Insurance people, bookkeepers and other professional advisors all warn against operating a business in partnership. But partners who work well together are a blessing to each other. It’s a tough world out there, business-wise, and two people who have complementing strengths and abilities are better able to withstand the trials and tribulations.
What are the advantages of a partnership?
• Partners arrive at better decisions more quickly. When two people discuss issues, the other perspective helps to bring focus to the matter.
• There’s more time available so that administrative tasks can be shared.
• Each partner brings certain skills to the partnership.
It is difficult, however, to find that perfect partner. Partnerships that go wrong usually do so because of a lack of trust, greed or spouses who disagree. And, yes, it’s true that one partner’s financial situation can affect the other one. A good partnership should be well-balanced from the start, with both partners being either as wealthy or as poor as the other.
Another benefit of a partnership is that no formalities are required. Broadly speaking, as soon as two people with contractual ability agree to operate together for profit, the partnership is born. There’s a lot to be said for not being too formal in business. Of course, a written agreement, professionally drafted by a canny lawyer, is a must, but an additional, informal arrangement may be more flexible, with the partners more open to change in business circumstances. Partners might also pay less tax, depending on the turnover of the business, because taxable income is split between them. Although not a formal legal entity like a company, a partnership can even be registered as a VAT vendor.
Is a small private company not a better idea? Well, it might be under certain circumstances. One very pleasing feature of the SA Income Tax Act is the set of “corporate rules”, which makes provision for the conversion of a partnership to a private company without any tax, VAT or transfer duty repercussions. Companies, though, have many new onerous requirements under the new Companies Act. Without going into too much detail, there’s a lot of red tape surrounding companies and especially around the office of “director”. A company director, it seems, is at risk of personal liability should they take decisions which place the company finances at risk. In business, there is risk in any event and this is one reason why it might be better to be a partner and not a director, an unavoidable position in a small private company.
Partners loath to incorporate their business might do well to compartmentalise the risks in the business and in their personal capacities by making use of trusts to house assets. However, partnerships are versatile as well. Even companies may operate in partnership with other companies, or a person might wish to operate in partnership with other entities such as small business corporations, to maximise the tax benefits associated with such arrangements.
• Peter O’Halloran is head of tax at BDO, Gaborone. Contact him at [email protected] Please state “Tax” in the subject line of your email.