Partnership
This is a business owned by two or more persons who have agreed to abide by a Partnership Agreement otherwise known as Partnership Deed. A partnership usually comprises of between 2 and 20 persons. The Partnership Deed will set out how management decisions are to be made and the proportion of the profits that each partner is entitled to. The Partners then pay personal income tax on their share of the profits.
Partnership like sole proprietorship also faces the challenge of unlimited liability. If the business runs into financial difficulties, each partner can be held responsible for all the business debts and not just his or her contributions to the partnership. The moral therefore is ‘know thy partner’. The life span of the partnership depends on the agreement signed by the partners involved.
Types of partnerships
There are different types of partnership arrangements. Below are some examples.
Limited Partnership
This is a type of partnership which is formed and registered under the Limited Partnership Act. In a limited partnership, there must be one general partner with unlimited liability and one limited partner whose liability is limited to the amount invested. The limited partners cannot take equal part in management and administration of the business but can have access to the account of the partnership.
General (Ordinary) Partnership
In this type of partnership, partners have equal responsibilities and risks in the business. All partners are agents of the firm and they share the responsibility of running the business. Hence they are liable to the full extent of the debts of the firm. The liability of members is unlimited.
Active Partnership
Partners under this type of partnership arrangement take active part in the management and administration of the partnership business. Partners contribute to the financing and formation of the business, take active roles in the day-to-day running of the enterprise and they earn salaries as agreed in the partnership deed.
Nominal (Quasi) Partnership
This is a type of partnership where a nominal partner contributes only his name to the formation of the business. He neither contributes capital nor takes part in the management of the firm. A nominal partner must be a distinguished personality within the society as his name must surely increase the reputation and possibly the goodwill of the partnership business. A nominal partner would share in the profits and or debts of the firm as specified in the Partnership Act of 1980.
Dormant Partnership
A dormant partner takes no part in the conduct and management of the partnership business. He will contribute capital and share from the profit but will not engage in the day-to-day running of the business. A dormant partner is not exonerated from the debts of the enterprise and would share in any liability in the event of wrong decisions by the active partners.
Formation of Partnership
Persons entering into partnerships usually express their intention in a partnership agreement known as Deed of Partnership. The Deed of Partnership is defined as agreements, rules and regulations guiding the members of a partnership.
The agreement contains the following rules and regulations:
1. The names of the partners.
2. The name of the firm.
3. The nature of the business formed.
4. The rights and duties of each partner.
5. The proportion in which capital is to be provided.
6. Whether interests should be paid on capital or not.
7. The signatories to the firm’s accounts.
8. The sharing of profits, provisions for drawings and payment of salaries to partners.
9. Duration of the partnership.
10. The circumstances under which the partnership shall be dissolved.
11. The method of admission of new partners.
12. The objective of the firm.
Advantages of partnership
The following advantages exist.
¨ Sufficient Capital: unlike sole proprietorship whose capital is limited to the investment of only one person, a partnership is able to generate adequate capital because it involves more persons who can provide more sources of funds for the business.
¨ Increase in production efficiency as a result of increase in capital and management.
¨ Better management through combination of skills and abilities and joint decision making that is, putting heads together to take joint decisions.
¨ Privacy: partnerships are not compelled by law to publish their annual accounts for public consumption.
¨ Sharing of risks and liabilities reduces individual burdens
¨ Higher chances of continuity
¨ No legal formalities required
¨ Specialization in management
Disadvantages of partnership
· Unlimited liability
· The business is not a legal entity
· Limited growth: growth potentials are dependent on the managerial abilities of the partners
· Disagreement between partners can end the business
· There is risk of dissolution of the business through death, insanity or bankruptcy
· The business may still not be able to raise sufficient capital required to run the business.
Posted by: Monday Desmond
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