If you want to work with someone else by pooling your collective assets and skills into the same business, but you don’t want to incorporate it as a company, you can do so by forming a partnership.
Partnerships see two or more entities (eg: individuals or companies) share the profits and losses of an unlimited liability business, with each partner taxed on their individual share of the net profits at the end of the financial year
A partnership is an unlimited liability business agreement between entities – rather than a business that exists as a separate legal entity – in which all the profits/losses, responsibilities and liabilities are shared according to a deed of partnership contract.
This is different from a company, which exists as a separate legal entity from its founders and has shareholders who enjoy limited liability protection, ensuring they don’t have to shoulder any more financial risk than the value of their shares.
In contrast, a partnership is made up of a group of entities who simply agree to pool their respective assets and skills into one collective offering. There are no shares in the business to own, because the business doesn’t exist as a legal entity.
If a partner leaves, for example, the partnership may cease to exist in which case a new partnership agreement has to be drawn up to start a new partnership.
Others prefer to incorporate companies because without limited liability, a partner could be held liable for all the partnership’s debts if the other partners become insolvent or can’t be located (this is called joint and several liability).
However, it is possible to register as a limited partnership. A limited partnership provides limited liability for ‘limited partners’, although they cannot participate in the management of the business. There must also be at least one ‘general partner’ who does not automatically have limited liability protection but who can be involved in managing the business.
Each partner can draw funds from the profits of the business as they need them for personal use, just like a sole trader. However, at the end of every financial year, the net profit of the business is shared between the partners before their share of the year’s income is taxed as individual profit.
Income, expenses, tax credits, rebates, gains and losses – it all gets accredited to each partner in proportion to their share set out in the deed of partnership.
- Shares in a partnership are usually equal unless the deed of partnership states otherwise.
- A partnership must have its own IRD number but partners return their share of profits/losses under their own individual IRD numbers.
- A partnership can have sleeping partners who invest in the business but don’t have a say in its day-to-day running.
- Partners can take a salary or a wage – and have PAYE deducted from their pay like an employee – if it’s stated in the deed of partnership. That partner’s salary or wage is then claimed as a deductible expense in the partnership’s tax return.
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