This article is useful reading for anyone wishing to set up a company, buying or selling a company. Net Lawman hosts a further two articles on ‘business structures’. These are:
- Trusts: ins and outs
- Companies: ins and outs
Introduction
A partnership is a relationship or association between two or more persons with a view to profit. The persons may be individuals or companies. Unlike a company the partnership is not incorporated. The rights and obligations of the partnership are governed by a partnership agreement which may be made in writing, verbally or by implication. It is also governed by the Partnership Act. Net Lawman recommends a written agreement is made to avoid disputes in the future.
A partnership enters into an agreement in the name of its partners. Usually each partner is jointly liable for the obligations under the agreement.
Accounting and records
Unlike companies, partnerships do not have any special legal accounting or recording requirements. Of course it is good practise to keep proper accounting records for taxation purposes. Income and losses are allocated to each partner according to their shareholding in the partnership, therefore it is important the accounts properly record income and loss so that each partner can calculate their individual tax.
Partnership assets/liabilities
Everything in a partnership is shared in accordance with each partner's shareholding in the partnership. Each partner’s shareholding is recorded in the partnership agreement. Similarly, assets and liabilities are shared between the partners in accordance with each partner's shareholding.
Note, unlike companies, partnerships have unlimited liability. This means that if one or more of the partners is found liable for doing or failing to do something, then all the partners in the whole partnership are personally liable. In a company, shareholders' liability is limited to the extent of their shareholding, which means the most they can lose is the value of their shares. In a partnership, on the other hand, there is no limit on the potential liability of partners.
Partnership shares
There is no legal requirement for either party to hold a certain number of shares.
The amount of shares held by each partner will depend upon the agreement reached between the parties. The proportion of shares held should be recorded in the partnership agreement.
The shareholding may be a fixed amount or a percentage. The amount should take into account a possible increase or decrease in the value of the partnership business and assets.
The shareholding may or may not reflect the liability or profit share of each party.
For example, a party may have contributed 50% of the assets but may be liable for 75% of any liabilities. Similarly, the party may only be entitled to 40% of the profits of the partnership business.
The agreement
The partnership agreement should set out all the terms of the relationship including the following:
- Partnership shares
- Partnership assets
- Distribution of profits
- Partnership liability. How liability is to be apportioned between the partners
- Terminating the partnership/buy back of shares
- Disputes resolution
Tax issues
Partnerships are not taxpayers, but the individual partners must still pay tax.
The income of a partnership and its losses are apportioned according to each partner's shareholding in the partnership. Each partner must include their share of the partnership income and/or loss in their own personal tax return. Capital gains and losses on partnership assets are also apportioned amongst the partners.
Terminating the partnership/buy back
There might come a time where one partner ‘wants out’. In this case, there are a number of possibilities:
- If a partnership is created for a particular purpose, then after the purpose is achieved or abandoned, the partnership dissolves
- If a partnership is created for a fixed period, then after the period is over, the partnership dissolves
- Once a partner resigns from a partnership or dies, the partnership is considered to be terminated. If there are still partners remaining then they will be treated as partners in a new partnership
- If a partnership is engaged in unlawful activities, it will be dissolved by the law.
These are not the only ways in which a partnership terminates. Often the partnership agreement will provide for situations in which the partnership terminates | 
