When a sole holder invites playfellows, a traditional form of cooperation appears. Since one-person possession by its very sense could belong to only one individual, there is no avoidance of this rule. But sometimes intelligent entrepreneurs establish a common partnership agreement between the participants. And all you need to do is start a trade!
General Partnership Definition
By a common association, traditionally, understand relations between two or more persons who carry out joint business activities in order to obtain monetary profit. Such a variety of connections makes it possible to simplify the firm’s management as much as possible taking into account investments, efforts, and skills of each of the company’s owners.
If the leadership of one individual may turn into an authoritarian form of government, then shared ownership is associated with active democracy. Shareholders have a collective vision of the future, performing daily tasks in the area assigned to them. Conflict situations are resolved through negotiations. So, among the three key elements of any general partnership are the equality, accountability and overall worldview of the company's aims.
Advantages and Disadvantages of a General Partnership
A conservative type of relationship is chosen not only by professionals of a narrow profile. It often resorts to couples or representatives of small businesses. What are the general partnership advantages?
Firstly, it does not provide for a separate legal entity of the firm. This means that firm should not be registered, which significantly facilities the process of opening a firm. Secondly, all revenues received are shared among companions. Each of them is individually taxed according to own share, without claiming a discrete tax liability.
Such circumstance entails certain disadvantages of a general partnership. In the absence of a legal address, a common cooperation does not have the right to possess property or other assets, or to enter into contracts with third parties.
Owners are personally responsible for loans and credits of the firm. I.e. each of the playfellows could lose own savings to pay the needed amount to creditors. Note, if the company declared itself bankrupt, a level of protection within frameworks of those ties is at a minimum grade. You will not be saved by the fact that you left a company. It is the factor of personal responsibility that discourages a lot of entrepreneurs from similar type of business relationship.
In addition to the risk of liability, common cooperation shares all the shortcomings of individual employers. A full association is no different from its proprietors. This means your trade could not sell shares of ownership in exchange for capital contributions and other forms of investment. Similar restriction makes any formal financing impossible. Another drawback to being borne in mind consists in that longevity of partnership is as great as its weak link. If one of the pards becomes disabled or leaves, then joint activity will ruin.
Partners in a General Partnership
People who simply strive to work together on a common aim are turning to a conservative ties. At the same time, own firm could be opened with only two persons, while other types of cooperation require the participation of up to 15 members.
Usually, holders are self-sufficient individuals who know the scope of their duties. They do not need to indicate the number of tasks. Such self-employment does not exclude activity in another sphere or with another member. After the opening of the company, third-party involvement is possible.
Traditionally, within the framework of the treaty, it is prescribed that after death or resignation of one of the pards, a common partnership is dissolved. Although even with one person, commerce may be continued, only in the format of a single trader. Entrepreneurs have equal powers and could act on behalf of the company. Concurrent, we should remember that playfellows are obliged to share information, to show honesty and objectivity towards other participants and, above all, to take care of the firm’s interests.
Starting and Running a General Partnership
Embark a common cooperation is not so difficult. One of the working initiators should get the status of a partner. Its receipt provides for responsibility, both for the registration of a new form of relations and for the fulfillment of obligations assumed. Consider the next principles:
- Take care of company’s denomination. Akin requirement is spelled out in most international protocols on doing business.
- Specify, whether permission of local authorities for opening the enterprise in their territory is required. If so, collect all needed papers.
- Enroll a partnership with HMRC for tax purposes.
- Learn and implement audit and financial reporting procedures.
- Think about the comfort of your workplace. Since general partnership does not provide for independent ownership of any property, it will not be superfluous to acquire companions with premises and equipment.
- Remember the registration of VAT if the firm's profit exceeds the permissible threshold within 12 months.
- Familiarize yourself with payroll systems and labor relations rules. Such knowledge will be useful when hiring employees.
According to the uniform partnership act, a conservative cooperation is based on the next rules:
- Equal rights and responsibilities among members;
- Distribution of income and outlays of the firm relative to each of the owners, regardless of the amount of initial investment;
- The adoption of strategically important decisions as a result of universal suffrage by the rule of the majority;
- Questions regarding changes in the scope of activity, involvement of an additional playfellow or other significant issues require unanimous agreement.
Of course, in the process of cooperation, a lot of businessmen seek to correct the above-mentioned points in order to facilitate business promotion. The law allows doing this, but only through a democratic vote.
One of the pards is usually engaged in working correspondence and documentation. Such documents include consolidated statements of profit and expenses of the company, data on the incomes of each of the players, VAT records and labor agreements (if any). Do not forget about annual tax return. Also, it is necessary to inform about updating the name or address of the firm, as well as about changes in the composition of companions.
Since proprietors are both playfellows simultaneously, instead of ordinary salary they are obliged to submit a report on their own. Each of the shareholders must correct your quota in the overall association and pay income tax with insurance premiums.
General Partnership Liability
Some experts are conducting research on limited partnership vs general partnership. If common association stipulates equivalent participation of each of the investors in decision-making, then the restricted one, as the term implies, restrains the borders of what is allowed. Frequently, a share of responsibility depends on the amount of capital, whereas in ordinary format, liabilities are distributed equally. Besides, limited firms have the right to own real estate.
In structures with restricted cooperation, it is often the company's CEO who is accountable for the debts. Other participants remain aloof. With a common relations, loans could affect not only the firm's assets but also personal financial savings of business owners.
Thus, the limited form of relations allows some investors to avoid responsibility for the firm’s collapse, but at the same time narrows their participation in the deliberative process. With traditional type, the principle of equality is observed. Incomes and expenses are divided among the participants in equal shares.
General Partnership Agreement
Some beginning businessmen prefer oral cooperation, relying on trust and friendship. But money and profits are sometimes incompatible, so it's better to focus on a written contract that guarantees obligations of each of the parties. The very existence of similar treaty is already a testament to a partnership. Naturally, any treaty has its own rules of registration, but almost all of them include the following information:
- Denomination and address of the location;
- Data about all partners;
- The date of commencement and its purpose;
- Principles of voting in the decision-making process;
- Costs of the holders displayed in percentage terms;
- The share of profits;
- Financial statements;
- Investments of additional partners;
- Procedures in the event of the departure of one of the initiators;
- The circumstances under which association should be terminated.
Such a treaty does not require permits from government agencies. It must be registered in a local commercial sector and collect all the licenses to get started. Note that your company could exist under a dummy denomination.
Thus, general partnerships are sometimes preferable to innovative kinds of business associations, especially when it comes to a small firm. Such cooperation may provide an adequate response to changes in the market niche, thanks to flexibility, in-depth control and personal responsibility of each playfellow.