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Partnership

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Partnership

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

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 the event that the partners make their own agreement, that agreement will prevail. However, for matters that are 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.

Advantages

  • Simple and inexpensive to set up.
  • Minimal reporting requirements.
  • Shared management/staffing responsibilities.
  • More opportunities for tax planning (such as income splitting between family members) than that of a sole trader.
  • A partner's share of the business's tax losses may be offset against other personal income, subject to certain conditions.
  • Combined skills, experience and knowledge can provide a better product/service.
  • Relatively easy to dissolve or exit and recover your share.
  • Access to capital.
  • Partners are not employees. Superannuation contributions and workers' compensation insurance are not payable on partners’ profits or drawings.

Disadvantages

  • Potential for disputes over profit sharing, administrative control and business direction.
  • Joint and several liabilities of partners. This means that each partner is fully responsible for debts and liabilities incurred by other partners - with or without their knowledge.
  • Changes of ownership can be difficult and generally require a new partnership to be established.
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