What is a Partnership?
A partnership is a type of business entity in which partners (owners) share with each other the profits or losses of the business.
It is a type of unincorporated company in which partners, manage the business and are equally liable for its debts.
This relationship is a highly contractual, exclusive bond in which both entities commit not to ally with third parties.
- A partnership is a basic business agreement.
- Each partner must contribute something;
- The partnership must be carried on for the joint benefit of the partners;
- Each partner must share in the profits.
- It is not required by the law that a partnership agreement should be in writing. However, it is always better to rather have it in a written format.
- There must be between 2–20 members and party must contribute something to the partnership. This contribution can be money or labour.
- Each partner is entitled to a share of the profit but it does not have to be an equal share.
- The partners are also involved with the management of the partnership.
Is it necessary to register a partnership?
No, a partnership is not a separate legal entity. Ultimately the rights and obligations of the partnership belong to the partners.
Register with SARS
All partners are required to include their full income from the partnership in their personal tax returns (IT 12) available from the Receiver of Revenue (this only carries the cost of postage – some banks offer assistance with the completion of this form free of charge as a customer service.
What are the pros and cons of a partnership?
- Simple to form
- No formalities required.
- Not a separate legal entity.
- Perpetual existence is not possible. When one of the partners dies the partnership dissolves (comes to an end and has to be reformed). Perpetual existence is therefore not applicable to a partnership.
- The simplicity and informality of the partnership can lead to fraud.
In partnerships it is most important to have a written agreement among partners specifying the conduct of the partnership, including the division of earnings, procedures for dividing up assets if the partnership is dissolved, and steps to be followed when a partner becomes disabled or dies.
While there is nothing stopping you from preparing your own partnership agreement, we recommend you have a legal expert table the contract.
Here are a few important points to consider when drawing up a partnership agreement:
- Name of the partnership
- Purpose of the partnership
- Duration of the partnership
- Responsibilities, performance and remuneration
- Explain in detail each partner’s role.
- What will be the income of each partner?
- Detail how profits or losses will be distributed
- Define each partner’s responsibilities and describe the level of performance that is required from them.
- State clearly if partners are expected to make a full-time commitment to the venture, or whether other business activities will also be allowed.
- Investment in the business
- If a partner loans money to the business, how will the partner be repaid?
- What will each partner be contributing in terms of cash, assets, loans, investments and labour?
- Withdrawal and admission of partners
- Provide guidelines that must be followed if one partner wants to leave the partnership.
- List grounds for a partner to be expelled from the partnership.
- Explain how new partners be admitted to the partnership.
- Can a partner sell their interests in the business to an outsider?
- Which partners will have cheque signing privileges?
- Who will be authorised to draw on the partnership’s accounts?
- How will the books be kept?
- What methods will be used to determine the value of the business in the event of a sale, dissolution, death, disability or withdrawal of a partner?
Decide if partners who leave have to sign a non-compete agreement.
The use of such clauses is included to cover the possibility that if a partner is expelled or leaves to start another business, he or she could potentially gain competitive advantage by abusing private information, trade secrets or customer/client lists, business practices, upcoming products, and copying marketing plans.
The non-compete clause prevents this from happening.
What guidelines should be followed if one partner wants to retire, dies or leaves the partnership?
What methods will be used to settle disputes?
Decide at the outset and include in the partnership agreement what methods must be disputes can’t be resolved. Methods include negotiation, mediation and arbitration.
- Negotiation – Negotiate directly with the other person. You may hire an attorney to negotiate directly with the other side on your behalf. There are no specific procedures to follow.
- Mediation – A voluntary process in which an impartial person (the mediator) helps with communication and promotes reconciliation between the parties that will allow them to reach a mutually acceptable agreement.
- Arbitration – Typically an out-of-court method for resolving a dispute. The arbitrator controls the process, will listen to both sides and make a decision. Like a trial, only one side will prevail. Unlike a trial, appeal rights are limited.
Legal route and court – only as a last resort if all other methods fail.
For more information
If you need to consult an attorney to assist you consult the Entrepreneur legal directory.
Sequestration is the legal term for personal bankruptcy. It is one way of dealing with debts you cannot pay.
The sequestration proceedings will free you from overwhelming debts so you can make a fresh start, subject to some restrictions and make sure your assets are shared out fairly among your creditors.
An important matter when it comes to insolvency is that it shouldn’t be confused with bankruptcy. Insolvency refers to one’s financial state.
In South Africa insolvency law is defined as the financial state or condition where a person’s liabilities (or legal entity) have exceeded their assets, and as a result this person cannot meet their obligations on time for debt owed.
Bankruptcy is the term used to refer to the distinct legal concept, in other words the matter of law.
The Law of Partnerships is complex
Francois Scholtz, Assistant General Manager, Business Partners replied to this question. He advises as follows:
“The Law of Partnerships is, as much as other disciplines in Law, a specialised field and is governed by Common Law and by specific sections of the Insolvency Act.
There are various kinds of partnerships and the liability of partners or their insolvent estates, are therefore greatly influenced by the nature of a particular kind of partnership (eg. Anonymous partnership and a partnership En Commandite).
It is therefore unwise to attempt to provide direct answers to your specific questions without taking into account the nature of a particular partnership and the own particular circumstances of an insolvent partner.
For these reasons and because of the variances that may be prevalent in specific circumstances, any article on partnerships will be best served if actual and a complete description of circumstances are used as the basis for a response by an expert or if it is done as a topic on partnerships in general in which the entire spectrum can be dealt with by a specialist on partnerships.”
However, if a partnership is not any of the abovementioned two kinds and is an ordinary partnership, the following general rules apply:
Insolvency of a partner
A partnership gets terminated upon the sequestration of the estate of a partner.
However, if the partnership is unable to meet its monetary commitments due to the sequestration of the estate of a partner, the estate of the partnership may also be sequestrated.
This is due to partners being jointly and severally liable for the debts of a partnership.
However, the estate of the partnership does not necessarily get sequestrated as a result of the insolvency of a partner.
Do the assets of a partnership form part of the sequestrated estate of a partner?
To the extent that a partner has an entitlement to its proportionate share of a partnership, the assets of a partnership will form part of a partner’s insolvent estate.
The insolvent estate will be entitled to its proportionate share of the free residue, if any, of the partnership’s estate on termination of the partnership.
Will Partners be liable for the personal debts of an insolvent partner?
No, unless a partner signed a deed of suretyship for a debt(s) of the insolvent partner.
Is it true that when an individual is sequestrated, all its assets will form part of its insolvent estate?
Yes, but a creditor of the individual may have a preferent/secured entitlement in law to some of the assets (or the proceeds thereof) of the insolvent estate, e.g. a bondholder over moveable/immoveable property bonded.
How does the entity the business is registered as affect insolvency?
If the ownership of the business vest in a Company (registered in terms of the Companies Act) or in a Close Corporation, (registered in terms of the Close Corporations Act), it will be unaffected by the insolvency of a shareholder/member of the Company or Close Corporation.
The insolvency of the shareholder/member will however influence the ownership of the Company/Close Corporation in that such interest will vest in the jurisdiction of the Trustee of the insolvent estate who will deal with such interest for the benefit of the insolvent estate.
Conversely, if the Company/Close Corporation is liquidated, the value of the interest of the shareholder/member in such an entity will have diminished, if not reduced to no value.
The above mentioned is for general information purposes and does not purport to be comprehensive or to provide specific legal advice and does not represent Business Partners’ official view