Partnership is an association between a minimum of two and maximum of twenty members coming together to undertake a/some business(es)) in order to make profit. The partnership Act 1890 defined partnership as the relationship which subsists between persons carrying on a business in common with a view of profit. Partnerships are also known as firms. The law allows this type of business to have between two and 20 persons as members although there are exceptions. A bank is not allowed to have more than ten partners and certain professional firms such as accountants, solicitors and stockbrokers are allowed to have more than 20 partners. Examples are Femi and Shade Enterprises, Diya Fatimilehin and Co; (estate firm).
Features or Characteristics of Partnership
(i) Ownership: Membership is limited and is from two to twenty.
(ii) Objective: The main aim of forming this type of business organization is to make profit.
(iii) Source of capital: The partners contribute the capital required for starting and running the business.
(iv) Unlimited Liability: Members of a partnership have unlimited liability for the debts of the firm.
(v) Life span: The duration of the business depends on the agreement signed by the partners involved.
(vi) Legal entity: It is not a legal entity as the partners are not separated from the business.
(vii) Management: The business is controlled and managed by the partners.
EVALUATION
- Explain the meaning of partnership
- Identify five features of partnership
Types of Partnership
- 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 into the business. The partners do not take equal part in management and administration of the business.
- General or Ordinary Partnership
This is the opposite of limited partnership where the members who formed the business have the equal rights and responsibility in the administration of the business. Every partner is jointly liable to the full extent of the debt of the firm. The liability of members is unlimited, which means that all partners are liable to the full extent of the debts of the firm.
Types of Partners
- Limited Partners: A limited partner is 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 has limited liability.
- General Partners:This type of partner has full power of participating in the conduct and management of the partnership business. A general partner has unlimited liability and binds the firm. Death or bankruptcy of this partner leads to the dissolution of the partnership.
- Active Partner: An active partner participates actively in the day to day running of the firm and is being paid a certain sum as salary. He contributes to the financing and formation of the business.
- 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.
- Sleeping or Dormant Partner: A dormant partner takes no part in the conduct and management of the partnership business. He contributes capital and share from the profit but receives no salary. A sleeping partner is liable for the debts of the firm.
EVALUATION
- Mention two types of partnership and point out their differences.
- Itemize five types of partners and explain and three.
Formation and Agreement of Partnership Business
A partnership business may be established without any formality although the partners have certain unavoidable obligations to third parties. It is usual for people entering into partnership to express their intention in a partnership agreement known as, deed of partnership.
Deed of Partnership
This is a document which contains the rules and regulations which partners agree to abide by in the course of the operation of the partnership. The deed is also called Partnership law. The contents of partnership deed are:
- The name of the partners
- The name and nature of business
- The objective of the firm
- Admission of new partners
- Procedure in the event of death of a member
- The amount of capital contributed by each partner
- The role of each partner in the firm
- How profits and losses are to be shared
- Whether or not salaries are to be paid to any partners and how much
- How decisions are to be made either by majority vote or what
- The duration of the partnership
- The rights and obligations of partners
- How the business shall wind up if the need arises
NOTE: Partnership is formed on agreement among the partners.
Rights of Partners
(i) The partners are entitled to share from the profits of the partnership business.
(ii) They must be indemnified by the firm in respect of payments made and personal liabilities incurred in the conduct of the business
(iii) A partner making advance beyond the amount of capital which he has agreed to subscribe is entitled to interest of 5%.
(iv) A partner has the right to act as the agent of the business.
(v) Every partner must have access to the partnership books of accounts.
(vi) Every general partner can take part in the management of the partnership.
EVALUATION
- List 5 contents of the partnership deed.
- Enumerate 5 rights of a partner.
- (a) What is a Deed of Partnership? (b) State six contents of a Deed of partnership. (c) Give three rights of a partner (SSCE Nov.,1999).
- Explain the rights of partners in the partnership business.
- State five features of partnership.
- Mention five kinds of partners.
Sources of Capital for Partnership
(i) Personal contribution: The partners raise the initial capital by contributing specified sums of money to the partnership.
(ii) Undistributed profits: Profits made in certain years can be ploughed back into the business for the purpose of expansion.
(iii) Admission of new partners: Additional capital can be raised by inviting new persons to become partners.
(iv) Loans and overdraft: Partners can easily obtain loans and overdraft from banks since they are jointly liable.
(v) Trade credit: Money can be obtained from middlemen in advance in order to facilitate production of goods.
EVALUATION
- State five sources of capital to a partnership business.
Advantages and Disadvantages of Partnership
Advantages of Partnership
(i) Sufficient capital: It is easier to raise more capital than a sole proprietorship because of the number of persons involved in this business.
(ii) Division of labour: The work of a firm is shared according to the area of specialization of each partner, for instance, an accounting firm may have one partner specializing in cost accounting while the other concentrates on auditing.
(iii) Better chance of continuity: There is greater continuity in partnership because the exit or death of one partner may not result to the dissolution of the business.
(iv) Better decisions: Better decisions are reached because two are better than one
(v) Greater possibility of expansion: There is the possibility of expansion by making use of additional capital derived from the admission of a new partner.
(vi) Abundant skills: Partner may have different skills as well as their employees to contribute to the growth of the business.
(vii) No legal formalities required: In setting up a partnership, no major procedure of establishment is required, unlike a limited liability company.
(viii) There is privacy: Partners are not legally compelled to publish the annual accounts for public consumption.
Disadvantages of Partnership
(i) Unlimited liability: If the business goes bankrupt, the partners may have to offset the debt by selling their personal properties.
(ii) Limited capital: Since partnership is not allowed to sell shares, its capital limited to the contributions of partners.
(iii) The death or exit of a general partner may end the business.
(iv) Slow decision making: Decision making process in this business is usually slow because a meeting of partners may be necessary before major decisions are taken.
(v) Disagreement between partners: Partners may disagree over a sensitive issue that may lead to the end of the business.
(vi) It is not a legal entity: Partnership business is not a separate and distinct personality. It cannot sue and be sued in its own name.
(vii) Private estates of partners are severally liable to be used to settle debts of the firm.
EVALUATION
Mention six advantages and six disadvantages of partnership
Dissolution of Partnership
Dissolution of partnership is the coming to an end of a partnership agreement. It is the wind up or liquidation of a partnership business. A partnership may wind up because of the following:
(i) Expiration of agreement: If entered into for a fixed term, the partnership is dissolved at the expiration of that term.
(ii) Death or bankruptcy of a partner: Partnership will be dissolved when one of the partners is bankrupt or dead.
(iii) Notice of retirement: A partnership may end when a partner has given sufficient notice of his retirement.
(iv) Joint decision: Partnership can be dissolved when all the members decide to put a stop to the business relationship.
(v) Insolvency of the business: Partnership can be dissolved when it cannot meet its obligations.
(vi) Court verdict: The court may decree the dissolution in certain cases, e.g. if a partner is incapacitated or if there is a misconduct.
(vii) Insanity of a partner: If one of the partners becomes insane, the remaining partners can apply to the court for dissolution.
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