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Partnership (structure)

What is a partnership?

Partners are joint owners of a business. They have the same goals and are equally responsible for the decisions made on behalf of the business.

Are all partners equal?

Not necessarily. For instance, in many law firms there are senior and junior partners. However, the partners remain equal from a legal point of view. If there is no written agreement, all partners:

  • share profits equally.
  • cover losses equally.
  • take equal responsibility for the business's activities and trading.
    A written agreement allows partners to change these general rules and record them in the agreement.

Partnership agreements

A partnership agreement is usually a good idea, otherwise there is no written record of the duties and responsibilities of partners, which can be very important if there's a dispute later on.

If there is no written agreement, the duties and responsibilities of partners are equal, which may not be what you want.

What does a partnership agreement cover?
It will cover issues like:

  • the amount of money each partner brings into the partnership.
  • how the profits will be divided.
  • the different roles and responsibilities of each partner.
  • the requirements to provide financial reports.
  • the rights of partners to draw on bank accounts.
  • how partners can leave the partnership and the consequences of this.
  • what happens when the business is sold.
  • how disputes are handled.
  • the salaries.
  • the rights of departing partners to start a similar business, etc.

Partner's unlawful acts

What if the partner does something that is outside their authority under the partnership agreement? This depends whether the person who dealt with the partner knew (or should have known) the action was beyond their authority.

But even if this is so, it will sometimes still be possible for the person to claim compensation from the partnership. The lesson is clear: be very careful who you accept into a business partnership.

Tax

Partners must file a Partnership Return with the tax office. It includes a profit and loss statement, and the tax is paid individually by partners on the profits as part of their personal income tax.

Dissolving partnerships

Any partner can dissolve the partnership provided they do it in a way required by the partnership agreement. Make sure you see a lawyer about this, because there are often certain legal formalities, particularly in relation to the formal notice that is required.

 

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