Partnership

This is a business unit owned by two or more people called partners.

Characteristics

  1. Formed by two to twenty members (partners) except for a professional partnership that may have a maximum of 50 members.
  2. Managed by members who may share the responsibilities according to their skills .where this is not possible they may employ skilled man power to manage there business.
  3. The partners contribute capital to the business according to the agreed proportions.
  4. Can either be a general partnership (liability of all the partners are unlimited) or a limited partnership however, there should be at least one member whose liability is unlimited.
  5. A partnership can be either permanent or temporary. A temporary partnership is also called a joint venture.

Partnership agreement
During the formation of the partnership the partners prepare an agreement which would govern the operations of a partnership. The agreement can be either oral or written .A written agreement is referred to as a Partnership deed. The contents of the partnership
agreement may include:
Name of the business and address of the head office.

  1. Capital to be contributed by each partner.
  2. Rate of interest on capital.
  3. Profit and loss sharing ratio.
  4. Salaries and commissions to be paid to partners.
  5. Rate of interest on drawings by partners.
  6. Objectives of the business
  7. Rate of interest on loans by partners to the firm.

Where a partnership agreement is missing or where it is ambiguous, the Partnership Act applies in case of a dispute:

  • All partners are entitled to equal contribution of capital.
  • No salaries allowances or commissions to any partner.
  • No interest on capital.
  • NO interest on drawings.
  • Profits and losses are shared equally
  • Each partner who incurs personal expenditure or loss while executing the duties of the business should be compensated.

Types of partners
The following are some various types of partners:

  • Active partner: one who takes active part in the running of the business.
  • Dormant (sleeping) partner: one who does not take active part in running the business.
  • General (unlimited liability) partner: one whose liabilities are not limited.
  • Limited partner: one whose liabilities are limited.
  • Minor partner: one who is under eighteen years.
  • Major partner: one who has attained the age of majority.(eighteen years)
  • Real partner: one who has actually contributed capital into the business.
  • Nominal partner: A person who is not a real partner but appears as one.

Advantages of a partnership
Some of the advantages of a partnership are:

  1. A partnership is able to raise more money than a sole proprietorship.
  2. Different talents are combined.
  3. Work is distributed among the partners.
  4. Losses and liabilities are shared.
  5. Fewer legal requirements than in a limited liability company.

Disadvantages of a partnership
Some of the disadvantages of a partnership are as follows:

  1. Liabilities of some or all the members are unlimited.
  2. Continued disagreements among members can lead to dissolution.
  3. Decision making may take long.
  4. Mistake made by one partner may result into losses that are shared by all the partners.
  5. A partnership that h3avily relies on one partner may be adversely affected on retirement or death of a partner.
  6.  A hard working partner may not be equitably rewarded.
  7. A partnership may have limited access to wid3e source of capital and managerial skills compared to a limited liability company.

Dissolution of a partnership
Dissolution of a partnership may arise from:

  1. Mutual agreement by all the partners to dissolve the business.
  2. Death, insanity or bankruptcy of a partner.
  3. Completion of the intended purpose or on the expiry of the agreed period, if the partnership was temporary.
  4. Court order.
  5. Written request by a partner to dissolve the business.
  6. If the partnership is engaged in unlawful practices.
  7. Retirement or admission of a partner.
  8. Continued disagreements among the partners.

Sources of capital for a partnership
All the partners of a partnership are jointly responsible for raising capital for the business. The capital may be raised from various sources which include the following:

  1. Personal savings
  2. Loans friends
  3. Loams from financial institutions
  4. Trade credit
  5. Hire purchase
  6. Profit from the business
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