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A Partnership as a legal entity

Provided by Business Partners Ltd, South Africa's leading investor in SMEs


shakehands.jpgChoosing the right format for your business is key to its success, and will depend on a range of factors. If your venture is going to have more than one, but less than 20 owners, a Partnership may be the way to go.

You're either about to start your business, have found that being a one-man show doesn't work anymore or some like-minded business people would like to become part of your business. Whatever the reason, you may decide to enter into a Partnership.

The basic definition of a Partnership is an association of between two and twenty people who are contractually bound to one another to operate a joint, profit-generating business. Each partner contributes money, goods or services to a fund, agreeing that any profits made will be shared between the partners as per their contract.

A Partnership is quite cheap to set up, as it does not have to be legally registered (at the Registrar of Companies). The State only requires that stamp duty be paid in connection with the Partnership agreement, and this is minimal.

The nature of a Partnership is described below. Depending on your needs, this could either be seen as advantages or disadvantages, so weigh your options.

Characteristics of Partnerships

  • Each partner must make a contribution to the Partnership
  • It does not have a juristic personality separate from the partners. Each partner can bind the Partnership
  • If the Partnership's estate is sequestrated, the estates of the partners can follow unless the partners undertake to pay the debts of the Partnership
  • The profits and net assets are usually distributed amongst the partners on dissolution of the Partnership in proportion of their respective interests
  • The life of the Partnership is not separate from the lives of the partners (so if one partner dies, leaves or is declared personally insolvent the Partnership becomes null and void)
  • On dissolution, the assets are liquidated, creditors are paid and partners must stand in for any shortfall
  • The Partnership is not a "person" for tax purposes and is not taxed as a company would be
  • There are no statuary audit requirements

Types of Partnerships

  • General/ordinary Partnership: partners liable jointly and severable for the debts of a Partnership
  • Anonymous (sleeping) Partnerships: the anonymous partner is not known to the public and liable to the partners for the pro rata share
  • Commanditarian Partnership: the partner commandite is purely a financial participant with a restricted liability-similar to a shareholder in a company. He shares in the profits and losses, but his liability is restricted to his specific contribution or an agreed amount.

Assets and Liabilities

As much as a Partnership is quick and easy to set up, and has benefits in terms of the taxes one has to pay, for example, there is also a down side to this. The partners are co-owners of the Partnership's assets and are all personally liable for the liabilities of the business, but with a right to recover a proportionate share from the other partners.

Should the business fail, creditors must initially try to recover monies against the business's assets. Then, if any amount is left unpaid after the Partnership has been sequestrated and all assets sold, a creditor can claim against the personal assets of the individual partners.

If the Partnership is declared insolvent by a court, every partner (except an anonymous partner, a partner en commandite or a partner who gives security for the payment of debts) must also be sequestrated at the same time. This means that not only could you lose your business, but that you and your family could lose all your personal finances and assets as well.

This is a very broad explanation of a Partnership and there are always exceptions to the rules. Before you sign any legal documents, do your research and contract the services of an independent legal professional with expertise in this area.

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