The South African company system is well developed and regulated. This article discusses the advantages and disadvantages of Partnerships.
In this article, we will deal with PARTNERSHIPS.
The South African COMPANY system is well developed and formally regulated; the governing body for companies is the Companies and Intellectual Properties Commission (CIPC) and all businesses are governed by the Companies Act (2008).
Other articles will deal with:
A partnership is formed where two or more people (limited to 20) wish to come together to form a business. Partnerships are a good way to conduct business for many people especially when used for small businesses with a low turnover. However, they do not offer the same security that comes with entities like private companies, particularly as they are not separate legal entities in the eyes of the Law.
Advantages and disadvantages are the best way to determine if a partnership best suits you.
ADVANTAGES OF PARTNERSHIPS
DISADVANTAGES OF PARTNERSHIPS
There are basically no legal formalities to set-up a partnership (e.g no registration with CIPC), and therefore they are relatively cheap and quick to establish.
They are less strictly regulated than companies and they are far more flexible in terms of management.
Profits, Responsibility and Decision Making
Partners share profits of the partnership which is an advantage where the partners have different skills and can work well together.
It is fairly vital that partners have a harmonious relationship as liabilities and the decision making is also shared.
The way partnerships are taxed can be an advantage as the partners pay tax individually only; the partnership/business does not pay tax as it is not a separate legal entity.
There are no statutory requirements that a partnership is audited.
All business ventures involving more than one person, regardless of form (like companies), run the risk of disputes arising but partnerships have no statutory measures for governance like companies.
For this reason, it is advisable to prepare and sign a written agreement (partnership agreement) when forming your partnership which will set out the procedure of governance; dispute resolution; and, if necessary, what will happen if the partnership is dissolved.
Partners must be in agreement before taking any steps for the business of the partnership. Therefore, there can be situations where there is less freedom to act.
Probably the biggest disadvantage of a partnership is the partners are subject to unlimited liability, which means that each of the partners shares the liability and financial risks of the business.
For example: if the partnership’s estate is sequestrated, the estates’ of the individual partners can also be sequestrated unless the partners settle the debts of the partnership themselves.
The way partnerships are taxed can also be a disadvantage.
For example, all profit from a partnership should be attributed to the partners and thus will be subject to the tax rate of the individual partner, which can lead to that partner paying higher taxes. This is opposed to a company, that can retain profit in the company and will pay the flat company tax rate regardless of income.
Partners share the profits equally. This can become an issue, particularly if over time some of the partners stop contributing equally.
Partnerships last only as long as the partners remain in the business. If there is any change to the partners in the partnership the whole partnership should be dissolved and a new partnership needs to be established.
Practically, this means each time a partnership is dissolved the partnership estate should be liquidated and a new partnership should be set-up. This would including, for example, new bank accounts, etc.
- Ordinary partner: the most common form of partners; these partners are liable jointly for the profits AND losses of a partnership.
- Anonymous partner: an anonymous partner is not disclosed to the public and, by agreement between the partners, anonymous partners will not be liable to third parties but will be liable to the other partners for a pro rata share.
- En commandite partner: this partner only contributes financial but has no say in the way the partnership is run (similar to a shareholder in a company however shareholders have a say in how the company is run). The advantage is this kind of a partner receives a share of the profit but their liability is restricted to their financial contribution which is set at a specified amount.
- Universal partnership: This form of partnership cannot be chosen, it is enforced by a Court Order and used to ensure the division of assets between the people involved. We will deal with this in more detail in future articles.
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