A partnership is a business type that is similar to a sole proprietorship in every way. The only small difference is that this type of business is owned by two or more people instead of one.
In this post, you can read about partnerships, and we will cover topics such as accounting and tax.
At Reportability, we are experts in accounting, tax, and reporting to the authorities. We have created a tool that automatically calculates your partnership's profit, handles the tax calculation, and tells you exactly how to report it correctly to the Danish Tax Agency.
What is a partnership?
A partnership is a specific business type where two or more people with the same business idea own the same company. A partnership is essentially the same as a sole proprietorship, with the tiny difference that there are multiple "partners" or owners.
Partnerships offer a structure that is ideal for people who want to work closely together and share both success and responsibility.
Other characteristics of a partnership
The most unique aspect of a partnership is its ownership structure. Apart from that, most rules and requirements for a partnership follow the same rules that apply to sole proprietorships.
For example, partnerships are also classified under accounting class A. This means that you must record the company's income and expenses, but there is no requirement to submit an annual report to the Danish Business Authority. Therefore, there is also no requirement to start the business with a minimum capital amount, as is the case when establishing a private limited company (ApS).
You can learn more about other aspects of accounting and tax further down in this post.
Liability in a partnership
Since there are multiple owners of the business, each owner is personally and jointly liable for any debt the company has accumulated over time.
This means that you are all equally liable. Regarding personal liability, it is important to be aware that the company's lenders can make claims against the owners' personal assets. This also means that if one of the owners cannot pay their share of the debt, the creditor can collect the money from another owner.
This can be a disadvantage of personal and joint liability, but it is possible to get help drafting a "partnership agreement." Such an agreement can, for example, help keep track of what should specifically happen if you end up in debt problems.
Accounting in a partnership
As in any other business, a partnership must also maintain accounts. The accounts do not need to be a formal financial statement that you submit to the Danish Business Authority. Instead, it is a set of accounts that enables you to calculate any profit or loss in the business.
Such accounts are also called tax accounts, and they must be based on all your bookkeeping accounts. For example, they must include an income statement, the annual result, an overview of the balance sheet, as well as assets and liabilities.
When it comes to accounting, it is important that you keep your financial records for five years. This is because the Danish Tax Agency (Skat) may require you to produce records dating back five years. Most accounting systems help you keep track of your financial documentation.
Calculating tax in a general partnership (I/S)
A tax return, as you read about above, is a calculation of the company's annual result. You must report this result—whether it is a profit or a loss—to the Danish Tax Agency on your personal tax return forms.
The number of fields you need to fill in depends on the tax scheme chosen by each individual partner and whether the company's total revenue exceeds 300,000 DKK.
If the company's revenue exceeds 300,000 DKK, it is not enough to simply report a profit or loss. Revenue of that magnitude requires you to submit extended financial information.
In addition, each partner in a general partnership must consider their tax scheme. You can choose to tax any profit in three different ways. These are known as the Personal Tax Act (PSL), the Capital Return Scheme (KAO), and the Business Tax Scheme (VSO). Each tax scheme has its own advantages and disadvantages, which you can read more about here.
How to calculate and report your partnership's tax
The most common way to report partnership tax is to distribute the reportable information equally. For example, if your partnership has a profit of 250,000 DKK before tax, the owners will split the amount between them. If there are two of you, you and your partner will each report 125,000 DKK in the field for company profit.
But how do you figure out what to report and how to do it?
There are generally three ways to do this. First, you can perform the calculations yourself and report the figures on your tax forms. Another way is to contact an accountant and have it done without having to worry about it.
The first solution does not cost much, but if accounting and tax for partnerships are not your core competencies, you risk making unfortunate mistakes.
The second solution, using an accountant, is clearly the easiest but also the most expensive. The benefit of not having to do much yourself can make a substantial dent in your profits, as accountants charge well for their important services.
Do it yourself with Reportability, a tool that makes you your own accountant
The third solution is to use our tool to calculate and report your results.
Reportability is an online self-service tool that automatically calculates your annual result and provides you with a complete guide that tells you exactly what each of you needs to report to the tax authorities.
It takes our users an average of 30 minutes to complete the tool's five simple and quick steps. Simply connect your accounting system and follow the steps. If you need help from an accountant along the way, our team is ready to assist you via the chat in the bottom right corner.
This solution is the perfect middle ground for those who don't feel it's time for an accountant to review the books, but still want to ensure everything is done correctly. The tool is always updated with the latest legislation.
