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Summary: Partnership is a business structure where two or more people work in business together with joint unlimited liability for business debts.
Partnership
A partnership is an arrangement between different parties to work together for mutual gain. These parties can be individuals, government bodies, businesses, organizations, or educational institutions. There may be a limited number of parties that are allowed to join a partnership in some countries, after which a corporation would have to be created instead.
In many but not all countries, a partnership is a legally recognized distinction that results in a new business structure that is distinct from both or all of the partners. To do this, the partnership receives its own tax number and files a tax return. However, the partnership doesn’t normally pay business tax like a corporation would. Instead, the partners receive their shares of the profits generated through the partnership and then pay tax on this income.
Partnerships can be created by making a partnership agreement. Though not necessary in all jurisdictions, these agreements are often recorded on paper to formalize the alliance. The partnership agreement would typically detail the type of partnership and the amount of control and share of profit that each partner receives. Partnerships can be equal or unequal, and partners can either own part of the business as equity partners or simply receive salary as salaried partners in law and accountancy firms, for example.
How does a general partnership differ from a limited partnership?
A general partnership is one in which all of the partners have equal, unlimited liability for the partnership. In case the business incurs debts or must pay damages to third parties, all of the partners are similarly responsible and share the liability equally.
On the other hand, a limited partnership limits liability for one or some of the partners. While other partners may have unlimited liability, the limited liability partners are only held liable for debts and damages up to the amount they invest in the partnership. LLPs are common in law firms and medical practices, so if one of the partners is liable for paying damages, the other partners are protected financially.
In many jurisdictions, a limited partnership requires that at least one partner with unlimited liability. The general partners usually have more liability but also more control over the business. Limited partners are often “silent partners” who simply invest money but are not involved in the day-to-day operations of the business.
In some jurisdictions, such as the United States, there are also Limited Liability Partnerships (LLPs), which, unlike a limited partnership, mean that all partners have limited liability.
Is a partnership the same as a joint venture?
A partnership is an alliance that usually results in a new business structure that is owned by the partners. They pay pass-through taxes, sharing the profits from the partnership according to their level of ownership and the partnership agreement’s stipulations. Partnerships are considered permanent or long-term relationships and must be formally dissolved at the end of their legal lifetimes. Partnerships, as agreements to collaborate on for-profit activities, may grow to be immense and create
While a joint venture, like a partnership, can represent a collaboration between two or more people or businesses, they are not long-term agreements. Instead, a joint venture is a short-term agreement, often a contract, of collaboration for a specific purpose. Joint ventures are typically entered into by businesses, institutions, and governments to perform projects that require collaboration. These parties may contract to perform a specific short-term function or to complete a project which is usually highly specific and limited in scope.
A joint venture, unlike a partnership, is not a specific legal structure. A joint venture could be structured through a partnership, a limited partnership, or a limited liability company/corporation. Often a company is incorporated as a “special purpose vehicle” for the purposes of the joint venture.
What are the pros and cons of a partnership?
- Pros
Single taxation
Corporations pay taxes on their profits, and when these profits are distributed to shareholders as dividends, they’re taxed again. Since partnerships are pass-through entities, they don’t pay corporate taxes. Instead, the partners only pay tax on the profits they receive personally.
Collaboration
Partners bring knowledge, experience, and skills to a partnership. Combining these elements can help a partnership do business more effectively than lone individuals.
Leverage
By joining forces, partners can leverage bigger purchasing or negotiating power together than any of them could individually.
Speed
Partnerships in most countries are much faster to set up than corporations.
- Cons
Risk of liability
Operating individually, a person or a business is only liable for their own mistakes. In a partnership, however, liability is shared, at least up to a limit. This means that if one partner engages in harmful actions or builds up debts, the other partners could be liable for them as well.
Reduced control
Working alone, a sole proprietor or independent contractor has complete control over how they work and the business decisions they make. In a partnership, however, all the partners have at least some say in how the business is run. This can lead to conflict, infighting, or even costly stalemates when compromises can’t be found.
Difficult divestment
A sole proprietor can close their business at any time. Likewise, shareholders can usually divest themself of company shares easily. With partnerships, divestment may be a lot harder and take more time if the other partners don’t have the liquidity to buy out the divesting partner.
Consider professional advice on business structures
Choosing the right structure for a business depends on control, liability, and tax benefits. It’s crucial to review the different options available and make an informed decision to gain the biggest benefits. Professional advice from qualified corporate lawyers or business consultants can save you time, effort, and money while helping you build an effective, competitive business. To learn more, get in contact with Remote People.
Andrew (Drew) joined the Remote People team in 2020 and is currently Director, Regulatory Affairs. For the past 13 years, he has been a trusted advisor to C-Suite executives and government ministers on international compliance and regulatory issues. Drew holds a law degree from the University of Otago, a PhD from the University of Sydney, and is an enrolled Barrister and Solicitor of the High Court of New Zealand.
