Category SMMEs

Should you structure your business as a Partnership or as a Private Company?

17 August 2021 Gillan & Veldhuizen Incorporated

Whether you have taken the decision to start a new business or would like to formalise your current business operations, deciding on how to structure your company will go a long way to ensuring the success of the business, its workings and the relationships between the relevant parties. Although there are several different options to choose from, two common choices are a partnership or a private company structure.

Simply put any voluntary association of persons registered and formed for any common purpose is called a company. But a partnership is a structured relationship between two or more individuals who have agreed to undertake a profit generating venture and share in the profits of the business conducted by all or any of them acting on behalf of the partnership (group). Each comes with its negatives and positives and should be duly considered depending on your business’s particular requirements and goals.

The differences

The structure of a company or partnership have very different consequences for how the business will be run, the tax obligations and the ability to take on additional business partners or sell the business. Other significant differences include setup and ongoing costs, management and control, flexibility and the owners’ or partners’ liabilities.

While a partnership may be the quickest way to set up a business in terms of formalities, a company is a vehicle ideally designed for running an ongoing business and is one of the more popular choices as it can provide transparency and shareholder protection that a partnership cannot. That being said, partnerships are easier and less expensive to set up than a company, with minimal ongoing costs, and partnerships are not required to pay income tax - each partner files the profits or losses of the business on his or her own personal income tax return.

Partnership agreements mirror the spirit and purpose of more formalised business structures such as a company, but are not as regulated by legislation, explains Charles De Meillon, candidate attorney at commercial law firm Gillan & Veldhuizen Inc.

Keeping good company

A private company can have a minimum of 2 shareholders and a maximum of 50, whereas a partnership must have a minimum of 2 members and can have a maximum of 20 persons. Shareholders of a company, being more in numbers, may not know one another and as result cannot all be expected to be mutually fair and honest. In the case of a partnership, the adage of ‘don’t do business with friends’ aside, we can assume that the partners know one another thoroughly, placing the partnership on the basis of the utmost good faith.

In a partnership, all partners are personally responsible for business debts and actions against the partnership. In addition to sharing profits and assets, a partnership also entails sharing any business losses, as well as the onus of any debts, even if they are incurred by the other partner. A company, on the other hand, a juristic entity, is distinct from its shareholders. The shareholders are not liable for the debts of the company.

“Best to take care with your agreements and the company you keep, the devil is always in the detail,” cautions De Meillon.

The fine print

It is important for the sake of autonomy to share the same vision for the company, to affect efficient decision-making processes and have effective legal agreements in place aimed at protecting all parties so as to avoid conflict or disagreements, which may result in the dissolution of the company or termination partnership, advises De Meillon.

The agreements regulating the conduct of the partners in a partnership and the shareholders in a company should contain clear dispute resolution clauses which the parties can utilise to resolve any differences effectively and quickly. A failure to include these dispute resolution clauses can result in the complete destruction of the either the partnership or company when disputes arise, as they are surely to do, even with the best of intentions of all involved.

Due consideration must be given to the more subtle elements of partnership and company agreements so as to establish the essence and true intention of the business within its fundamental framework that protects and benefits all involved. In doing so, one may guard against potential risks and eliminate any uncertainty that may be present between the partners or owners, their use of the business’s assets and the general expectations of the respective parties.

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