A partnership involves two or more people (up to 20, with some exceptions) going into business together with a view to making a profit.
There are two types of partnership – General and Limited
A general partnership is where all partners participate to some extent in the day-to-day management of the business.
A limited partnership is one formed by up to 20 people. It has at least one general partner who controls the company’s day-to-day operations and is personally liable for business debts, and passive partners called limited partners.
A limited partner contributes a defined amount of capital to the business, but is generally not liable for its debts or obligations.
Before entering into a partnership it is advisable to have a lawyer prepare a formal agreement outlining:
1) Each partner’s role and level of authority
2) Each partner’s financial contribution
3) A procedure for resolving disputes
4) A procedure for ending or resigning from the partnership
It is important to have a formal agreement because personal liability is unlimited for each partner.
Advantages of a partnership include that:
A) Two heads (or more) are better than one
B) Your business is easy to establish and start-up costs are low
C) More capital is available for the business
D) You’ll have greater borrowing capacity
E) High-calibre employees can be made partners.
F) There is opportunity for income splitting, an advantage of particular importance due to resultant tax savings
G) Partners’ business affairs are private
H) There is limited external regulation
I) It’s easy to change your legal structure later if circumstances change