A partnership may be defined as a type of business organisation in which two to twenty persons agree legally to set up and manage a business outfit with the sole aim of making profit.
Partnership is usually formed by an association of two to twenty persons, who by an agreement (usually legal) decide to pool their resources (capital) or skill or both together and establish a business enterprise. The people involved in partnership agreement are called partners and they share the profit, losses and risk of the business. When partners are involved in banking enterprise, the number required by law is between two and ten.
FEATURES OR CHARACTERISTICS OF PARTNERSHIP
- Ownership: The partnership is owned by two to twenty persons but in a banking enterprise it is between two and ten.
- Objective: The main objective of the partnership is to make profit.
- Source of capital: The capital required to set up the business is provided by the partners based on legal agreement.
- Liability: The partners have unlimited liability.
- Life span: The life span of the partnership depends on the agreement signed by the partners involved.
- Legal entity: It is not a legal entity as the partners are not separated from the business.
- Management: The business is controlled and managed by the partners.
SOURCES OF CAPITAL FOR PARTNERSHIP
- Personal contributions from partners: The partners can jointly agree to contribute their money either equally or pro rata as major sources of capital.
- Loans and overdraft: Partnership can easily obtain loans and overdraft from the banks since they are jointly liable.
- Trade credit: Money can be obtained from middlemen in advance in order to facilitate production of goods.
- Undistributed profit: Retained profit can be pumped back to the business to aid its expansion.
- Admission of new partners: Upon the admission of new partners, more capital will be brought into the business.
TYPES OF PARTNERSHIP
(a) Limited partnership: Limited partnership 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 partners cannot take equal part in management and administration of the business. The limited partner can have access to the account of the partnership.
The main features of limited partnership are:
- A limited partner cannot participate in the management of the business.
- Liability is limited but there must be a partner with unlimited liability.
- It must be registered.
(b) General or ordinary partnership: In general partnership, partners have equal responsibility and risk in the business. All partners are agents of the firm and they all 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; they all take active part in the administration and management of the business.
The main features of general partnership are:
- All the partners have unlimited liability.
- Partners are agents of the enterprise.
- They have equal responsibility in management.
- They have equal power in binding the contract.
TYPES OF PARTNERS
- Limited partner: A limited partner is the one who has agreed to contribute a certain sum to a partnership business and is prevented by law from taking any active part in the management and administration of the business. He is liable for debts and obligations of the partnership only up to the amount of capital he has contributed. A limited partner has limited liability.
- General partner: A general partner has full power of participating in the conduct and management of the partnership business. He is entitled to take full share in the management of the firm. This kind of partner is liable to the full extent of his estate for the partnership debts, i.e. he has unlimited liability.
- Active partner: An active partner takes active part in the management and administration of a partnership business. He contributes to the financing and formation of the business, takes active role in the day-today running of the enterprise and is being paid a certain sum as salary.
- Nominal or quasi-partner: 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. This partner will share in the profit or debts of the firm as specified in the Partnership Act of 1890. He might be a politician or a successful business man.
- Sleeping or dormant partner: 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 enterprise, i.e. no active participation in the firm. A sleeping partner receives no salary but is liable for the debts of the firm. The mere fact that a partner is a dormant one does not exonerate him from liability in the event of wrong decision by the active partners.
RIGHTS OF PARTNERS
- The partners are entitled to share from the profits of the partnership business.
- A partner making advance beyond the amount of capital which he has agreed to subscribe is entitled to interest of 5%.
- A partner has the right to act as the agent of the business.
- Every general partner can take part in the management of the partnership.
- Every partner must have access to the partnership books of accounts.
- They must be indemnified by the firm in respect of payment made and personal liability incurred by them in the conduct of the business.
FORMATION OF PARTNERSHIP
A partnership business may be established without any formality although the partners have certain unavoidable obligations to third parties; they may make such agreement between themselves in respect of the internal management of the firm. It is accordingly usual for people entering into partnership to express their intention in a partnership agreement known as deed of partnership. Deed of partnership may be defined as agreements, rules and regulations guiding the members of a partnership.
The agreement contains the following rules and regulations:
- The names of the partners.
- The name of the firm.
- The nature of the business formed.
- The rights and duties of each partner.
- The proportion in which capital is to be provided and whether interest should be paid on capital.
- The signatories on the cheques.
- The sharing of profits and provision for drawings.
- Duration of the partnership.
- The circumstances which shall dissolve the partnership.
- The payment of partners’ salaries.
- The method of admission of new partners.
- The objective of the firm.
ADVANTAGES OF PARTNERSHIP
- Sufficient capital: Partnership has more financial resources than a sole proprietorship because more people are involved, hence more capital can be raised through partner’s contributions.
- Increase in production: There is increase in production as a result of increase in capital and management.
- Joint decision making: Better results are derived when two or more partners put their heads together and take joint decisions for the enterprise.
- There is privacy: In this kind of business unit, there is privacy because partners are not legally compelled to publish the annual accounts for public consumption.
- Better management: By combining skills and abilities, partnership businesses are usually better managed than a one-man business.
- Sharing of risks and liabilities: The partners can share risks and liabilities among themselves and this will reduce individual burden.
- Better chance of continuity: There is better chance for continuity because the death or exit of a partner may not lead to the end of the business.
- No legal formalities required: In forming a partnership, no major procedure of establishment is required, unlike a company.
- Increased efficiency: The bringing together of special skills and talents help to increase efficiency in production.
- Specialisation in management: The principle of division of labour can be applied in the managerial and administrative hierarchy of the business.For example,in an accounting firm, some accountants may be management accountants while others may specialise in auditing or taxation.
- Greater possibility of expansion: There is the possibility of expansion, by making use of additional capital derived from in-coming partners.
- Loan facilities: A partnership can easily obtain loan from creditors since they are jointly liable. The loan can be used for the expansion of the business.
DISADVANTAGES OF PARTNERSHIP
- Unlimited liability: The partners are liable for the debts of the partnership business up to the full extent of their estate.
- Business is not a legal entity: Partnership business is not a separate and distinct personality. It cannot sue and be sued in its own name.
- Limited growth: The growth of the partnership will be limited to the managerial ability of the partners.
- Disagreement between partners can end the business: There is the possibility that a disagreement between the partners can put the business to an end.
- Risk of dissolution: Death, insanity and bankruptcy of a partner will bring the business to an abrupt end.
- Difficulty in management: Since every partner will want to contribute his own quota, decision-making may be slow and long.
- False records: Some of the partners, especially the active partners, can use false records to gain advantage over others.
- Inability to raise sufficient capital: Partners cannot invite the public to raise capital. Members of the public are always afraid to invest because of its unlimited liability.
- Action of one partner is binding on others: There is an inherent danger that one partner, through his recklessness, can put others into problem and this may destroy the business. All the partners will be held responsible for the action of one of the partners in the course of running the firm’s business.