LESSON 2

PARTNERSHIPS

A partnership is a relationship which subsists between persons with a minimum of two (2) and a maximum of twenty (20) who carry out business in common/together with a view of making profits.

Or A partnership is a group of people between two (2) to twenty (20) who contribute their capital to start a business with the aim of making profits.

The partnership is recognized after signing a partnership deed or agreement.

Note: A partnership deed/ agreement. This is a written document/ statement of agreement among members of a partnership consisting of terms and conditions on which their partnership business is being formed.

Features of partnership

There may be a minimum of two and a maximum of twenty members in a partnership. However, in case of banking the number is limited to ten (10).
Capital is contributed by the partners and no appeal for public subscriptions
The partners in most cases have limited liability to personal property (a case for limited partnership).
Each member can act as an agent of the firm with the authority to sell goods and services or even purchase (to enter contracts with authority).
Every member is responsible for all debts of the business and there is unlimited liability for ordinary partnership.
The responsibility, profits and losses are shared on an agreed basis.
Like a sole proprietor, a partnership may be ended any time by the death, withdrawal, bankruptcy or incapacity of any member.
A partnership may be temporary or permanent. A temporary partnership is formed for either a specified period or specific purpose, at the expiry of which the partnership is dissolved. These are sometimes called joint ventures.

Permanent partnership is intended to continue indefinitely, that is, continues for uncertain length of time and its end is not defined at the time of formation.

Note: Contractual capacity. The partnership act provides that a person who does not have a contractual capacity cannot be a partner. This is a legal term which means that a person who, in the eyes of the law, is not a fit and proper person or who does not have enough mental capacity to conduct his own affairs, is not entitled to enter into any sort of contract (such a person is deemed to have no contractual capacity).

This is because a partnership is also a contract where partners must agree to abide by certain conditions and to undertake certain responsibilities. Therefore, a mentally incapacitated person, a bankrupt person etc may have no contractual capacity.

Types of partnership

There are two types:

Ordinary partnership

This is a type of partnership where all the members have unlimited liability and in case the partnership is in debts, the personal property in addition to business property can be sold to pay the debts.

Limited partnership

This is a type of partnership where members have limited liability and only the property of the business can be lost in case the firm is in debts but not personal property. The liability of members is limited to the nominal amount of capital they have put in business.

Types of partners

Active partner. This is a partner who contributes capital, shares profits and losses but also involved in the day to day running of the business. (He takes part in the management and may be given a fixed area of responsibility such as a salesman).
Dormant/sleeping/silent partner. This is a partner who contributes capital for the business, shares profits and losses, but is not involved in the day to day running of the business. ( it is common with busy people who have full-time jobs or businesses elsewhere).
General partner. This is a partner having unlimited liability and may be called upon to meet the firm’s debts from his personal resources if the firm fails to settle them.
Limited partner. This is a partner whose liability towards the debts incurred by the business is limited to a stated sum, usually the capital contributed by him. (The firm’s creditors will have no right over his personal possessions /property).
Major partner. This is one who is over 18 years of age and liable for the firm’s debts.
Minor partner. This is one who is below 18 years of age and is not liable for the firm’s debts beyond his capital. (He can be admitted as a partner under certain conditions / circumstances and is entitled to certain privileges). After 18 years of age, he is given 6 months to decide whether or not to continue as a major partner.
Real partner. This is one who contributes capital to the business.
Quasi/nominal partner. This is a person who does not contribute capital and does not participate in the day to day running of the business but allows the firm to use his name as a partner. (This may be a reputable businessman or a social dignitary who may be convinced to allow his name to be used in exchange for a small share of profit).
Out-going/Retiring partner. This is one who has withdrawn from the partnership. However, he is liable to all debts and losses of the firm incurred before his withdrawal.
Incoming partner. This is one who has been admitted to an existing partnership. This is done only with the consent of the existing partners and rules of procedure.

A case for partnerships

There is a wide scope of capital raised unlike sole proprietors. This promotes faster expansion of business.
Promotes specialization since partners of different skills come together and divide work such as production, management and marketing. There is better combination of talent.
New ideas are brought into the business due to consultations to each other as two heads are better than one.
There are more prospects / chances of continuity. If sickness arises or death, the partnership may not close down.
There is more time for leisure and resting as work is shared among members.
The burden of losses / debts is shared among the members which prevents straining of one person. This reduces possible calamity.
More profits are obtained since more work is done by many people.
Encourages large scale production which in turn leads to economies of scale.
New partners are easily admitted in view of expanding the business unlike sole proprietorship having only one person. Even an employee with special qualities may be made a partner.
Formation of a partnership is fairly easy/ simple; with no legal requirements to be complied with except registration of the business name.
In the event of difficulty, mutual discussions among partners are likely to come up with an agreed position or solution.
Partnerships are more creditworthy, since they have more valuable items which can act as collateral security to acquire loans unlike sole proprietor.

A case against partnerships

There is collective responsibility for mistakes by one partner, due to collective work (such as a poor deal). This is referred to as joint involvement.
Although it has continuity chances, some risks such as death, withdrawal; can cause /arouse disagreements which can press for drafting a new partnership deed.
Some risks pose great problems to the partnership business most especially the death or withdrawal of a very active member or the largest shareholder.
There is delayed decision making since there is no urgent attention. There is need for mutual consultations on any policy. For example, an attractive business opportunity may be missed.
Most times non-encouraging profits are given to members because profits are shared among many members, and this may discourage some members.
The disagreements on certain matters and or being suspicious to each other, may affect the smooth running of the business.
Sometimes there is unlimited liability to personal property of some members/partners although a limited liability partnership can be formed (hence some people may fear joining due to risk of losing severely).
Hard working partners are discouraged by the lazy partners, yet profits arising from his labour are shared by all the partners.
Also, when compared with other companies (joint stock), partnerships raise relatively less capital since membership is restricted to twenty (20) partners.
Quarrels /disputes which may arise among partners about business issues may also create long-lasting hatred for each other even in other fields.

Factors that may lead to dissolution of a partnership

When/if it is a temporary partnership i.e. the duration of the business specified in the deed has expired or on the fulfillment of the purpose of the partnership intended.
When/if one of the partners notifies or expresses his intention to dissolve the partnership to other partners in writing.
If a partner becomes insane, bankrupt or even dies, then the partnership is dissolved.
When a partnership becomes unlawful usually due to changes in the law. For example, if a law is introduced banning the activities of the type being carried out by the firm under the partnership.
A court can also dissolve a partnership on application from one of the partners (or another interested party) under the following circumstances:

When the acts of a partner are centrally to the partnership deed provisions and damage the interests of the firm.
When the partnership business cannot obtain profits.