“Alone we can do so little; together we can do so much” (Helen Keller)
In our last article in the series “Choosing the right legal entity for your business” we looked at the sole proprietorship option. Let’s move on to the partnership option, where a group of business owners replaces the sole owner/trader.
Firstly, what exactly is a partnership?
We talk loosely about our “partners” in various contexts, but it is important to understand how the law views the concept in a strictly business situation. In broad terms a partnership is an association of between 2 to 20 people/companies/trusts who agree to pool resources (such as money, property, services, skills etc – whatever is agreed upon) and to operate a jointly-owned business, trade or profession for profit. Partnership assets are jointly owned by the partners and profits are split between them as agreed.
A quick note on the different types of partnership
In this article we talk only about the most common form of partnership – the “ordinary” partnership. In specific circumstances you may also want to consider an “anonymous” partnership (where one or more of the partners are “sleeping partners”) or an en commandite or “limited” partnership. They differ from “ordinary” partnerships in several important respects so take specific legal advice if you are thinking of using them.
We’ll look at the “universal partnership” concept in a future article (it’s normally relevant in cases of cohabitation by unmarried couples).
6 advantages of partnerships…..
….. and 6 disadvantages
What about “Joint Ventures”?
Before you agree on a joint venture (“JV”) with another individual or business, be careful. Although a JV normally applies only to a single transaction, it could well amount to a partnership, no matter what title or description you give it. And as we saw above, partnerships have many pitfalls for the unwary – rather put your JV into a separate entity or have your lawyer draw up a JV agreement giving you some form of liability protection.
Watch out incidentally for “inadvertent” partnerships – as a partnership can be formed verbally or even tacitly (implied from conduct), you could find yourself establishing a partnership by mistake! Another reason to have everything recorded in a full contract.
Remember to take full professional advice on the legal and tax implications of using each type of entity before choosing.
This is the third article in our series “Choosing the right legal entity for your business”. Next time we’ll look in more depth at the private company option.
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