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Aron Govil: What Is A Partnership Business Structure And How Is It Different From Other Business Structures In Terms Of Taxes And Legal Issues?

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Even though the traditional business structures such as sole proprietorship, general and limited partnership, Co-Partnership firm or company are still very common across our nation, a new type of business structure has recently been adopted by several professionals for its benefits.

In fact, I am going to make you familiar with this latest business entity – the partnership business structure – which is quickly becoming common in Nigeria and around the world.

What Is A Partnership Business Structure?

A corporation is nothing but an individual legal entity created by law that owns the property, can enter into contracts, and earns income. It has rights and liabilities separate from those of its members or shareholders. The most common types are Sole Proprietorship, Partnership (general or limited), and Co-Partnership firm or company also known as Joint Venture Company/Business Establishment, Public Limited Company (PLC), or private limited company (Ltd).

In a nutshell, a partnership is defined as two or more persons carrying on business with a view to profit. The persons are called partners and they may be individuals, companies, or firms.

How Is It Different From Other Business Structures?  Aron Govil

The important features that distinguish partnerships from other business structures are as follows:

  • Partnerships are not separate legal entities like companies;
  • Partnerships have no share capital and the partners are jointly and severally liable for the debts of the business;
  • Partnership profits are taxed as personal income;
  • Partnership agreements can be very flexible.

What Are The Benefits Of A Partnership Business Structure?

There are several benefits of a partnership business structure which include the following:

  • Partnership agreements can be very flexible, allowing partners to agree on the division of profits, responsibilities, and liabilities.
  • Partners are jointly and severally liable for the debts of the business meaning that if one partner cannot pay the debt, the other partners are responsible.
  • Partnerships are not separate legal entities like companies so there is no need to set up a company and comply with complex company law regulations.
  • There is no need to issue shares and shareholders meetings are not required.
  • Partnership profits are taxed as personal income.

What Are The Disadvantages Of A Partnership Business Structure?

The main disadvantages of partnerships include the following:

  • Partners are jointly and severally liable for the debts of the business meaning that if one partner cannot pay the debt, the other partners are responsible.
  • Partnerships do not offer limited liability to members (unlike companies) so creditors can take legal action against each member to recover their debts.
  • A partnership must be registered at both state and federal levels in Nigeria which is also very time-consuming especially when you consider the fact that partnerships are not separate legal entities like companies so there is no need to set up a company and comply with complex companies law regulations.
  • Limited Partnership Companies which allow pooling of capital among investors do not exist in Nigeria.

So What Is The Best Business Structure For You?

The business structure that best suits your needs will depend on your appetite for risk, the amount of capital you can raise, and how much time you are willing to invest in managing the company.

Sole Proprietorship

If you are just starting out in business or don’t expect the company to grow beyond one owner, this is probably the easiest and least expensive structure to set up. The downside, however e s that you will be personally liable for all debts incurred by the business which means creditors can make a claim against any personal assets you may have, even if they are not related to the business. Another significant disadvantage is that there is no continuity after your death or retirement because there is no succession plan like in other business structures.

Partnership

If you are looking for a business structure that is more flexible and offers limited liability to members, then a partnership may be the best option for you. However, keep in mind that partners are jointly and severally liable for the debts of the business so if one partner cannot pay, the other partners are responsible.

Company Structure

If you want to set up a company, there are several options to choose from including private limited companies (Ltd) and public limited companies (PLCs). An Ltd offers limited liability to its shareholders while a PLC offers shareholder protection against bankruptcy as well as higher fundraising potential due to its ability to offer shares to the public. The downside of both company structures is that they are the most expensive to set up and maintain.

Which Business Structure Is Best For You?

The choice of business structure should be driven by your specific requirements in terms of limited liability, tax treatment, and legal status. Talk to a qualified accountant for more information on the best option for you to learn more about how we can help you start your business says Aron Govil.

Conclusion:

If you want to set up a company, there are several options to choose from including private limited companies (Ltd) and public limited companies (PLCs). An Ltd offers limited liability to its shareholders while a PLC offers shareholder protection against bankruptcy as well as higher fundraising potential due to its ability to offer shares to the public. The downside of both company structures is that they are the most expensive to set up and maintain.

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