Partnership is a business organization owned and controlled by two or more people. It can also be defined as a relationship that exists when two to twenty people agree, decide to run a business together, and share the risks and profit of the business.
- Pooling of both mental and material resources together
- Ownership is from two to twenty persons or two to ten persons for a banking business
- The partnership has unlimited liability except for the limited partner
- They have a limited source of finance.
- The partners contribute funds and skills according to the agreement reached and share the profit.
- Major decisions are taken together
- Risks on the business are borne together
- The business is not a legal entity.
For the Formation of a partnership, business partners must have a written document or agreement that will guide the business for effectiveness and efficiency. The agreements, rules, and regulations guiding the partners are known as a deed of partnership.
The Deed Contains Some or all of the Following
- The name and address
- The nature of the business formed
- The objectives of the business
- The amount of capital contributed by each of the partners
- The role of each partner in the business
- How profit and losses will be shared among members
- Remuneration of partners
- The rights of partners
- How to admit new partners
- Process of retirement in case of death
- Its dissolution
- Its obligation and how matters should be decided.
Types of Partners
Ordinary or General partner: The partners have equal responsibility and bear all the risks of the business equally. All the partners have equal powers, unlimited liabilities. They take active part, profits and loss are shared as it is stated in the deed of partnership.
Active partner: This partner takes an active part in the formation, financing, capital contribution, and management of the business.
Limited Partnership or Sleeping partner or Dormant partner: He contributes only part of the capital but does not take part in the management and organization of the business. Here all partners do not have or take part in the management of the business. The liabilities of the partners are limited to the capital they contributed.
They invest their money in the business but not entitled to take part in the running of the firm.
Nominal Partner: He does not participate in the running of the business and neither does he contribute money towards the business. He allows his name to be used for business functions.
Advantages of Partnership
- Different partners bring better decisions for the development of the company.
- Partnership business is easy to form.
- Sources of funds for expansion of the business are easily achieved.
- The life span (continuity) of the business is higher than the sole proprietorship
- There is privacy in business affairs because it is not required to publish their accounts.
- Risk are been shared among the partners.
- Large capital through the contribution of partners
- Responsibilities are easily shared among members.
- Members specialize in various functions.
Disadvantages of Partnership
- Limited capital is involved: The minimum member is two (2) and the maximum member of partners is twenty (20) the amount of capital that will be contributed will be limited to the number of formation.
- The active partners have unlimited liabilities.
- The business is not a legal entity
- There is a delay in decision making because all the partners must be consulted before any decision can be taken.
- Misunderstanding, argument, and disputes may occur among members.
Sources of Funds for Partners
The total capital is contributed by all the partners but there are some other ways to increase the capital.
1. Government assistant. Federal or state give loans to medium or small scale companies
2. Loans and overdrafts by Financial Institutions such as banks, finance houses.
3. Credit and hire purchase
4. Clients or customers making advance payment.
5. Investment profit (Plough back profit)
6. Financial aid from well wishers.