Forms Of Ownership- Partnerships 24-06

7 Tips for Making a Business Partnership Work

Also read the chapter on forms of ownership on the study guide on the D6, pages 88-98

Partnership

A partnership is an agreement between two or more parties that have agreed to finance and work together in the pursuit of common business goals. All partners bear equal responsibility for debts incurred.

Characteristics of a Partnership

1. A partnership is an agreement between 2 -20 people.

2. A contractual relationship can be in writing or oral.

3. There are no legal requirements in starting a partnership except the drawing up of a partnership agreement. The partnership agreement includes the following:

·         The name of the partnership, The names of the partners, The duties of each partner, The aim and nature of the partnership, The contribution of each partner, How the profits will be shared or how the losses will be divided, How disputes (disagreements) will be settled, Salaries paid to partners, How leave is allocated. Any insurance, drawings allowed and how interest will be paid

4. Partners are jointly and severally liable for debts on the business (partnership isn’t a legal personality)

5. Each partner must make a contribution to the Partnership.

6. The capital of the partnership is controlled by partners.

7. The profits and net assets are usually distributed amongst the partners in proportion of their respective interests.

8. The Partnership is not a "person" for tax purposes and is not taxed as a company would be. Profits generated vests in the partners personally and individually and the partners are personally taxed on such profits of the business.

9. On dissolution, the assets are sold to pay off people owed, and partners must stand in for any shortfall/loss.

10. The life of the Partnership is not separate from the lives of the partners. If one partner dies, leaves or is declared personally insolvent the Partnership becomes null and void unless indicated otherwise in the partnership agreement.

11. It is optional to prepare the financial statements and there are no statuary audit requirements.

12. There is no specific suffix to be reflected in the name of the partnership.

Advantages of partnerships

1. Partnerships are relatively easy to establish. There are no formal requirements for the creation and running of a partnership. This makes partnerships an inexpensive business entity to run. There are few legal requirements involved in drawing up a partnership agreement.

2. Partners invest new capital into the business to finance expansion.

3. Partners contribute new skills and ideas into a business. A partnership may benefit from the combination of complementary skills of two or more people and this eases a burden on one man.

4. Partners share responsibilities for decision making and managing the business.

5. Partners share any profits and are therefore motivated to work hard.

6. Partners are taxed in their own capacities, which could lead to lower taxation, depending on the level of income of the individual.

7. Partnerships provide moral support and will allow for more creative thinking and brainstorming.

8. Partnership information is available to partners.

9. Partnerships are not compelled by law to prepare audited financial statements.

Disadvantages of a partnership

1. Partnership is not a separate legal entity and therefore partners are liable for the debts in their own capacity.

2. Partners are jointly and severally liable for the actions of the other partners. The personal, individual assets of the partner may be attached for the liabilities of the partnership under certain circumstances (unlimited liability).

3. Discussion between partners can slow down decision making and they may disagree on important business decisions.

4. Problems can arise if one or more partners are lazy, inefficient or even dishonest. There may be arguments, the business may lose money and other partners will have to work harder.

5. The partnership may terminate on the death of a partner, unless there are sufficient funds available to buy the deceased partner’s interest or indicated otherwise in the partnership agreement

6. On dissolution, the assets are liquidated, creditors are paid and partners must stand in for any shortfall.

Lesson Files
Lesson Questions

questions to be answered via apollo

1.  Outline the differences between a sole trader and a partnership:

a. number of owners

b. continuity

c. limited/unlimited liability

 

2. mention 2 advantages and 2 disadvantages of both a sole trader and a partnership.

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