The fall of partnerships: a commercial decision or a tax decision?

The fundamental question addressed in this thesis is: can the fall of the ordinary partnership be attributed to commercial (non-tax) considerations, or is it, at least in part, due to the distortionary effects of the tax system? The author seeks to establish, primarily using new empirical research, that the tax system is highly likely to have had a significant role to play in the demise of partnerships. That is not to say that genuine commercial considerations are irrelevant but, given that basic principles of good tax design require that taxation should not affect business form selection, the present situation must be regarded as unsatisfactory. The need for systemic reform, or at the very least steps towards it, is clear. Chapter 1 presents the statistical background to the thesis. Chapter 2 considers the economic viability of the partnership as an alternative to incorporation for businesses involving more than one owner-manager, highlighting the limited liability illusion. Chapter 3 addresses the failing of the LLP, notwithstanding some initial optimism that the form would be highly attractive to businesses of all sizes. Chapter 4 explores the unfortunate truth that numerous acts of incorporation are, and have been, driven by tax considerations, rather than the sound commercial reasons discussed in Chapter 2. The availability of a double tax saving – perhaps exaggerated by artificial income splitting – in the corporate form for would-be partners leaves the partnership as the most vulnerable form for tax-motivated incorporation. Chapter 5 presents the case for a disincorporation relief as a way out for owner-managers locked into the company structure and concludes the thesis. Annexes A-D provide supplementary information, whilst Annex E provides a postscript on a more controversial proposal involving the decoupling business form and tax treatment.