A partnership is defined a one or more people joining together in business with a view to make a profit and each partner receiving a share of the profit according to their share ratio for example 3 partners each holding 33 shares each.
Partnerships do not pay tax, but all partners pay tax on their profit split that the partnership makes. A partnership must submit a partnership tax return each year with the trading figures included on it and the usual penalties apply form HM Revenue & Customs for late submission of this.
Advantages and Disadvantages of a Partnership
- Partners can pool their labour, capital, and expertise.
- Partners can share tasks, allowing greater work-life balance.
- More partners can bring their experience and new perspectives to the firm.
- Partners may bring additional debts or liabilities.
- There is a greater chance of disagreement or mismanagement.
- It may become harder to sell the business.
Different Types of Partnership
There are different types of partnerships:
In a general partnership, all parties share legal and financial liability equally. The individuals are personally responsible for the debts the partnership takes on. Profits are also shared equally. The specifics of profit sharing will almost certainly be laid out in writing in a partnership agreement.
Limited Liability Partnership
Limited Liability Partnership (LLPs) are a common structure for professionals, such as accountants, lawyers, and architects. This arrangement limits partners’ personal liability so that, for example, if one partner is sued for malpractice, the assets of other partners are not at risk.
Some law and accounting firms make a further distinction between equity partners and salaried partners. The latter is more senior than associates but does not have an ownership stake. They are generally paid bonuses based on the firm’s profits.
Limited partnerships are a hybrid of general partnerships and limited liability partnerships. At least one partner must be a general partner, with full personal liability for the partnership’s debts. At least one other is a silent partner whose liability is limited to the amount invested. This silent partner generally does not participate in the management or day-to-day operation of the partnership.1
Finally, the awkwardly-named limited liability limited partnership is a new and relatively uncommon variety. This is a limited partnership that provides a greater shield from liability for its general partner.
Every partnership should have a written partnership agreement but a verbal one can also be used. But if there is no partnership agreement when settling disputes the partnership Act 1890 will be used.
Here are some suggestions that should go into the agreement:
- Name of Partnership.
- Duration of Partnership.
- Bringing the partnership to its end.
- Expelling partners.
- Partners Retiring.
- Partners Investments.
- Sharing profits and losses.
- Interest on advanced capital.
- Decision making and delegation.
- Who is the senior partner.
Partnership Rules in Different Countries
If you are going to operate a partnership, then always the law in the individual country as they may be different from country to country e.g., United Kingdom to United States of America.
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