What is a Partnership business?
As its name suggests, this form of entity is when two or more persons come together to carry out a business. However, the maximum number of persons allowed in a partnership is 20.
Same like the Sole Proprietor, liabilities for the Partnership is also unlimited. You can refer to the explanation for unlimited liability in the Sole Proprietor section.
Partnership Act 1961
Unlike Sole Proprietor which does not have an Act created for it, all Partnerships are governed by the Partnership Act 1961. In event that the partners make their own agreement, that agreement will prevail. However, for matters not covered within that agreement, the particular provisions in the Partnership Act will be applicable. In the Partnership Act, the main provisions spell out the following:-
- All profits or losses are shared equally.
- Partners are not eligible for interest on their capital injected into the partnership.
- All partners are entitled to take part in managing the business.
- Partners are not eligible for salary.
- Loans or advances by partners to the business will carry an interest at the rate of 8% per year.
- Most decisions require majority of the partners. However, change of nature of business requires consent by all partners.
- There must be expressed agreement when a partner is required to leave the partnership.
- All existing partners must give consent if they want to introduce new partners into the business.
- Accounts and books must be kept at the principal place of business and be made available to all partners. All partners are allowed to keep a copy of the accounts.
If this is so risky, why still set up this kind of entity?
This form of business is cheap, easy to set up, with minimal documentation and paperwork. There are much fewer guidelines and formalities (except for the Partnership Act 1961) wherein there is no requirement to appoint auditors, company secretary or tax agents. You do not need to disclose your financial statements to the general public.
When do you want to use this type of business entity?
General recommendation for you to choose this type of business is when:-
- Your risk of business liability is minimal or zero (you have to decide your risk tolerance); AND
- Your business is not making huge profits. This is from the tax planning point of view.
- Setting up a Sole Proprietorship business.