In today’s class, we will discuss partnerships. 

Partnership

CONTENTS

1. Definition, features, advantages, and disadvantages

2. Business conditions suitable for partnership

3. Formation formalities, documentation

4. Rights of partners

5. Sources of finance

6. Dissolution of partnership

Partnership

A partnership is defined as the relationship that exists between two or more (but more than twenty) persons carrying on a business in common for making profits.
A partnership is a relationship that exists when two or more persons contribute skills, money, or other resources to establish, own, and manage a business organization with the sole aim of making a profit.

Conditions suitable for the formation of a partnership

1. A partnership is suitable for executing short-term venture

2. A partnership is suitable where the ownership and control should not be extended outside the family or friends

3. A partnership is suitable where the success of the business requires the skill or knowledge of experienced members of the partnership e.g. solicitors

4. A partnership is suitable where a large amount of capital is not necessary for a business, as in a limited liability company.

5. The partnership is suitable where the partners have contractual capacity

Formation of a partnership

A partnership may be established without any special formalities. However, a written agreement called a partnership deed is usually drawn up. Partnership deed: This is a written agreement entered into by partners of a partnership business. It is a document that states the agreements, rules and regulations that guide the conduct of a partnership business.

Contents of the partnership deed

1. Name of the firm (i.e. name of the partnership business)

2. Name of the partners

3. Nature of the business of the firm

4. The capital of the firm and the amount to be contributed by each of the partners

5. How profits and losses are to be shared

6. Duration of the partnership

7. The circumstances that shall dissolve the partnership

8. Procedure for dissolution

9. Procedure for admitting new partners

10. The methods of settling disputes, if any, etc.

Partnership at will: This refers to where no fixed term or period has been agreed upon for the duration of the partnership.

Features of the characteristics of partnership

1. It is owned by two to twenty people (partners)

2. The initial capital is contributed by the partners

3. Profits and losses are shared by the partners

4. Unlimited liability i.e., the liability of the partners is unlimited

5. It is not a legal entity: It, therefore, cannot sue or be sued in its name

6. No special formalities are required in its formation

7. Partners are agents of the firm

8. The motive of its formation is to make a profit

9. Partners participate in the management of the firm

Advantages of partnership

1. Increased capital: More capital is made available as more persons have to contribute together

2. Joint and better decisions are taken

3. Sharing of risks and liabilities among partners

4. It is easy to form – no legal formalities required in its formation

5. There is specialization in the management/application of the division of labor

6. There is privacy, as the partners are not legally required to publish the annual accounts for public consumption

7. It can withstand competition

8. Partners have more room for holidays, sick leave and rest

9. Greater scope for expansion than a sole proprietorship

Disadvantages of partnership

1. Unlimited Liability: The partners are liable for the debts of the business even to the extent of their private property

2. Inability to raise sufficient capital

3. It is not a legal entity

4. The action of one partner is binding on other partners and the firm i.e. partner is an agent of the firm

5. A disagreement between partners can end the business

6. Pride of ownership diminishes

7. Lack of continuity: The death or retirement of one partner leads to the dissolution of the business

8 Profits are shared

9. It is shown in decision/policy making, as a result of the need for consultations among partners

Rights of partners

1. Rights to share in the profits of the partnership business

2. Right to take part in the management of the partnership business

3. Right to have access to, inspect and copy the books of account of the business

4. Indemnity: Right to be reimbursed for expenses or losses incurred on behalf of the business

5. Right to act as the agent of the business

6. A partner making an advance beyond the amount of capital which he has agreed to subscribe is entitled to interest of 5% per annum from the date of the advance.

Sources of capital/finance for a partnership

1. Personal contributions of the partners

2. Loans from partners

3. Loans and overdrafts from banks

4. Trade credits, i.e., credit purchase

5. Retained profits (ploughed-back profits)

6. Other credit facilities e.g., hire purchase, leasing, etc.

7. Grants/loans from government agencies e.g., NAPEP, NDE

Dissolution of partnership

1. This means bringing the existence of the partnership business to an end. A partnership may be dissolved due to any of the following reasons.

2. The expiration of the term or period fixed for the partnership business

3. The death of a partner

4. The bankruptcy of a partner

5. Through the mutual consent of all the partners

6. If the partnership business becomes insolvent

7. The happening of an event that causes the partnership to become illegal

8. The insanity of a partner

9. When one partner gives notice to the other of his intention to dissolve the firm

10. On the order of the court

11. The completion of the venture/project or undertaking, when a single venture was the purpose of the partnership

Review questions

1. What four conditions are necessary for the dissolution of a partnership?

2. State five rights of a partner in a partnership business.

General evaluation

1. Explain five examples of industrial occupations

2. State five uses of capital as a factor of production

3. List five features of a partnership business

4. State six functions of an entrepreneur

5. Explain six functions of Commerce in an economy

Theory

1. Give any five reasons why sole traders come together to form a partnership

2. Give three rights of a partner

In our next class, we will discuss more about Partnership. We hope you enjoyed the class.

Send your questions in the comment section below, and we will respond