This is a business unit owned by two or more people called partners.
- Formed by two to twenty members (partners) except for a professional partnership that may have a maximum of 50 members.
- 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.
- The partners contribute capital to the business according to the agreed proportions.
- 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.
- A partnership can be either permanent or temporary. A temporary partnership is also called a joint venture.
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.
- Capital to be contributed by each partner.
- Rate of interest on capital.
- Profit and loss sharing ratio.
- Salaries and commissions to be paid to partners.
- Rate of interest on drawings by partners.
- Objectives of the business
- 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:
- A partnership is able to raise more money than a sole proprietorship.
- Different talents are combined.
- Work is distributed among the partners.
- Losses and liabilities are shared.
- Fewer legal requirements than in a limited liability company.
Disadvantages of a partnership
Some of the disadvantages of a partnership are as follows:
- Liabilities of some or all the members are unlimited.
- Continued disagreements among members can lead to dissolution.
- Decision making may take long.
- Mistake made by one partner may result into losses that are shared by all the partners.
- A partnership that h3avily relies on one partner may be adversely affected on retirement or death of a partner.
- A hard working partner may not be equitably rewarded.
- 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:
- Mutual agreement by all the partners to dissolve the business.
- Death, insanity or bankruptcy of a partner.
- Completion of the intended purpose or on the expiry of the agreed period, if the partnership was temporary.
- Court order.
- Written request by a partner to dissolve the business.
- If the partnership is engaged in unlawful practices.
- Retirement or admission of a partner.
- 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:
- Personal savings
- Loans friends
- Loams from financial institutions
- Trade credit
- Hire purchase
- Profit from the business