It’s that time again; time for another edition from Bayley’s Governance Guide. In the last article we explored the top three pros and cons of the Sole trader; the Lone Ranger ready to take on the world. Well sometimes, being the Lone Ranger gets a little boring and you want some good company to enjoy the entrepreneurial ride. That brings us to… ‘The Partnership!’ In this article we will explore the top three pros and cons of registering your business as a partnership.
(Side note) – Before we get into it, I must mention that there are three different types of partnerships – the General or Ordinary Partnership, the Limited Partnership and the Limited Liability Partnership (LLP). The General or Ordinary Partnership is by far the most popular and the one for which we receive the most enquiries, so the General Partnership will be our focus in this article.
How about some bad news first, so we end on a high note? After much musing, we came up with the following as the top three disadvantages of the General Partnership:
Disadvantage #1 - Personal and unlimited liability for loss, injury or damage
By far the greatest disadvantage to the general partnership is your personal exposure. The Partnership is considered neither a Corporation nor a company, which are incorporated entities with their own separate legal personality. So very much like the sole trader, the partnership is not recognized as a separate legal person. There is no “corporate veil” as it were shielding the partners’ property from creditors or any other third party claim for loss, injury or damage. So what does this mean for us as partners? It means that, unless your Partnership Agreement provides otherwise, your liability is unlimited and personal, i.e. your personal car, home, money in the bank are all at risk should things go south. Yikes!
Disadvantage # 2 - One partner’s actions can bind the partnership.
Each partner is an agent of the partnership and can enter into a contractual arrangement with a third party that binds all partners within the partnership to that agreement. So if your partner, in his professional capacity, has signed a contract, binding you to an arrangement that you do not agree with, you are bound to that contract my friend. Of course there are exceptions to the rule such as if your partner was acting outside of his / her authority and whether the third party knew he had no such authority, but these can be a long and tedious process to prove and who wants to go through that right? So bottom line, enter into a partnership with trusted partners, because their actions can bind you.
Disadvantage #3: Each partner can be held personally liable for another partner’s negligence
So imagine this: you’re at home sipping wine and enjoying a foot massage at the end of a long day and suddenly you get a call…there is a moment of silence as you listen to the news, your eyes slowly widen in shock and your palms become increasingly drenched with anxious perspiration until your glass of wine crashes to floor as you exclaim ”WHAAAT?” One of your business partners does not perform his duty as he should have and it has caused someone millions in damages or even worse…his Life! You sit there for another hour still trying to process exactly what you were just told. Remember that your partner’s actions, both good and bad binds the partnership so if a third party suffers loss or injury, the partnership and every partner in it is liable to the same extent as the ‘bad guy’.
We all want that match made in heaven, the perfect marriage that is inundated with the sweet aromatic flavors of honey and roses and everything that is good in the world. But let’s get real; sometimes it just doesn’t work out that way.
As with everything in life, there is balance. Thank God things aren’t just all bad (although it may seem that way). So now, onto the good stuff:
Advantage #1: A Partnership is easy to start and easy to dissolve
You must register the partnership with the Companies Registry and finalize your Partnership Agreement. The Partnership Agreement details the relationship between the partners and guides the way business is run. Although it is my personal recommendation to have your Partnership Agreement formalized in writing, the Agreement need not be in writing, it can be implied simply by conduct or agreed to verbally and just like that you’re in business.
“Sir do you take this woman to be your mutually beneficial business partner? - Yes I do!”
“Maam do you? - Yes I do!”
As easy as it is to start, it is just as easy to dissolve. In some cases, a written Partnership Agreement provides for its termination and gives guidance as to how a partner may leave the partnership, however a partnership formed verbally or by conduct can be dissolved simply if the parties agree to go their separate ways. The partnership will be considered terminated if only one person remains, for, as the name suggests, a partnership must have two or more persons. Don’t forget to de-register from Companies Registry.
Advantage #2: No post incorporation filings and disclosures
The general Partnership is not as heavily regulated as companies, so general partners are able to maintain a greater degree of privacy than members of a company. There are no post incorporation filings and disclosures required, so you are free to run your business without the hassle of remembering a barrage of deadlines. No red tape. No hassle.
Advantage #3: One-off transactions can be facilitated
While a Partnership is usually for the carrying on of continuous activity for profit, you can opt to enter into a Partnership arrangement for a single transaction, function or event. In this way, the partners can benefit from each other’s resources without being tied into an ongoing business arrangement that comes with increased risk as highlighted above. It is always a good idea to test the strength and trustworthiness of a potential ongoing business partner, through partnering for one-off transactions, before deciding to enter into business together for continuous activity.
Coming up next…The Limited Liability Company!
Ceronne Bayley LLB MBA is the Lead Corporate Governance Consultant of her own consulting firm, Ceronne Bayley’s Consulting Services. She is a Corporate Secretary by profession and has fifteen years’ experience working with and advising Boards of Directors of State Enterprises as well as profit and non-profit companies in the private sector.
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information contained herein are for general informational purposes only. Readers should contact their attorney to obtain advice with respect to any particular legal matter. No reader should act or refrain from acting on the basis of information in this article without first seeking legal advice from counsel in the relevant jurisdiction. Only your individual attorney can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to this article do not create any professional relationship between the reader and Ceronne Bayley’s Consulting Services.