:
There are many parts that should be included in any articles of partnership. These are:
- Names of included parties - includes all names of people participating in this contract
- Commencement of partnership- includes when the partnership should begin. The date of the contract is assumed as this date, if none is given.
- Duration of partnership - includes how long the partnership should last. It is automatically assumed that the death of one of the contracting parties breaks the contract, unless otherwise stated.
- Business to be done - includes exactly what will be done in this partnership. This section should be very particular to avoid confusion and loopholes.
- Name of firm - includes the name of the business entity.
- Initial investments - includes how much each partner will invest immediately or by installments.
- Division of profits and losses - includes what percentages of profits and losses each partner will receive. If it is not a limited partnership, then there is unlimited liability (each partner is responsible for all partners' debts, including their own).
- Ending of the business - includes what happens when the business winds down. Usually this includes three parts: 1) All assets are turned into cash and divided among the members in a certain proportion; 2) one partner may purchase the others' shares at their value; 3) all property is divided among the members in their proper proportions.
- Date of writing - includes simply the date that the contract was written.
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