To understand why it’s always a good idea to register your new business partnership, we first take a look at those who haven’t been registered. For such a business to be ‘legal’ it has to meet these requirements:

• Each party must bring something to the partnership or bind themselves to it.
• The venture must be carried on for the parties’ mutual benefit.
• The aim must be to make a profit.
• The partnership contract must be valid in terms of the law.

Some of the best examples include professional services such as lawyers, accountants and doctors who operate as unincorporated or common-law universal partnerships. However, this type of partnership comes with risks and costs.

The reason it is risky is because the contract or agreement between the partners is the only legal framework for the partnership. It regulates who owns how much of the assets and the proportion in which profits and losses are shared. This could be tricky, primarily when having to determine contributions and liability to divvy them up at the end of a partnership. This usually becomes a job for the courts.

During the partnership’s lifetime you won’t be able to alienate or use partnership assets as personal security without first getting your partners’ consent. Moreover, the partnership will automatically terminate when one of the partners dies.

Universal partnerships are typically also expensive from a tax point of view. In addition, you and your partners will be open to claims in your personal capacity. For these reasons, universal partnerships are considered to be expensive, risky and limiting.

The importance of distinguishing between shareholders, directors and investors

Even knowing the drawbacks of a universal partnership, many founders and entrepreneurs are still hesitant to register their business from the outset because of the cost involved. While it may feel like an unnecessary additional expense when starting out, the long-term benefits will far outweigh the initial cost.

Suppose you start your business as a universal partnership. It immediately exposes your (personal) assets, regardless of your signed surety. So, the question is: how confident are you with your concept and the economy? Not to mention that investors or financiers generally don’t invest in entities – unincorporated or incorporated – that don’t distinguish between shareholders and directors.

A shareholder, in essence, is an investor who is confident in a concept and ready to take it to market but isn’t always involved in running the business.

Directors deal with the day-to-day management of the business and are required to impartially run the business, which can become increasingly difficult as the business grows.

This is when it could limit a company’s growth – shareholder-directors often struggle to fulfill their roles objectively outside the personal need for return on investment. Investors and financiers consider this a risk.

Incorporating corporate governance structures is therefore fundamental in ensuring that investors and financiers view your business as a sound investment.

In simple terms, a small company managed like a big company instils confidence.

Don’t forget your own wants and needs

To decide whether a new co-shareholder will also be a director, it is crucial to know what you need. First, ask yourself if you need an active participant or simply funds (i.e. a silent partner or shareholder).

Most entrepreneurs know the importance of doing proper due diligence before entering a shareholder or partnership agreement, but many forget to investigate their own needs. This is why I always recommend incorporating your business at the outset:

• Ensure that the most suitable people are directors or skilled (professional) service providers advising you on the best practices.
• Be selective when it comes to investors or partners.
• And run your business as if you are pitching for that dream opportunity tomorrow morning.

Learn more about Old Mutual’s funding and support for SMEs here.