According to the partnership Act. A partnership is referred to as a relationship which subsists between persons carrying on a business in common with view of making profits.
A partnership is thus an extension of sole proprietorship and is in fact necessitated by the fact that a sole trader may for several reasons fail to carry out his business efficiently and profitability.
Partners pull the financial and managerial skills together in order to make profit.
According to the partnership Act (934) a partnership business may come into existence through any of the following ways.
- By actions of persons concerned
- By a simple put in written
- By a partnership deed
NB the above ways of forming a partnership are allowed by the partnership Act, However its better to remember that it may be made illegal under the following circumstances.
Circumstances under which the Partnership is illegal
If the partnership has been formed for an illegal purpose e.g. theft. If is formed and the partners do not meet the minimum qualifications e.g.
Where the partnership contains more than 20 members. Where the partnership wants to run their business with the name which does not disclose the true names of all the partners or the name had not been registered under the registration of the business Act under which it is deemed illegal.
Requirements for the Registration of a Business Name.
Under the partnership Act , the partners must furnish the registrar of business names for the following
- The business name
- The general nature of the business
- The principle place of location of the business
- The present Christian and sir names together with their usual residential address.
- The nationality of each partners
- Any other occupation of the partners
- The date of commencement of their business.
Types of Partners
These are the real partners in new sense of the partners which refers to those partners who are the most active partners in the partnership. In most cases the general partner is a reliable of the debts of the partnership.
This is a partner whose liabilities are limited to the amount of capital contributed to the partnership business. This type of partners do not usually participate in the management of the partnership becus4 if thy do they loose their limited liability in respect to the
transaction and decisions participated in.
This is the type of partner who takes the active part in the running of the business. In most cases such a partner may be employed somewhere or may be in another business all together. The partner contributes capital to the partnership business and the profits or losses at lower proportions.
Articles of Partnership/ Partnership Deed.
Although it is not a statutory requirement the partnership can be formed by a written agreement, it is usual for the partnership business in particular those involved in huge commitments to write articles of a partnership also known as a partnership deed.
The aim of this document is to safeguard the interest of each partner and it constitutes a legal contract among the partners.
Contents of a Partnership Deed
1. The nature of the business to be carried out
2. The capital and property of the firm together with the respective capital contributions of each partner.
3. The sharing of profits or loses by partners.
4. The rules as to the case of interest on capital and drawings by partners.
5. Provision for proper accounts and their audit
6. The power of each partner.
7. The drowns for the resolution of the partnership
8. The method of determining the value of good will on retirement of drafting in of a new partner.
9. The method of determining the amount payable to a deceased partner.
10. No partners may should carry on a competing business
11. Any changes in partnership composition must be agreed upon by all partners.
Management of Partnership
Members of a partnership are correctively responsible for the management of the business. The members may share responsibilities and duties according to their respective skills and availability in order to ensure effectiveness in management of the partnership.
The partners may decide to hire skilled or non-skilled labour to assist the management of the partners.
Features/ characteristics of a Partnership
1. Mutual agency – each partner is an agent of the partnership and therefore any action by one partner with transacting the business binds the rest of the partners provided his actions are within the partners express or implied authority.
2. Limited life- since the partnership is a relationship originating from an agreement between two or more members any changes in their relationship caused by factors such as- death withdrawal of a partner e.t.c terminates the partnership or dissolves it.
3. Unlimited liability
In a partnership the partners’ liability is not limited to the amount of capital investment.
The partners are separately held liable for the debts of business and their personal properties may be sold to meet such debts.
4. Ownership of interests – the interest of a partner in a partnership business e.g. right to inspect the accounting records of a firm of a firm, admission or dismissal of partner transit of interest e.t.c must have the full consent of the partnership.
5. Sharing of profits
Each partners share of profits of proportional to his/her investment in the partnership. And any agreement of non-partner to share the profits does not make a non-partner a partner.
NB circumstances under which a non-partner may be included in sharing the partnership profits and losses.
1. As compensation for services rendered to the partnership
2. As compensation for the partnership use of his/her property or name.
3. As payments for loans advanced to the firm
4. As payment to the next of kin.
Sources of Capital of a Partnership
1. contributions from partners
2. Loans from commercial banks and other financial institutions
3. Stock from hire purchase firms
4. Credit facilities from suppliers
5. Loans from government institutions e.g. K.I.E e.t.c.
6. Plough backs from retained profits
Classification of Partnerships
There are five ways through which partnership are classified.
1. By trading
A partnership may be classified was
- Non-trading partnerships- these partnerships whose activities are to offer services e.g. legal, medical, accountancy, teaching e.t.c.
- Trading partnerships – these are partnerships whose main activities are manufacturing, purchasing or sales of goods.
2. By liability
- General partnerships – are partnerships in which all partners may publicity act on behalf of the firm and each partner individually be held responsible for the debts of the firm. Their properties may be attached to clear the debts of their
- Limited partnerships – a partnership whose activities of certain partners are limited. The personal liabilities of such partners (limited partners) are limited to a certain amount stated. These amounts are normally equivalent to the amount of
NB the following conditions must be fulfilled for a limited partnership to be formed.
1. The partnership should not consist more than 20 partners.
2. The partnership must consist one or more general partners.
3. The limited partners are not liable to the partnership debts beyond his capital contribution.
NB Restrictions of the limited partners.
1. Is entitled to inspect the books of the firm and examine the partnership state at any time.
2. The death, withdrawal bankruptcy of a partner shall not cause dissolution of a partnership or the partnership can not be dissolved by a court order because of lunacy of the partner.
3. A limited partnership is only dissolved by the general partners unless brought through a court order.
4. Any differences on partnership matters can only be decided by a majority of the general partners.
5. With the consent of the general partners a limited partner may assign his/her shares in the partnership to another person.
6. A person may be introduced into the partnership without the consent of the limited partners.
3. By time duration
- A temporally partnership ( joint venture partnership) – this is a partnership formed for a specified period of time
- Termination of the stated period or accomplishment of the purpose may cause the partnership to come to an end.
- a permanent partnership (partnership at will) – This is a partnership formed to carry the business indefinitely
- It does not have a fixed life of fulfilling its purpose
4. By activity
- Active partner – this is a partner who is actively involved in the day to day management of the partnership and may be paid a salary for these services. And the partner is held liable for the debts of the firm.
- A dormant /sleeping partner – does not take part of the day to day management of the partnership but contributes capital, shares profits and is liable for the business debts
5. By capital contributed
- Real partner – a partner who contributes capital into the business and whose name may be used in relation to transactions of the business and enjoys the profits of the partnerships.
- Nominal partner – is a partner who has not contributed any capital to the business but allows his or her name to be used in the business. They are usually influential persons whose names can be used.
- He is not fully liable to the partnership debts however is he presents himself to the public in a manner that portrays him a general partner he will be held liable.
- Quinsy-partners – a partner who has retired from the partnership but has left his capital in the partnership business which is treated as a loan, he earns interest
6. By age
- Majority partner – A partner who has attained the age of 18 years and above. Such a partner unless stated to the centrally can be held liable for the partner.
- Partner shares only profits and not losses since he didn’t participate in decision making that may have caused such losses.
- The liability of the minor is limited only to the amount of capital contributed to the business since any liabilities arising may not be part his decision making.
- The minor partners can act on behalf the partnership and such acts shall be binding on the other partnership
- When the minor partner attains the age of majority he/she has up to six months to decide whether or not to continue with the partnership. If he/she decides to stay, he has full responsibilities and rights of a major partner.
Termination/ Dissolution of Partnership
Although the partnership deed or articles of partnership will contain regulations of terminating the partnership, nevertheless in the absence of our subject these regulations, a partnership may be dissolved in the following ways.
1. When the fixed time if any are stated in the articles of the partnership expires.
2. If the partnership was specifically entered into for a given venture, transactions or undertakings the completion of which or achievement will automatically dissolve the partnership.
3. If the partnership is a partnership at will, it can be dissolved by any partner giving notice of his intention to dissolve the partnership.
4. By mutual consent of all partners
5. By bankruptcy or death of one the partners.
6. By one partner’s shares in the partnership being changed or attached by a court order for private debts.
7. If any events occur which will make the partnership business illegal, the partnership will stand dissolved irrespective of the content of the partnership deed.
8. Automatic or compulsory dissolution as it is provided section 39 of the partnership Act which lay the following grounds under which a partnership may be dissolved by a court order.
- If any one of the partners becomes insane
- If any of one partner becomes permanently incase of performing his/her duties through in capabilities, accidents or disabilities
- Where a partner has acted in a manner which is pre-judicial to the carrying out firm’s business and may bring the name of the business to its disables.
- Where a partner was found guilty of breach the partnership contract.
- Where the firm has been operating in losses.
Circumstances under which the Partnership Deed is ideal.
1. In a business where the amount of capital required is reasonably large.
2. If professional were pulling together effort for efficiency and better performance.
3. If professional areas where the law prohibits a couple of days.
Advantages of Operating a Business under a Partnership
1. A partnership business benefits from the talents of individual ensuring almost efficiency and acceptance.
2. Since a partnership would be owned by a no. of partners it sets a basis of pulling together saving to raise large capital for investments
3. Sound decision making through consultative processes
4. A higher growth rate as a result of combining ambitious from different partners.
5. Partnerships have a good will and financial influence enabling it to raise finance easily.
6. Collateral or security of loans can be easily be raised.
7. Formation of partnership business requires minimal government interventions.
Disadvantages of Operating a Business under a Partnership
1. Slow decision making due to long discussion processes
2. Sharing of profits tends to disregard hard working partners.
3. Partnership business have limited life incase of retirement or dead of one partner.
4. Disagreements make partnerships business vulnerable to disputes among partners.
5. The partners have unlimited liability which lead to loosing personal property in the event the partnership business cannot settle its debts.
6. The agency burden where every partner is an agent of the partnership and one’s partner’s mistake may affect the rest.
7. Limited managerial skill may lead to mismanagement of the business.