Partnerships: Working Together
A partnership is when two or more people (up to 20) agree to operate a business together. They share the profits according to their agreement and contribute to the business in some way—this could be money, skills, or resources. For example, two friends might open a bakery where one handles baking and the other manages the finances.
While partnerships allow you to pool resources and skills, they also come with shared risks. A partnership is not a separate legal entity, meaning you and your partners are personally liable for the business’s debts. If your bakery incurs debt, creditors can come after both of you—individually and collectively.
It’s crucial to formalize the terms of your partnership in a written agreement. This should outline how profits will be split, who’s responsible for what, and what happens if one partner wants to leave. Without a clear agreement, disputes can arise, which may strain the relationship and the business.
When to register a partnership:
Registering a partnership is a great option in certain situations, especially if you and your partner are on the same page about how you’ll run the business. Partnerships work best when you know and trust your partner well. Mutual trust is essential because you’ll be sharing responsibilities, profits, and risks. If the business is straightforward—without a lot of assets or complex operations that could lead to disputes—a partnership can keep things simple and effective.
Partnerships are also ideal for short-term ventures. For example, if you and a partner want to team up for a specific project or seasonal business, such as running a pop-up store during the holidays, a partnership offers a flexible and easy-to-manage structure. It’s a practical choice if the business involves low risks, like providing consultancy services or selling handmade goods, where there’s little chance of liability issues.
If you’re working with a very tight budget, a partnership can help you pool resources and split costs like rent, supplies, or marketing. Since partnerships don’t require as much formal structure as companies, they’re also more cost-effective to set up and run. This can be especially useful for new entrepreneurs who don’t yet need to project the image of a large, substantial business. For example, two freelance graphic designers teaming up for a shared client base might find a partnership suits their needs perfectly.
However, keep in mind that a partnership means shared responsibility, so it’s crucial to formalize your agreement in writing. A partnership agreement should outline things like profit-sharing, decision-making, and what happens if one partner wants to leave or the business closes. This can help prevent misunderstandings and keep things running smoothly.
Advantages of a Partnership
Setting up a partnership is simple and straightforward, with very few formalities involved. You don’t even need to create a formal partnership agreement to get started, though it’s highly recommended to draft one. A partnership agreement lays out important details like how profits will be shared, who’s responsible for what, and what happens if one partner wants to leave. Having this in writing can save you a lot of headaches down the line.
Unlike companies, partnerships don’t have to meet formal auditing requirements, which saves time and money. If your business grows and you want to convert the partnership into a company (Pty Ltd), the process is relatively simple. For example, if your small bakery expands and needs more structure to attract investors or hire employees, you can easily transition into a company structure.
Disadvantages of a Partnership
One of the biggest risks of a partnership is that your personal assets and liabilities are closely tied to the business. If the business fails or accumulates debt, creditors can come after your personal belongings, such as your car or home, to recover what’s owed.
Additionally, all partners in a partnership are jointly and severally liable for the debts of the business. This means that even if all partners incur a debt together, a creditor can demand the entire repayment from just one partner if the others can’t pay or disappear. For example, if your business partner skips town, you could end up footing the entire bill for a shared loan.
Another drawback is the way taxation works. Each partner is taxed individually on their share of the business’s profits, regardless of whether they’ve actually received the money. This can create cash flow issues, especially if profits are reinvested in the business rather than distributed.
Lastly, partnerships lack permanence. If one partner dies or decides to leave the business, the partnership automatically dissolves. At that point, a new partnership would need to be formed if the business is to continue operating. This lack of continuity can create complications, especially for long-term ventures.
