PARTNERSHIP: FORMATION, ADVANTAGES, DISADVANTAGES & CHARACTERISTICS

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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 the purpose of making profits.

A partnership is the relationship that exist when two or more persons contribute skill, moneys’ worth in order to establish, own and manage business organization with the sole aim of making profit.

CONDITIONS SUITABLE FOR THE FORMATION OF PARTNERSHIP

  1. Partnership is suitable for executing short term venture
  2. Partnership is suitable where the ownership and control should not be extended outside the family or friends
  3. Partnership is suitable where the success of the business requires the skill or knowledge of experience members of the partnership e.g. solicitors
  4. Partnership is suitable where large amount of capital is not necessary for a business as in a limited liability company.
  5. Partnership is suitable where the partners have contractual capacity

FORMATION OF 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 written agreement entered into by partners of a partnership business. It is a document which 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 which 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 CHARACTERISTICS OF PARTNERSHIP

  1. It is owned by two to twenty person (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 own name
  6. No special formalities is required in its formation
  7. Partners are agents of the firm
  8. The motive of its formation is to make profit
  9. Partners participate in 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 management/application of division of labour
  6. There is privacy: as the partners are not legally required to publish the annual account for public consumption
  7. It can withstand competition
  8. Partners have more room for holidays, sick leave and rests
  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. Action of one partner is binding on other partners and on the firm i.e. partner an agent of the firm
  5. 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 business
  8. Profits are shared
  9. It is show in decision/policy making – as a result of need for consultations among partners

 

REVIEW QUESTIONS

Akanni and Bello are sole proprietors. Akanni proposed that their business be merged to form a partnership

  1. Explain to Bello how such a partnership would be to their mutual benefit
  2. State five reasons why Bello might be reluctant to accept the proposal

 

RIGHTS OF PARTNERS

  1. Rights to share from 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 advance beyond the amount of capital which he has agreed to subscribe is entitled to interest of 5% per annul 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 which 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 partnership.
  2. State five rights of a partner in a partnership business.

WEEKEND ASSIGNMENT

  1. A partnership business will not raise capital through (a) contributions (b) credit purchases (c) debentures (d) retained earnings
  2. In a partnership business, start-up capital is sourced mainly through (a) loans from bank (b) contributions by members (c) public appeal for fund (d) help from friends
  3. In partnership business, the maximum number of person for its formation is

(a) 5 (b) 10 (c) 2 (d) 25

  1. Profit in partnership is shared according to (a) amount contributed by each partner (b) agreement in the deed (c) number of hours put in by each partner (d) seniority of partner (e) types of partners
  2. The partnership agreement contains the (a) duration of the partnership if known (b) goodwill and credibility of the partners (c) relationship among the partners and customers (d) size of the partnership

THEORY

  1. Give any five reasons why sole traders come together to form partnership
  2. Give three rights of a partner

GENERAL EVALUATION QUESTIONS

  1. Explain five examples of industrial occupation
  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

 

See also

BUSINESS UNITS & SOLE PROPRIETORSHIP

COMMUNICATION

STOCK EXCHANGE

THE FINANCIAL POSITION OF BUSINESS FIRMS

PROFIT

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