This is a relationship which subsist between people carrying on a business with a view to making profit. Membership ranges from two to twenty (ten for banking) but this does not apply to members of the stock exchange. This could be among friends, family members or people of like minds who agree to pull their resources together to form a business entity in form of partnership. This form of business organization is common among professionals in Accounting, Engineering, Legal, architecture etc. Wherever it becomes more convenient to work together instead of running individual business, a partnership often evolves. It could be formed by artisans, teachers coming together to establish a school, Doctors coming together to establish hospitals etc.
There are two types of partnerships:
- Ordinary or General Partnership is where all members are active and share the responsibilities equally. They also share their profit as agreed in their article. They have unlimited liability. This means that their liability to their creditors is unlimited in the event of a liquidation. They will have to pay from their pockets if necessary.
- Limited Partnership: This is where members enjoy limited liability. However at least one member must have unlimited liability and such partners are referred to as general partners. They bear the risk of the partnership. They are usually the managers of the business and bears the debts of the business while the limited partners are only responsible for the extent of their capital in the business.
KINDS OF PARTNERS
- Active Partners: These are the ones involved in the daily operations of the business. They are known to the public as the members of the partnership.
- Secret Partners: These partners are also active in the business, but they are unknown to the public. They are not involved in contractual arrangements like active partners.
- Dormant Partners: These partners are not active in the operations of the business. They are also not known to the public as partners. However, they contribute to the finances of the partnership. They are like passive investors expecting a return on their investments.
- Nominal Partner: This is a partner who lends his name to the business in order to arouse public interest. He may be a public figure with a good reputation and integrity. People would rate the business very high because he is involved. He does not contribute to the capital or the daily activities of the business but may share in the profit.
- Silent Partner: These are partners that do not take part in the operations of the business but contribute actively to the capital and other financial requirements. They are also known by the public as members of the business or firm.
ARTICLE OF PARTNERSHIP
This is the constitution of the partnership. It is also known as the partnership deed. It is an agreement in writing, stating the rights, duties, and partners of the partnership. The content of any partnership deed would include:
- Name of the partnership. This is the business name known to the public.
- Number of members at commencement
- Place, address or location of business office or offices
- Partners contributions to capital
- How profit or loss would be shared among members and when. This could be at the end of each trading period.
- Mode of admission of new members
- The legal status of the firm and each member of the business
- Mode and procedure of withdrawal of members
- Mode of termination of the business.
ADVANTAGES OF PARTNERSHIP
- Availability of a larger amount of capital: Where more than one person contributes to the capital of a business, it is expected that the capital will be more. As many as twenty people could form a partnership. This means that they can raise a larger capital compared to a sole trader.
- Better management: A Partnership would be able to deploy more personnel and train them to meet a higher manpower needs than a sole trader. This is a result of more capital to acquire skilled staff in addition to members who are equally professionals.
- Tax advantages: There is less strain on partnerships compared to companies in terms of taxation. They are not compelled to send their accounts to tax authorities, but members pay the regular tax.
- A considerable level of Privacy: Partnerships enjoy a considerable amount of privacy because they are not compelled to publish their financial statements in newspapers like public liability companies. Members of the public are not exposed to their financial status.
- Personal Interest of Partners: There is a higher level of productivity in partnerships because of the personal interest of members to succeed. They want a good return on their investment, and this is possible only when everyone is dedicated to the course of the firm. The members know that their effort will determine the size of the return of their investment and this is a motivation for all businessmen.
- Better Credit Standing: Partnerships can raise funds from financial organizational because of their scale of operation, the integrity of their members and their financial outlay compared to a sole trader. They may also be able to afford the necessary collateral required to secure loans for expansion.
- Possibility of Continuity: There is the possibility for Partnerships to be sustained better than sole trade. This is because there is a provision in the article to admit new members. This makes it easy to replace those leaving. It is also possible to transfer membership to another person. A father can transfer his position to the son or friend or a professional colleague. This enhances continuity.
- A personal relationship with employees: This is possible because the number of employees in a partnership is relatively fewer than the corporations. In a partnership, everyone knows the other and there is a close relationship between staff and owners. They can impact on the staff positively due to this closeness.
- A definite legal status: Partnerships enjoy a defined legal status because they are registered with the corporate affairs commission. Some members have limited liability while others do not. However, by virtue of being registered officially, they have a definite legal status. They transact business in their name. They can sue and be sued when necessary.
- Less legal strain during formation: The process of registering a partnership is not strenuous. Once the deed of partnership is drawn and signed by members, the registration process with the authorities is straight forward.
- Unlimited liability: Although some members of a partnership enjoy limited liability, the general partners do not. The fact that someone still suffers from unlimited liability is a setback. In companies, every subscriber enjoys limited liability. In the event of a liquidation, they are only liable to the extent of their financial contribution to the company.
- Disagreement between partners: It has been seen that disagreement between partners on issues has impacted negatively on some partnerships to the extent of liquidation. Where a dispute arises amongst partners and there is no amicable resolution, there is usually the danger of liquidation. This happens where the principal or general partners are involved because they are the soul of the firm. It could result in splits or closure. In companies, aggrieved members would simply sell their shares at the stock exchange and invest their funds in other companies. It does not result in outright liquidation.
- Difficulty in withdrawing investments: The capital of a partnership is not quoted in the stock exchange. This makes it difficult for the partners to sell or remove their shares and invest elsewhere. If any member insists on withdrawal of capital and there are no funds to meet this request, the partnership may sell assets but where this is not enough, closure becomes inevitable. To avoid closure, members must retain their investments in the partnership.
- Collective Responsibility: In a general partnership, there is a collective responsibility of the members in all outcomes emanating from the operations of the firm. This is like sole trade but not possible with companies.
- Lack of Continuity: Although the article of partnership is clear about share transfer and withdrawal of investment, partnerships are rarely sustained as companies. The possibility of continuity is very low. Only a few partnerships survive for long.
- Limited Expansion: The prospect of expanding operations is comparatively low compared to companies. Instead of expanding, partnerships would rather split. Moreover, their limited resources may not support the desired expansion drive.
- Delay in Decision Making: It is also argued that the process of decision making is slow in partnership. This is because some of the members may not be available for decision making. This is very true of members who are not active but would want to contribute to vital decision making. The process of getting everybody on board could delay the decision-making processes and the need for timely decisions. You don’t need the shareholders of a company to make operational decisions.