What Is a Partnership? A Simple Guide for South African Entrepreneurs
What is a Partnership? A Simple Guide for South African Entrepreneurs
What is a Partnership?
A partnership is a business arrangement where two or more people agree to run a business together and share both the profits and the losses. It is one of the simplest business structures in South Africa and does not require formal registration with the Companies and Intellectual Property Commission (CIPC).
Unlike a company (Pty Ltd), a partnership is not a separate legal entity this means the partners themselves are personally responsible for the debts and obligations of the business. If the business owes money and cannot pay, creditors can come after the personal assets of the partners.
A partnership is not a separate taxpayer. Each partner is taxed individually on their share of the partnership's profit the partnership itself does not pay tax.
Types of Partnerships
South African law recognises different types of partnerships. The most common are:
- Ordinary Partnership
- The most common type. All partners share equally in the management, profits, losses, and liabilities of the business unless the partnership agreement states otherwise.
- Extraordinary Partnership
- One or more partners contribute capital but take no active part in running the business. Their liability may be limited to the amount they invested. However, South African courts have not always recognised limited liability in this structure the same way other countries do.
- Partnership en commandite
- A variant of the extraordinary partnership where a silent partner's liability is limited to their capital contribution. The silent partner's identity is not publicly disclosed.
- Anonymous Partnership
- Similar to the partnership en commandite, but the entire existence of the partnership may be kept confidential from the public.
How is a Partnership Formed?
A partnership can be formed verbally, but it is strongly recommended to have a written partnership agreement in place. A partnership agreement sets out the rules all partners must follow and helps prevent misunderstandings.
What should a partnership agreement include?
- The name and nature of the business
- Each partner's capital contribution
- How profits and losses will be shared between partners
- The roles and responsibilities of each partner
- How decisions will be made
- What happens if a partner wants to leave or dies
- How the partnership can be dissolved
Without a written partnership agreement, disputes between partners are governed by the general principles of South African partnership law which may not reflect what the partners actually intended. Always put the agreement in writing and have it reviewed by a legal professional.
Does a partnership need to be registered?
No a general partnership does not need to be registered with CIPC. However, depending on the nature of your business, you may need to register for tax purposes with SARS (e.g. for VAT if your turnover exceeds R1 million per year), obtain a business licence, or register with a professional body if your trade requires it.
Pros and Cons of a Partnership
| Advantages | Disadvantages |
|---|---|
| Easy and inexpensive to set up no formal registration required | Partners have unlimited personal liability for business debts |
| Shared skills, knowledge, and responsibilities | Each partner is liable for the actions of the other partners |
| Combined capital makes it easier to fund the business | Disputes between partners can be disruptive or fatal to the business |
| Flexible partners can agree on any structure that suits them | The partnership dissolves automatically if a partner dies or withdraws |
| No corporate tax profits are taxed at each partner's marginal rate | Profit sharing may cause conflict if contributions are unequal |
How is a Partnership Taxed?
A partnership is not a separate taxpayer in South Africa. This is one of the most important tax features of a partnership. Instead of the partnership paying tax as an entity, each partner is taxed individually on their allocated share of the partnership's net profit.
How it works in practice
- The partnership calculates its total income and allowable deductions for the tax year.
- The net profit (or loss) is split between the partners according to the profit-sharing ratio in the partnership agreement.
- Each partner includes their share of the profit in their own personal income tax return (ITR12) as business income.
- Each partner pays tax at their own marginal income tax rate on that share.
Each partner's taxable share + Other personal income = Individual taxable income
Thabo and Liesl run a consulting partnership (60/40 profit split)
Are partnerships subject to provisional tax?
Yes. Because the income is not subject to PAYE, each partner who earns a share of partnership profit will generally be required to register as a provisional taxpayer and make two advance tax payments per year (August and February).
Can a partnership register for VAT?
Yes. If the partnership's total taxable turnover exceeds R1 million in a 12-month period, it must register for VAT as a business entity. The partnership itself registers and accounts for VAT not the individual partners.
What expenses can a partnership deduct?
The partnership can deduct expenses incurred in producing its income, provided they are not of a capital nature. Common deductions include:
- Office rent and utilities
- Salaries paid to employees (but not to the partners themselves)
- Professional fees (accounting, legal)
- Business travel and vehicle expenses (with logbook)
- Depreciation (wear and tear) on business assets
- Advertising and marketing costs
- Business insurance
Amounts drawn by partners from the partnership are treated as drawings against their profit share not as salaries. They cannot be deducted as a business expense when calculating the partnership's taxable income.
Partnership vs. Company Which is Right for You?
Choosing between a partnership and a registered company (Pty Ltd) is one of the most important decisions for entrepreneurs. Here's how they compare:
| Feature | Partnership | Company (Pty Ltd) |
|---|---|---|
| Registration required | No | Yes CIPC registration required |
| Legal entity | Not a separate legal entity | Separate legal entity |
| Personal liability | Unlimited partners personally liable | Limited shareholders not personally liable |
| Tax | Partners taxed individually at marginal rates (up to 45%) | Company pays corporate tax at 27% |
| Admin & compliance | Low no annual returns to CIPC | Higher annual returns, audits may apply |
| Continuity | Dissolves on death or exit of a partner | Continues regardless of shareholder changes |
| Profit distributions | Partners share profit directly | Dividends attract 20% dividends withholding tax |
A partnership suits small, low-risk ventures between people who trust each other and want minimal administration. A company is better if you need limited liability protection, plan to grow, or want to bring in investors. If you're unsure, speak to a tax practitioner or accountant.
Dissolving a Partnership
A partnership can come to an end for several reasons. Under South African law, a partnership automatically dissolves when:
- One of the partners dies
- A partner is declared insolvent
- The agreed period of the partnership expires
- The purpose for which the partnership was formed is completed
- All partners agree to dissolve the partnership
- A court orders dissolution (e.g. due to irreconcilable disputes)
On dissolution, the partnership's assets are used to settle any outstanding debts and liabilities. Remaining assets are then distributed to the partners in accordance with the partnership agreement or, failing that, in proportion to their capital contributions.
Tax implications on dissolution
When a partnership dissolves, the disposal of partnership assets may trigger Capital Gains Tax (CGT) for each partner on their proportional share of any gain realised. Partners should ensure all outstanding tax affairs are finalised and that final ITR12 returns are submitted.
FAQs
No. A partnership is not a separate taxpayer, so it does not have its own income tax number. Each partner declares their share of the partnership profit on their own personal income tax return (ITR12). However, the partnership may need to register for VAT separately if its taxable turnover exceeds R1 million per year.
Partners typically take "drawings" from the business withdrawals against their share of the expected profit. These drawings are not salaries and are not tax-deductible for the partnership. At year-end, the actual profit is calculated and compared to the drawings taken, with any difference settled between the partners.
If the partnership makes a loss, each partner's share of the loss is allocated according to the profit-sharing ratio. Each partner can generally use their portion of the loss to offset other income in their personal tax return, subject to ring-fencing rules that SARS may apply to certain types of losses (such as losses from a trade carried on without a reasonable expectation of profit).
Yes. There is no maximum number of partners in a general partnership under South African law. However, some regulated professions (such as attorneys and accountants) may have their own rules about how many partners are permitted or how the partnership must be structured.
Not exactly. A joint venture is typically a short-term arrangement between parties to collaborate on a specific project, after which the arrangement ends. A partnership is generally an ongoing business relationship. The tax treatment of joint ventures can differ from partnerships if you are involved in a joint venture, it's advisable to get advice on how it should be structured and taxed.
Yes, in most cases. Since the income from a partnership is not subject to PAYE, partners who earn a share of partnership profit above the tax threshold are generally required to register as provisional taxpayers and make two advance tax payments per year (August and February). Use TaxTim's decision tree to check if you need to register.
Yes. A company (Pty Ltd) or close corporation can be a partner in a partnership. In such cases, the company would include its share of the partnership profit in its own corporate income tax return (ITR14) and pay corporate tax at 27% on that share.