Business Structures: Partnerships

Another popular business structure is that of a partnership. A partnership is when two or more people (or organisations) form a business in common.

Advantages

There are various advantages that arise when a partnership structure is used.

Firstly, as a partnership involves multiple partners, it allows the partners ‘share’ their expertise and focus on their respective strengths, provide a greater access to capital, and also allows the partners to share the weight of carrying on a business.

Partnerships are easy to form, and the costs associated to it are relatively low as there are no registration fees. In addition to this, the terms to the partnership agreement can be altered relatively easy, which will allow the partnership to adapt if a need arises.

There is no partnership registry, so its use as a structure can provide a degree of anonymity because third parties may not know is behind the investment, which could be advantageous.   

While the partnership will need to file a tax return to record the profit (or loss) for the year, the profit or loss passes through to the partners. This means that the share of each partners profit or loss is dealt with at an individual level rather than at the entity level as it is in companies.

Disadvantages

The major disadvantage that arises when using a partnership structure is that the partners have unlimited liability and are personally liable for the partnership’s debts. Furthermore, you will also be liable for the other partner’s business debts if they cannot pay them.

Another disadvantage is that should a new partner enter, or an existing partner exit, a new partnership will form and a new partnership agreement need to be formed. As a result, it is a more expensive process than a sole trader as these new agreements may require the involvement of a third party.

Lastly, due to the need to file a partnership tax return along with each partner filing an income tax return, there is an additional compliance cost that is incurred.

How We Can Help

If you have any questions or would like to know about what structure would suit you best, please contact us to schedule an appointment. We can help you with drafting the required documents such as a partnership agreement and provide additional business, tax and accounting advice.