Monday, 30 January 2012

THE DIFFERENCE BETWEEN A PARTNERSHIP AND A LIMITED COMPANY

5 comments:

  1. Both partnership and limited liability company are forms of vehicles through which commercial business may be undertaken.

    Partnership vs a Limited Company

    The main difference between a partnership and a limited company is that the liability of a company’s shareholders is limited to the amount of the unpaid amount on the shares that they own. Partners on the other hand, cannot restrict their liability (unlimited liability) and therefore can be held personally responsible for any unpaid debts the partnership incurs. The Limited Partnerships Act however introduces certain qualifications for partnerships with limited liability (we shall discuss this under separate covers).

    Joint and Severally Liable
    This is potentially very dangerous as partners are joint and severally liable for partnership debts.
    Thus if one partner engages in an activity which results in large debts, all partners, regardless of whether or not they had prior knowledge of the activities would be equally liable to make good any shortfall in funds from their personal assets.

    Partnership Deed
    The internal workings of a partnership are usually governed by a deed. This agreement is the equivalent of the memorandum and articles of association belonging to a company. Partnership Deeds may be registered with the Registry of Documents as established under the Registration of Documents Act, Chapter 285 of the Laws of Kenya

    The partnership deed will set out procedures and rules relating to capital maintenance, profit shares of individual partners, the admission of new partners and the resignation of existing ones.

    Partnership Act, Chapter 20 of the Laws of Kenya

    The Partnership Act does not provide a comprehensive set of rules and procedures on the governance of a partnership and therefore, without a partnership deed many important aspects of the business, such as disputes and working practices will not be covered and may therefore result in inconsistent and perhaps unfair decisions being taken.

    Partnership and Limited Company Tax

    One further difference between a partnership and a limited company is the way in which each is taxed. A company pays tax on its profits and directors are taxed on what they receive in remuneration from the company.

    A partnership on the other hand is not taxed in its own right as a company is (a partnership is not a separate legal person). Instead each of the partners are taxed on their share of the profit, irrespective of how much or how little they have taken out of the business.

    The following is a simply example:

    Partnership Kshs Limited Company Kshs
    Profits 500,000 500,000
    Salaries to Partners / Directors 250,000 250,000
    Partnership pays tax on 0
    Company pay tax on 250,000
    Partners pay tax on 500,000
    Directors pay tax on 250,000

    Although both entities are effectively taxed on Kshs. 500,000 within the company, the tax is split between the company and the directors. The company will pay corporation tax at 21% on the retained Kshs. 250,000 whilst the directors will be taxed at income tax rates (up to 40%) on the Kshs. 250,000 paid to them.

    The partners however will be taxed fully at income tax rates and may therefore have a much higher tax bill.

    Taking this simplistic example and ignoring personal allowances for the moment the two entities will pay tax of:
    Company Kshs. 250,000 x 21% = Kshs. 52,500
    Directors Kshs. 250,000 x 40% = Kshs. 100,000
    Total tax on company’s earnings = Kshs. 152,500
    Partners Kshs. 500,000 x 40% = £200,000
    As a result, in the above example the company and the directors are (Kshs. 200,000 – Kshs. 152,000) Kshs. 48,000 better off.

    Do contact us at stralexgroup@gmail.com or on + 254 734 330 100/ +254 773 865 798 for further advisories on registration of limited liability companies, preparation of partnership deeds and all matters related to companies and partnerships.

    For: Corporate Law & Business Services Consulting Group

    Kenneth KANG’ETHE
    PARTNER

    ReplyDelete
  2. This is really cutting edge machines. It is really good for business too. new mexico llc

    ReplyDelete
  3. Yes Paul. We help our clients identify the most suitable business vehicles for various kind of business undertakings.

    ReplyDelete
  4. im studying economics and i have been having a hard time trying to understand this..but your article is much easier to understand. THANKX!

    ReplyDelete
  5. Thank you again for all the knowledge you distribute,Good post. I was very interested in the article, it's quite inspiring I should admit. I like visiting you site since I always come across interesting articles like this one.Great Job, I greatly appreciate that.Do Keep sharing! Regards, Trademark Registration

    ReplyDelete