ADVANTAGES OF PARTNERSHIPS

DISADVANTAGES OF PARTNERSHIPS

Set-up

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.

Flexibility

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.

Taxation

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.

Audits

There are no statutory requirements that a partnership is audited.

Disagreements

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.

Agreement

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.

Liability

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.

Taxation

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.

Profit-sharing

Partners share the profits equally.  This can become an issue, particularly if over time some of the partners stop contributing equally.

Life Span

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.