What is a Partnership?
A partnership is an agreement between individuals who form a business together with a view to making profit, without having formed a company. In the absence of a written Partnership Agreement, the agreement itself will be governed by the Partnership Act 1890 (“the Act”). The definition of partnership is provided under Section 1 of the Act.
It is a default form of business organization where in circumstances a group of individuals are conducting business, and do not form or register a company. They will be deemed to have become partners.
- General Partnership – this is a similar version of a partnership and holds the basic make up and responsibilities of when a business is formed by multiple owners.
- Limited Partnership – this includes both general and limited partners, there always must be one. There are different types of partners who have different levels of liability and responsibilities in the business, although they all pay tax on their respective shares. A limited partner contributes to the establishment of the business, and they are only liable for the amount they initially invest. They are unable to withdraw their initial investment.
- Limited Liability Partnership (LLP) – this is in circumstances where all of the partners in the business hold limited liability. None of the partners bear responsibility for the business’s debts beyond their initial investment and pay taxes on the income from their profits. A partner under the LLP is therefore both an owner and a decision-maker in the business and has limited liability.
What is a Company?
A company is an artificial legal entity having a separate legal identity formed by shareholders and their ownership is dictated by the level of shares owned. The officers of the company have a responsibility to the shareholders. The formation and regulation of a company is governed under the Companies Act 2014 (as amended).
There are many types of companies:
1. Private Limited Company (LTD)There are two types, one is limited by shares (Ltd.) and the other is limited by guarantees. (CLG)
- A company limited by shares has shareholders and a director or directors. The company must issue a statement of capital, which provides information on its shares including:
- the total number;
- the value of each share;
- and the names and addresses of all the shareholders.
- Shares under this type of company can only trade their shares privately and the shareholders can’t sell their shares on the stock exchange.
- A limited by guarantees company means that the business is typically not run for profit, is legally separate from those who run it, keeps it own finances, invest its profits back into the company and has guarantors. These types of companies have no shareholders and instead have members. Every member guarantees the company’s debts up to an agreed upon amount. These are typically Non-Governmental Organizations, charities and clubs.
- the total number;
- the value of each share;
- and the names and addresses of all the shareholders.
2. Designated Activity Company (DAC)
A designated activity company is a company which has a specific object clause to indicate the type of activity it operates. It must have a minimum of two directors and can have shareholders. Its operations are confined to the specific objects it is incorporated for.3. Public Limited Company (PLC)
As opposed to an LTD, a PLC can sell its shares on the stock exchange. All the shareholders have limited liability and they are only responsible for the amount they invest in the company. There are qualification and pre-registration requirements in order to be deemed to be a PLC.Key Differences between partnership and a company?
1. Liability
Where a partnership has been formed the partners will be deemed to have unlimited liability for the business’s obligations i.e. debts, tax, expenses. Partners therefore have significant exposure to litigation where the affairs of the business are not managed efficiently.
- Section 9 of the Act provides “Every partner in a firm is liable jointly with the other partners, and in Scotland severally also, for all debts and obligations of the firm incurred while he is a partner….”.
- Section 12 of the Act provides that “Every partner is liable jointly with his co-partners and also severally for everything for which the firm while he is a partner therein becomes liable under either of the two last preceding sections.”
The Partnership Act 1907 provides for an alternative form of partnership which limits a partner’s liability based on their share capital contribution.
Whilst there are liability concerns when a partnership is formed, no such concerns arise in relation to the formation of a company. A company’s shareholders have limited liability meaning the company’s members are not ultimately liable for the debts of the business.
Certain other types of partnership have recently been allowed to have limited liability such as solicitors and doctors and they use the moniker “LLP” to denote limited liability.
2. Taxation and Company Registration Office Filing difference
Under a partnership a partner’s tax liability is only based on their income derived from the business and is governed under the Tax Consolidation Act 1997. The tax computation is derived from the profit and loss of the business and the partner is deemed to be artificially conducting a separate trade, each individually. Income tax is applied. Income tax rates in Ireland are 20% up to thresholds and 40% thereafter. Normally partnership returns are filed by one nominated partner known as the assessable partner.
A company’s income is taxed as corporation tax based on the profits and loss of the enterprise. The default corporation tax rate is 25%. This can reduced to 12.5% if it is a trading company. Non trading companies are companies which do not trade but may hold assets or investments.
The filing obligations under company law and tax law are very strictly regulated and there are significant penalties where filing have not been done on time. These require a company to be up to date with its accounting obligations and disclose and file relevant returns in a timely fashion.
Partners pay higher tax than companies, but they may enjoy significant privacy advantages over companies as there is no obligation to publicly file their accounts.
Conclusion
When a business is being formed, important consideration must be placed on the desires of the operators of the business.
Companies enjoy a lower tax rate and limited liability. However, where money is paid to the shareholders via dividends, income tax can arise.
Partners do not by default enjoy limited liability and pay a higher headline tax rate. However, they have more privacy than companies and do not have to pay corporation tax but pay income tax on their profits. There is no second charge to tax to take money out of the operation as there is in a company.
It is important at the outset of your business to obtain the relevant legal and tax and accounting advice and we are available to assist in this regard.
