Section one of the partnership act 1890 defines partnership as a relationship which subsists between two to twenty people carrying on a business in common with a view of making profit and the sharing exercise being confined to only members in the partnership deed.
In a partnership business, not only is extra capital brought into the business, additional skills, managerial experience and business clients are introduced. It is found among doctors, lawyers and accountants. The partners are collectively known as firms. You can enter into partnership with business associates with the purpose of making profit
Two to twenty people can start up a partnership business. However, for the banking sector, two to ten people can set up banking.
Examples of Partnership Business
Partnership business examples are:
- Williams and Co (law chamber)
- Lawal and Co (estate agents)
- Keyamo and Co (law chamber)
- Akintola Williams and Co (Chartered accountants)
Features Of Partnership Business
The features of partnership are;
- Capital is from members contribution: The source of capital of a partnership is from the contributions of individual partners.
- Unlimited liabilities for partners: There are usually an unlimited liability for partners, as they are liable for the total debts of the business.
- Not a legal entity: A partnership business is not a separate legal entity. It is not distinct from its members.
- Limited membership: The total number of partners can be up to twenty except in banking and some other businesses, which maybe ten.
- Motive is profit: The motive of setting up a partnership business is to make profit.
- Each partner is an agent of the business: Each partner is an agent of the firm and other members. Therefore, any action of a partner is binding on the firm and other partners.
Conditions Suitable For The Formation Of Partnership
- Contractual capacity: All partners must have contractual capacity. They should have the ability to enter into a contract.
- Preparation of the agreement: A deed of partnership stating the rules and regulations of the business should be prepared.
- Registration of business: A partnership firm should be registered under the registration of business name.
- Short-term venture: Partnership is suitable for carrying out business activities that are short-term in nature.
Ways Of Determining The Existence Of A Partnership
The existence of a partnership can be determined by the following factors:
- Intentions: Intentions of the parties should be expressed or implied.
- Share of profits: The partners have agreed to share the profits of the firm.
- Common participation: All partners have a say in the management of the firm.
- Being held out as a partner without protest: It is assumed no partner is admitted into the partnership without the consent of all members. This is to prevent acrimony among them.
- Business relationship: There should be a business relationship existing among the partners of the firm.
Formation Of Partnership
A partnership business is registered under the registration of business name as a firm. Partnerships do not use limited after their names. The following particulars of each partner should accompany the registration of business name:
- Present forenames and surnames
- Permanent residential address
- Any other business occupation
In forming a business Partnership, agreement can be entered into orally or in a written form. In order. In order to avoid any dispute and ensure mutual understanding, the rights, duties and responsibilities should be documented in the deed of partnership.
Deed Of Partnership
A partnership deed is a document drawn up by the partners, which contains the rules and regulations guiding businesses. It is a document which will clarify the respective positions and duties of the partners in a business.
A partnership may be established without any formality, but it is better to have a written agreement.
Contents of Deed of Partnership
- Name of the partners and other particulars
- Name of the business
- Signatories to the account
- Duration of the partnership
- Amount of capital to be contributed
- Rights of each partner
- Duties of each partner
- Amount of salary to be paid
- The nature of the business
- Method of admission of new partner
- Dissolution of partnership
- Registered office
- Partnership account procedures
- Terms and conditions of the partnership
- Profit and loss sharing ratio
- Rate of interest on drawings
- Rate of interest on capital
- Valuation of goodwill
Where There Is No Partnership Agreement
If no specific agreement is made on the partnership business, the following provisions of section 24 of the Partnership Act 1890 must be applied;
- There is no interest on capital
- No salary for partners acting in business
- Profit and loss are to be shared equally
- No interest is to be charged on drawings
- 5% interest a year on loans made by partners in excess of the agreed capital
- No partner may introduce a new person without the consent of all existing partners
Importance Of Deed Of Partnership
The importance of partnership deed is as follows:
- A record of terms and conditions: It provides a permanent record of terms and conditions surrounding the partnership.
- Takes care of dependents of a deceased partner: It is used in the event of death of a partner. The agreement will serve as a basis for settling the accounts.
- Rules and Regulations: Partnership deed contains the rules and regulations governing the firm
- Useful for settling disputes: In case there is a dispute, the deeds of partnership will serve as a reference point. It will be useful in settling disputes between the partners.
Types Of Partnership Business
There are two types of partnership; Limited partnership and Ordinary partnership. The two types of partnership will be explained below:
1. Limited Partnership
The limited partnership is a form of partnership in which there should be at least one ordinary partner who should be responsible for all the debt if the business fails. The others are limited partners. Here, partners do not take equal part in the management and running of the business.
Features of Limited Partnership
- Limited Liability: The liability of the limited partner for the debit of the firm is limited to the amount invested in the business.
- Registration: It should be registered under the limited partnership act.
- One general partner with unlimited liability: One ordinary partner should be responsible for all the debts of the firm.
- A limited partner cannot participate in the management: A limited partner is not permitted to participate in the management of the firm.
- Limited Partners have access to the account: The limited partners can have access to the accounts of the partnership.
2. Ordinary Partnership
Ordinary partnership is a type of partnership business where all partners have equal responsibilities and powers and each may participate in the management of the firm. They are equally responsible for the liability of the partnership, which is unlimited. All of them take active part in the day-to-day running of the business and are liable for the debt of the firm.
Features of Ordinary Partnership
The features of ordinary partnership are:
- Unlimited Liability: They are liable to the full extent of the debts of the firm. Their private properties will be sold to settle the liabilities.
- Equal powers: In an ordinary partnership, all the partners have equal powers to take decisions.
- Equal responsibilities in the management: Each partner should take active part in the management of the business.
- Agent of the firm: All the partners are agents of the firm. Every action of a partner in the course of business is binding on the other partners.
Types Of Partners
The five types of partners in a partnership business are:
- General Partners: This is a partner who is entitled to take full share in the administration and management of the firm. He has the power to participate in the conduct and management of the business. A general partner is a partner whose liability in respect to the liabilities of the partnership is unlimited.
- Active partner: This is a partner who participates actively and positively in the daily activities of the firm. He will be remunerated according to agreement.
- Limited Partner: This is a partner who has contributed to the financing of the business but cannot take an active part in the management of the firm. The liability of a limited partner is limited to the total amount he contributed and it will not extend to his private properties. In short, he has limited liabilities.
- Dormant (sleeping) partner: This is a partner who contributes capital but doesn’t participate actively in the running of the business; he has contributed financially but takes no part in the administration and management of the firm. A sleeping partner stays in the background and has the same duties, rights and liabilities as the other partners.
- Nominal partner (Quasi): A nominal partner allows his name to be used by the firm for prestige and reputation purposes. He is a partner who does not contribute capital or engage in the day-to-day running of the business. He is a person of high standing or reputation who can increase the goodwill of the firm in order to ensure more benefits for the organization. The law will hold him responsible for the liabilities of the firm.
Rights And Duties Of Partners
- They will all share in the profits.
- It is their right to be indemnified by the firm in respect of the expenses incurred in the conduct of the business.
- Rights to act as agent of the firm.
- The right to have access to books of accounts.
- General partner may take part in the management of the partnership.
- Interest of 5% of amount contributed in excess of capital.
- No person should be introduced as a partner without the consent of all existing partners.
- All decisions may be decided by the majority of the partners.
Partner’s Duty Of Utmost Good Faith
Utmost good faith means all parties to a contract must disclose all relevant particulars.
- Render true accounts: The partners must render true accounts and give full information to one another on all partnership matters.
- Give accounts to other partners: A partner must give accounts to other partners for any profit made by him through the use of the firm’s name and property.
- Give an account for profit made in a completed business: Partners must account for any profit made in a business of the same kind that is competing with the partnership.
Partnership business advantages and disadvantages
What are the advantages and disadvantages of a partnership?
Advantages of Partnership
The following are some partnership business advantages:
- High degrees of privacy: Partnership businesses are not mandated by law to publish its annual accounts. The accounts are kept secret.
- Additional specialized skill: Different specialized skills and talents can be pooled together in partnership. Additional skill and management expertise will ensure better and effective management than a sole trading business.
- Joint and better decisions: Two good heads are better than one. Sharing of ideas and skills among partners will lead to better decisions. Partners can make joint and better decisions than in a sole trading business.
- Specialization in management: In the partnership business, there is division of labour among the partners. This will lead to specialization and efficiency in productive activities.
- Continuity in business: Partnership business will continue if one of the partners is not around. Other members will continue with the firm.
- Sharing of risk: When there is loss, it will be shared among the partners and this will lighten their burden.
- Possibility of Expansion: There is the possiblity of expansion as extra capital is brought into business. The major reason for forming a partnership is to secure additional capital to expand productive activities.
- Possibility of raising additional capital: There is the possiblity of raising more capital, as all the partners will contribute money to the business except for a nominal partner.
- Availability of loan facilities: Partners can easily raise loans because creditors are aware that all partners are jointly and severally responsible for the loan.
Disadvantages of Partnership
The disadvantages of a partnership business are:
- Unlimited liability: The partners are liable or responsible for the debts of the firm. They will lose the capital invested and private investment in case of insolvency.
- Not a legal entity: A partnership is not a separate legal entity. It is not separated from its owners. It cannot sue or be sued in its own capacity.
- Restrictions on transfer of ownership: It is not easy for a partner to transfer his ownership to another person. This is because other partners may not agree.
- Delay in decision-making: Since there is a need to consult all the partners before any decision can be taken, there may be a delay.
- Disagreement may end business: Petty quarrels or misunderstanding among the partners could cause the business to end.
- Joint responsibility: Each partner has the power to bind the other partners in all contractual agreements. Any action taken by a partner is the joint responsibility of all the partners.
Sources Of Capital For Partnership Business
- Capital contributed by all partners: The capital contributed by the partners toward the formation and operation of the firm is one of the sources of finance.
- Loans: Money can be borrowed from financial institutions or individuals to finance a partnership business.
- Overdraft: This allows the partners to overdraw their accounts up to a certain agreed limit.
- Capital contributed by new partners: Another source of capital is when new partners are introduced, they will bring in more funds.
- Retained profit: Parts of the profit of the partnership may be ploughed back into the business to increase operations.
- Trade Credit: Trade credit from suppliers is a major source of capital. They can get goods on credit from suppliers without immediate payment.
Circumstances In Which Partnership Will Be Illegal
- Where there is more than twenty people.
- Where it is formed for illegal purposes.
- Where the purpose is contrary to public policy.
Dissolution Of Partnership Business
Dissolution of partnership is the process whereby a partnership is automatically dissolved or brought to an end by the events which make it unlawful to carry on with the business.
Dissolution means cessation of business, disposal of assets, settlement of debts and division of cash balance among members.
Reason For Dissolution Of Partnership Business
The reasons for the dissolution of the partnership business are:
- Withdrawal or retirement of partners
- Admission of a new partner
- Death of a partner
- Insanity of a partner
- Bankruptcy of a partner
- Non-performance of the business
- Expiration of the time given
- A joint decision to discontinue
- Illegality of object of the business.
- Dissolution by the court