PARTNERSHIP BUSINESS– MEANING,TYPES, FEATURES, ADVANTAGES AND DISADVANTAGES

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A partnership is a business in which a group of people agree to own and control business activity with the sole aim of earning profits.

In other words, a partnership is an unincorporated business organization in which individuals agree to merge resources and knowledge with the sole aim of earning profits. 

Individuals who agree to form a partnership business are known as partners, and the business as a whole is known as a firm

The partners provide the necessary capital to the business, run the business jointly and partake equally in the work, profits, and liabilities of the firm. 

Partnership Agreement

The effect of conflicts can be lessened if the partners can execute a partnership agreement. 

A partnership agreement specifies the relationship between the different individuals who are collaborating in a given business enterprise. 

A partnership agreement is intended to mitigate the effect of risk by ensuring that all partners agree with the terms and conditions of the partnership arrangement.

A partnership agreement enumerates everyone's rights and responsibilities. 

A typical partnership agreement usually lists the following:

1. How profit(or loss) is shared among partners.

2. Amount of cash and other contributions to be made by each partner.

3. Each partnership's responsibilities.

4. How the partnership is to be dissolved. 

Types Of Partnership

There are two types of partnership: general partnership and Limited Partnership.

1. General partnership: This is the default version of the partnership business. 

Under this type of partnership, unless otherwise stated, all partners partake equally in the management and decision-making of the business.

Each partner in a general partnership is considered an agent of the business. This means each partner represents the business when dealing with third parties.

Also, partners have unlimited liability as they are equally liable for the debts and liability of the partnership. 

Furthermore, profit is shared evenly among the partners (Unless otherwise stated).

2. Limited partnership: This is a form of partnership in which there are at least one general partner and a few limited partners. 

These limited partners have limited liability as they are protected regarding the debt and liabilities of the business that would affect a general partner. 

Limited partners have no managerial authority. Hence, they are not considered agents of the business.

Types Of Partner

The following types of partners are based on the extent of their liability, or their participation in the firm.

1. Active/working partner: This is a partner who participates actively in the day-to-day activities of the business. 

He runs the business on behalf of all the partners. He acts as a representative of other partners in the daily activities of the business. Active partners are usually paid salaries.

2. Dormant/Sleeping Partner: This is the direct opposite of an active partner. 

A dormant partner is a partner who contributes capital but does not participate actively in the day-to-day activity of the business.

Since he provides capital, he also partakes in the profit or losses of the business.

3. Nominal Partners: This is a partner that does not have any significant interest in the business. 

He only allows his name to be used by the firm for reputational purposes. A nominal partner is usually someone of high prestige.

The nominal partner does not make any capital contributions to the firm. Hence, he would not have a share of the profits either. 

It should, however, be noted that nominal partners may be legally accountable to third parties for acts and liabilities of the business. 

4. Limited partner: This is a partner who has limited liability. This means that in the event of liquidation, the personal property of a limited partner is not used to settle the business debt.

Stated simply, the liability of a limited partner is limited to his investment in the organization.

A limited partner does not play an active part in the running of the business, he only contributes capital.

5. General partner: This is considered the direct opposite of a limited partner. The general partner has unlimited liability as his belonging can be used to settle the business debt.

Unless otherwise stated, a general partner takes an active part in the day-to-day running of the business.

The death or bankruptcy of a general partner usually brings a partnership business to an end.

6. Partner by Estoppel: If a person implies to another that he is a partner of the firm through his words, acts, or behaviour, that person cannot deny that he is not a partner.

This means a person who is not technically a partner but has represented himself as such may become a partner by estoppel.

Alternatively, a partner by estoppel can refer to someone who is not a partner in a firm but, through his or her behaviour or conduct, leads others to believe that he is.

Features Of Partnership Business

1. The business is managed collectively: Managerial decisions in a partnership business usually involves all partners.

Hence, the business is collectivity managed by all partners.

2. Limited ownership: A partnership is usually owned by a minimum of two and a maximum of twenty. However, In some cases (like banking firms) the maximum is reduced to ten.

If the partners exceed this limit, then the business is no longer a partnership business and a new form of business will have to be formed.

3. Source of capital: The capital of a partnership business is provided by individual partners.

4. Unlimited liability: Except in the case of limited partners, all partners are liable for the debts and liabilities of the business.

That is, the partners may lose all of their assets, even assets not invested in the business. 

5. Each partner is an agent: Every partner of a partnership is also a representative or agent of the business. As an agent, each partner can act on behalf of other partners.

To put it another way, there is a principal-agent relationship in the partnership business

6. Profit-oriented: The sole motive of a partnership business is to maximize profit.

7. Not a legal entity: A partnership business is not a legal entity as it can not sue and be sued in its name.

Another way to look at it is that the business represents the partners, and the partners collectively mean the business.

As such, anything that affects the business automatically affects the partners.

Advantages Of Partnership Business 

1. Better decision-making: Partnership businesses benefit from the experience and expertise of each partner.

As a result, decisions made in a partnership are usually better than that of sole proprietorships because nearly all partners are consulted.

Remember the popular adage that says two heads are better than one. 😊

2. Privacy is guaranteed: Unlike corporations, partnership business is not mandated to publish their annual reports. 

As a result, the partners can keep everything that transpires in the firm to themselves, allowing for privacy.

3.  Easy to form: A partnership business can be formed without legal formalities

Even if the business is registered, the cost is relatively cheap when compared to an LLC form of business.

4. Possibility of expansion: Since a partnership is financed by two or more individuals, the business has a better chance of expanding than a one-man business( sole proprietorship)

As a matter of fact, for most individuals, the major reason for forming a partnership is the additional capital for expansion that can be obtained.

5. Efficiency and specialization of management: In partnership, virtually every partner partake in one activity or the other. 

One partner may take care of sales, another may handle purchases, this makes for the division of labour. 

Division of labour, in turn, will lead to efficiency and specialization in management

6. Risk sharing:  Any loss suffered by the firm will be shared equally by all partners, with the benefit that each partner's burden will be significantly reduced.

7. Large resources: Because a partnership business requires more than one partner, it can get more capital than a sole proprietorship.

More so, a partnership can easily obtain additional capital by admitting a new partner.

8. Flexibility: The partnership business is one of the most flexible business organizations. 

At any time, the partners can easily change the size or scope of operation. All that is required is the agreement of all partners.

9. Less time commitment: Because the responsibility for managing the partnership business is shared among the partners, it becomes possible for partners to take time off and relax.

Disadvantages Of Partnership Business

1. Unlimited liability: All partners (except limited partners) have unlimited liability. 

This means that in the event of liquidation if the asset of the business cannot cover its liabilities, the personal properties of the partners may be used to settle the business debt.

2. Not a legal entity: A partnership business is not a legal entity. It can not enter into a contract, sue, and be sued in their name.

3. Disagreement among partners: Disagreement among the partners may not augur well with business activities. 
In the worst-case scenario, it could lead to the dissolution of the partnership. 

4. Possibility of Dissolution: The business could be dissolved if one of the partners retires or dies.

This is particularly true if the partner in question is an active partner or a general partner.

5. Delay in decision-making: Virtually every partner is consulted before any decision is taken. 

This may lead to a delay in making vital decisions. Delays in decision-making may not augur well with business activities.

6. Limited capital: Though capital provided in partnership is more than that of a sole proprietorship, this is less when compared to corporations

This is because the partnership is usually owned by a maximum of 20 partners.

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7. Restrictions on transfer of interest: If any partner wishes to transfer his or her interest to a third party, he or she must first obtain the approval of all other partners.

This is a limitation because it is more likely that not all partners will agree to such transfers.

To conclude, a partnership is a type of unincorporated business organization that is owned by two or more persons.

There are six different kinds of partners: active, dormant, nominal, limited, partner by estoppel, and general partners.

The characteristics of the partnership include collective management, joint ownership, the sharing of capital, profit-oriented, unlimited liability, and lack of legal status.

The benefit of forming a partnership business are improved decision-making, guaranteed piracy, the convenience of formation, and expansion potential.

Unlimited liability, lack of legal status, partner disagreements, limitations on the transfer of interest, and a delay in decision-making are all drawbacks of a partnership business.

For now, that is all. As usual, I eagerly await your feedback in the comment section.

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