A partnership is not a separate legal person or taxpayer.
It is a relationship between two or more persons who decide to join forces.
A partnership is not registered with the CIPC – instead a separate legal document, containing all the necessary requirements relating to a partnership, needs to be drawn up between all the relevant parties.
Each partner may contribute money, assets, property, labour or skills and will be taxed in his own capacity based on his share of the partnership’s profits or losses.
Every time a partner joins or leaves the partnership, it effectively means that the partnership is dissolved and a new partnership is formed.
The tax implication is severe since changes to the partnership means that you must account for capital gains on the dissolvement.
You should also continuously account for the various partners’ contributions to the partnership.
SARS does however take a lenient stance on this technicality, but to operate a partnership remains very burdensome from a tax perspective.
Being in a partnership would require you to draw up a partnership agreement. This agreement may include :
- the amount of capital to be invested by each partner;
- the proportion of profits (like drawings) for each partner;
- what happens when a partner becomes ill and can no longer work;
- what happens when a partner dies; and
- control of banking (for example which partner signs the cheques).
A partnership has the following advantages and disadvantages:
Advantages :
- Easy to establish and operate.
- The different skills of partners are combined.
- Each partner has a personal interest in the business.
Disadvantages :
- Unlimited liability of partners – each partner may be held liable for all the debts of the business. One partner can cause the loss of the partnership’s assets as well as the personal assets of all the partners.
- Authority for decision-making is shared and differences of opinion could slow the process down.
- Not a legal entity.
- Lesser degree of business continuity as the partnership technically dissolves every time a partner joins or leaves the partnership.
- Number of partners restricted to 20 except in the case of certain professional partnerships such as accountants and attorneys
SOURCES :
Cronje & Cronje
Business Partners
