Partnerships

Meaning of Partnership

A partnership is a business owned and managed by two or more persons who become partners by written agreement.  The Partnership Act of 1890 and the companies Act of 1958 state that the maximum number of people who can form a Partnership is restricted to 20 persons while the minimum should be 2 persons. These partners share the profit or losses and the responsibilities of their business. Those in law and accounting professions are prohibited under the Companies Act of 1968 from forming partnerships. A document containing the written agreement, rights and obligations of the partners is called the deed of partnership.

Types of Partnership

There are various types of partnerships as stated below:

(a) Ordinary Partnership: This is a partnership in which all members are held liable for the debts of the business.

(b) Limited Partnership: This is a partnership with limited liability in that members will not be asked to contribute more money than the one used to start the business in case the business fails. For Partnership to become limited, it must be registered with the Registrar of Companies otherwise it will be treated as ordinary partnership.

(c) Active and Sleeping Partners: Partners who take part in running the business are active partners while those who do not take part in the running of the business are sleeping partners.

(d) Quasi or Nominal Partners: A nominal partner is a partner only in name. He contributes no capital and his name is only brought in to earn respectability  and to bring goodwill to the business.

Advantages of Partnership

(i) It has more capital than sole trading.

(ii) Partners have different ability and talents therefore, each partner specializes in an aspect of business which he is best suited.

(iii) Partners meet to discuss matters relating to the firm.

(iv) There is usually more commitment to work.

(v) Profits are shared only by partners.

Disadvantages of Partnership

(i) Partners have unlimited liability for debts in case of business failure.

(ii) If one partner takes a wrong decision, it affects other partners.

(iii) Disagreement among partners causes confusion in the business.

(iv) Partnership comes to an end with the death or resignation of a partner.

(v) Decision is slower than with a sole proprietorship.

EVALUATION

1. What is Partnership?
2. Outline two advantages and two disadvantages of Partnership.
3. Define Partnership.
4. Explain the following types of partnership: (a) Ordinary Partnership (b) Quasi Partnership.