Are en commandite partnerships still relevant, or have companies won the battle?
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In this day and age, it has never been easier to incorporate a company and hence more and more people are moving towards using companies for business instead of partnerships. While using a company has certain benefits, it also has certain draw backs that are never really explored and partnerships are being ignored more and more.
These days companies can be easily incorporated using the online BizPortal system which is relatively easy and quick to use and also the BizPortal allows for the registration of the company for Unemployment Insurance Fund contributions, income tax, employee tax payments (PAYE) and also enables the opening of a bank account.
Companies also have the following benefits:
- Perpetual succession.
- Limitation of liability.
- Ease of change of directors and shareholders.
- Existence is separate from the directors and shareholders.
- Fixed tax rate.
The drawbacks of using a company which are often ignored or forgotten about are:
- Lack of privacy.
- The introduction of tax inefficiencies.
- Dividend Withholding Tax.
- Complex winding up procedure.
- Complex administration.
- Complex compliance requirements.
Whereas a partnership may, depending on the unique requirements, be a more suitable vehicle to do business through.
Partnership en commandite
While partnerships require an attorney to prepare the partnership agreement, partnerships are very flexible and, in some instances, are better suited for special business arrangements (Eg: Such an arrangement which comes to mind is where: Partner A contributes capital, does not want to be involved in the operation of the business, gets a share in the profits and wants limited liability; and, Partner B contributes his time and labour, operates the business, gets a share in the profits and is willing to accept liability).
A partnership en commandite would meet Partner A’s requirements and would shield Partner A from the liabilities of the partnership beyond the contributed capital or the agreed amount.
A partnership en commandite provides the following benefits:
- Grants Partner A privacy.
- Each partner is taxed on their share of the profits.
- There is no dividend withholding tax.
- The winding up procedure can be simplified.
- The administration is set out in the partnership agreement.
- The compliance requirements are limited.
The drawbacks of a partnership en commandite include:
- Limited lifespan of the partnership.
- Partner B is exposed to unlimited liability.
- It is difficult to change partners – owing to the partnership coming to an end in such circumstances.
- The partnership does not exist separately from the partners.
- The partners are taxed at their own respective tax rates.
A compromise could be to establish the business in a company and conclude the partnership en commandite with the company – of course this does have its own benefits and drawbacks and hence it will be prudent to seek legal advice.
In light of the above, partnerships are more relevant than ever before and can be used as a wealth creation tool.