General Oct 17, 2024

General partnership: establishment, taxation and debts

Are you looking for an alternative to the traditional business form? No minimum capital is required when establishing a general partnership, and handling matters is generally flexible. At the same time, the operation is more risky, as all partners are responsible for the company's debts and other obligations with their entire assets.

If this sounds good, a public limited company might be a suitable option for you. We will tell you what it is, how it is set up, and what special features it involves in terms of taxation, profit distribution, liabilities and debts. By reading our guide, you will be able to make informed decisions when approaching this form of business.

What is a general partnership?

An general partnership is a form of joint liability company in which at least two partners conduct business together to achieve a common financial purpose. This form of company is especially suitable for small companies and family businesses, where decision-making power and profit sharing practices can be coordinated among the partners.

Benefits

Easy to set up: No minimum capital required or complicated set-up processes.
Flexibility: Decision-making is quick when there is less bureaucracy.
No minimum capital: No need for large initial capital.
Freedom of contract: The partners can agree on things quite freely.
Possibility of influence: Directly to the company's decision-making and operations by each partner.

Risks

Personal responsibility: High financial risk for partners.
Dependence on other partners: Another's actions can directly affect you.
Access to financing: The interest of outside investors may be less.
Possible conflicts: A company agreement that is too flexible can lead to disagreements.

Suitability of an general partnership

Before establishing an general partnership, it is therefore important to carefully consider its suitability for your own business in terms of advantages and disadvantages.

The following factors should also be taken into account:

Nature of business: The general partnership is especially suitable for small companies where the partners actively participate in the activities.
Trust between partners: If a decision made by another partner leads to partnership debts, then everyone is still responsible for them.
Risk management: It is important to maintain good records and consider taking out insurance.
Taxation: The taxation of an general partnership can be advantageous, especially with the right tax planning
Financing options: Getting external financing can be more challenging than, for example, with a limited company.

An open partnership is especially suitable for situations where the partners know each other well and trust is strong. This form of business is common, for example, in family businesses or when entrepreneurs want to conduct business in close cooperation without major administrative obstacles.

Examples of public companies

Family businesses

Many family-owned companies operate as open companies. For example, a family-owned local bakery or craft workshop, where family members are partners, will benefit from this form of partnership due to its simplicity and flexibility.

Consulting companies

Two or more experts can establish an general partnership to provide consulting services. This enables direct cooperation and quick response to customer needs.

Small service companies

For example, two barbers and hairdressers can establish a joint shop as an general partnership. They share the premises and expenses and are jointly responsible for running the business.

Establishment of an general partnership

An general partnership can be founded by:

Natural persons: Two or more individuals with a common business idea.
Companies or entities: Legal entities can also act as partners.
A combination of the above: For example, one person and one company.

Establishment requirements:

Habitation: At least one of the partners must have a permanent residence in the European Economic Area. Otherwise, permission from the Finnish Patent and Registration Board is required.
Company agreement: The founders must draw up a written partnership agreement, which all partners must sign.

Drafting of the company agreement

The first and most important step in establishing an general partnership is partnership agreement compilation. This agreement forms the basis of the company's operations and defines the rights and obligations between the partners. It is recommended to spend time and possibly also a legal expert in drafting the partnership agreement, so that all important points are taken into account.

The company agreement must contain at least the following information:

Company name: The name must contain the words "general partnership" or otherwise indicate that it is a general partnership.
Company registered office: Finnish municipality where the company's administration is handled.
The company's industry: A clear description of the business the company is engaged in.
Company members: Everyone's names and contact information.

In addition, it is good to agree in the partnership agreement:

Profit sharing and loss sharing: Unless otherwise agreed, profits and losses are shared equally.
Decision-making power: Who or who can make decisions and sign contracts on behalf of the company.
Resignation and dissolution from the company: Procedures when a partner resigns or when the company is dissolved.
Company contributions: Possible monetary or other contributions that the partners invest in the company.

A carefully drafted partnership agreement reduces risks and possible conflicts in the future. It is important to remember that the partners are responsible jointly and severally of the company's debts and obligations, so the agreement must be in accordance with the interests of all parties.

Incorporation notice and registration

Once the partnership agreement is signed, the next step is to make declaration of incorporation to the trade register. This is done by filling out the necessary forms and submitting them to the Finnish Patent and Registration Board (PRH). The registration fee for an general partnership is 240 euros.

The declaration of incorporation must state:

Company name: You can enter alternative names if the primary one is already taken.
The company's domicile and address information.
Industry.
Company members' information.
Financial period: Usually a calendar year, but can also be another 12-month period.

At the same time, you can register in the registers of the Tax Administration:

Advance collection register
Register of persons liable for value added tax
Employer register (if the company has employees)

An general partnership is only created when it is registered in the trade register. After registration, the company receives a Y-ID, which is needed, for example, for opening a bank account and invoicing.

Other practical matters

A well-planned is half-done, and this is especially true when starting a business. Carefulness during the establishment phase ensures that the company's operations can start smoothly and that the requirements of the law are met. Here are some practical things to take care of:

Opening a bank account: The company must open its own bank account, which is used for all the company's financial activities. In order to open a bank account, you need a partnership agreement and an extract from the trade register.

Insurances: Consider the necessary insurances, such as liability insurance, accident insurance and any industry-specific insurance.

Accounting: The general partnership must keep double-entry bookkeeping according to the law. It is recommended to hire a professional accountant or use reliable accounting software.

Permissions and notices: Find out if the company needs special permits or notifications to the authorities for its operations. For example, in the restaurant industry, you need a serving license and the approval of the health authority.

Tax planning: Since the company's profit is distributed to the partners for taxation, it is good to plan in advance how the profit distribution affects taxation. At this point, you should consult a tax expert.

Distribution of profits of an general partnership

Profit sharing principles

Profit distribution takes place in accordance with the principles agreed in the partnership agreement. Unless otherwise agreed, statutory principles are followed:

Interest on corporate contribution: Interest according to the Interest Act for the partner's contribution to the company..
Distribution of the final profit: The remaining profit is divided equally among the partners.

If an equal distribution leads to unreasonableness, the distribution shares can be negotiated. Losses are usually distributed according to the same principle as profits.

Example of profit sharing:

The company's profit for the financial year is €100,000.
Partner A has invested €50,000 in the company and partner B €30,000.
The interest rate according to the Interest Act is set at 2%.
A receives interest of €1,000 and B €600.
The remaining profit of €98,400 will be divided equally or according to the agreement.

Freedom of contract

In an general partnership, the partners have extensive contractual freedom. They can agree on the profit sharing as they wish, as long as it is acceptable to all parties. This emphasizes the importance of the partnership agreement and that all important matters are agreed in writing.

The right of the partners to withdraw funds

In an general partnership, the partners have the right to withdraw funds from the company flexibly. This is because the partners are personally responsible for the company's debts. Funds can be withdrawn:

In the form of salary: If the partner works in the company, he can be paid a salary, which is a tax-deductible expense for the company.
As a private appointment: The partner can withdraw funds as a private withdrawal, but this is not a deductible expense for the company or taxable income for the partner.

Excessive asset withdrawals can lead to losses in the company's capital, which increases the partners' financial risk. That's why it's important to keep records of withdrawals and make sure that the company's financial situation remains stable.

general partnership taxation

The taxation of an general partnership differs from, for example, the taxation of a limited company in that the company is not taxed as a separate legal entity. Instead, the company's profit is distributed to be taxed in the personal taxation of the partners. This means that the company's profit is divided among the partners and taxed in their own taxation either as earnings or capital income.

Distribution of income shares

The company's profit is distributed among the partners as agreed in the partnership agreement. Unless otherwise agreed, the winnings will be divided equally. The income share to be distributed consists of:

Earnings: Taxed according to the progressive tax scale.
From capital income: Taxed at a rate of 30% (34% to the extent that capital income exceeds EUR 30,000).

Calculation of net worth

The amount of capital income is based on the partner's share of the company's net assets. Net assets are calculated using the formula:

Net assets = Assets - Liabilities + (30% x wages paid in the previous 12 months)

The partner's share of capital income is usually calculated at 20% of his share of the company's net assets. This part is taxed as capital income, and the rest of the income is taxed as earned income.

Example:

The company's net assets are 100,000 euros.
There are two partners, so each one's share of the net assets is 50,000 euros.
The capital income part is 20% x €50,000 = €10,000.
If the partner's income share is €60,000, €10,000 is taxed as capital income and €50,000 as earned income.

Advance tax and tax planning

The partners pay advance tax based on the estimated income. With a realistic estimate of the future income, you avoid additional tax consequences. Overestimated advance taxes are returned as tax refunds, but the money is then temporarily out of use.

Tax planning tips:

Estimate income realistically: This makes it easier to manage cash flow and pay advance taxes.
Take advantage of tax deductions: The company's expenses and investments can reduce taxable income.
Salary vs. profit sharing: Consider whether it makes sense to pay yourself a salary or increase income through profit sharing.

Responsibility for debts

Personal liability of the partners

One of the most significant characteristics of an general partnership is the partners unlimited and personal liability of the company's debts and other obligations. This means that:

Shared responsibility: Each partner with all his personal property.
Commencement of liability: When a partner joins the company, and also covers debts incurred before joining.
End of liability: The partner is responsible for the company's debts until his resignation is entered in the trade register and announced.

Regressioikeus

If a partner has to pay the company's debts in excess of his own share, he has the right to collect their share from the other partners. This is called as a right of recourse.

Example:

The company is unable to pay its €50,000 debt.
The creditor demands the entire amount from partner A.
A pays the debt and can then collect his share of the debt from partner B.

Risk management

Because the responsibilities are great, it is important to:

Trust between partners: Strong mutual trust reduces risks.
Good accounting and financial monitoring: Financial transparency helps to avoid unpleasant surprises.
Liability insurance: Consider taking out liability insurance for the company and partners.

Liquidation of an general partnership

The dissolution of an general partnership can become timely for many reasons, such as by a joint decision of the partners, due to the termination of the partnership agreement, or as a result of the death or bankruptcy of a partner. The dismantling process usually proceeds as follows:

Decision on dismantling: The partners agreed on the termination and liquidation of the company's operations.
Liquidation: The liquidators of assets and liabilities are usually the partners themselves, unless otherwise agreed.
Debts are paid: Or the funds are set aside to pay them before the property is distributed.
Property distribution: Equally, between the partners in accordance with the partnership agreement, unless otherwise agreed.
Discharge notice: From the dissolution of the company to the trade register, when the process is complete.

Resignation of the company owner

A partner can leave the general partnership in the following ways:

Termination: If the partnership agreement is valid for an indefinite period, the partner can terminate the agreement by notifying the other partners. The notice period is usually six months.
Transfer of company share: A partner can transfer his partnership share to another person, but this requires the consent of all partners.
Death or Bankruptcy: If a partner dies or goes bankrupt, the company can be dissolved, unless otherwise agreed.

Effects of resignation:

End of liability: The resigning partner is responsible for the company's debts until his resignation is entered in the trade register and announced.
Redemption of share: The departing partner's share of the company's assets is determined in accordance with the partnership agreement. He is paid the share of the company's net assets that belongs to him, unless otherwise agreed.

It is recommended to agree in detail on the resignation procedure and possible redemption conditions in the company agreement to avoid disagreements.

Is a general partnership worth it?

The general partnership is a flexible and simple form of business, which is especially suitable for situations where:

The company members know each other well and want to do business in close cooperation.
The business does not require large capital investments, and the personal contribution of the partners plays a central role.
We want to keep administrative bureaucracy to a minimum, and we want to keep decision-making flexible.

Establishing an general partnership can be an excellent solution under the right circumstances. It offers the opportunity to combine the expertise and resources of the partners effectively, and its flexible structure enables a quick reaction to changes in the business environment.

However, before making a decision, it is important to:

Draw up a careful partnership agreement: This reduces misunderstandings and helps prevent possible conflicts.
Consult experts: The help of a lawyer and an accountant can be invaluable during the founding phase of the company.
Critically evaluate the business plan: Make sure that the general partnership is the best possible form of company for the planned business.

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