What Is Partnership Business? All You Need to Know

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what is partnership business structure - types of partnership - advantages and disadvantages

Partnership Business is one of the common types of business organizations almost every where in the world.

A partnership is a business organization in which two or more (but not more than twenty) persons come together, agree to legally combine resources, set up, and manage a business.

The major objective here also, it to maximize profit.

Each partner contributes funds and efforts and profits are shared on an agreed ratio, usually proportional to the amount of capital contributed by each partner.

In the United States, however, any number of persons can set up a partnership.

meaning of partnership business in Nigeria

In this article, you’ll learn everything about the partnership business organization, you’ll find more information about features, sources of capital, merits, and demerits.

Features of Partnership Business

The following features are what makes a partnership business structure what it is.

  • Ownership: The business is owned by two to twenty (2-20) persons, but in a banking enterprise, it is between two and ten (2-10)
  • Objective: The major objective of the partnership business is to maximize profit.
  • Sources of capital: Capital to run the business is from partners contribution, based on a legal agreement.
  • Liability: Partners have unlimited liabilities
  • Lifespan: The lifespan of a partnership business depends on the agreement signed by partners.
  • Management: The business is managed by active partners.

The Major Document Of a Partnership

In a partnership business structure, one document is dominant namely;

  • Deed of partnership

Let’s talk about this.

Partnership Deed or Partnership Agreement

Partnership deed or Partnership Agreement, also known as a Partnership Contract, is a written agreement between two or more individuals who intend to form and carry on a business.

Partnership deed - partnership agreement

Deed of partnership is a document that contains the provisions made for the internal activities of the business. Such provisions are expected to enhance smooth administration.

The deed of a partnership contain:

  • The name of the business
  • Location of the business
  • Identity of partners
  • Nature of the business
  • The scope of the business
  • Admission of partners
  • Duration of the partnership
  • Duties of partners
  • The capital contribution of each partner either in monetary terms or properties.
  • Criteria for sharing profits and losses.
  • Mode of salary payments, drawings, and other remuneration
  • Right of a partner in the case of withdrawal
  • Provisions for continuing the business by in the event of death or withdrawal of a partner.
  • Restrictions to be placed on the authority of certain partners.

Download Partnership Deed Sample From Cleartax

Types of Partners

The people involved in partnership agreement are called partners and they share profit, losses, and risks of the business.

The contribution of each partner in the business varies. To avoid disagreement, there is a division of labor with each partner taking charge of designated tasks.

The partners however, are as a group, responsible for everything that goes on the business. As stated by the law, all partners are equally responsible for the liabilities of the business.

If the Business goes bankrupt, the property of every partner can be sold to recover money to settle debts and other liabilities.

types of partners in partnership agreement

The partners may not be the only ones working in the business, they may employ workers who will work for them, depending on the size of the partnership business.

Partnership form of business is found in common professions like accountants, medical practitioners, lawyers, economists, engineers, etc.

Also Read: Why you should start a business – what the outgoing generation did wrong

Now, let’s talk about types of partners.

1. Active or Managing Partners

An active partner takes active pat in the management and administration of a partnership business.

He contributes to the financing and formation of the business, takes role in the day-to-day running of the enterprise and is being paid.

If he wants to retire he must give a public notice to other partners, otherwise he will keep being liable for the acts of the business.

2. Nominal or Quasi Partner

This type of partner contributes ONLY his name to the formation of the business. He only takes advantage of his name.

He neither contributes capital nor takes an active part in running/managing the business, and so he doesn’t share profit or loss.

Still, he is liable to outsiders as an actual partner to third parties for acts done by any other partner.

3. Sleeping or Dormant Partner

A dormant partner takes no part in the conduct and management of the partnership business.

He will not engage in the day-to-day running of the business but will contribute capital and share from profits and losses made.

4. Partners in Profits Only

This type of partner is only interested in sharing the profits of the business. He will not be liable for losses or liabilities of the business.

5. Limited Partners

A limited partner is the one who has agreed to contribute capital to a partnership business, prevented by law to take any active part in management of the business.

He has limited liability, meaning he is liable only up to the value of his capital contributions in the business.

6. Partners By Estoppel or Holding Out

If a person holds out to another that he is a partner of the firm, either by his words, actions or conduct then such a partner cannot deny that he is not a partner.

This basically means that even though such a person is not a partner he has represented himself as such, and so he becomes partner by estoppel or partner by holding out.

7. General Partner

A general partner has full power of participating in the conduct and management of the business and has unlimited liability.

Also Read: Meaning of joint stock companies in Nigeria

Advantages of A Partnership Business

Business partners enjoy the following partnership business advantages:

advantages of business partnerships
  • Sufficient capital: Compared to a sole proprietorship business structure, a partnership has more financial resources and capital base because of its membership size.
  • Joint Decision Making: This is another advantage of a partnership business as better results are achieved when two or more people rub minds together.
  • Better Management: By combining special skills of business partners, the business is better managed than a one-man business. Also, the burden of management is shared among partners.
  • Greater Possibility of Expanding the Business: By making the best use of contributed capital made by incoming partners, the business has a higher possibility of expansion.
  • There’s an increase in production as a result of the increase in capital, unlike a one-man business.
  • Each partner has a personal interest in the business and this will, in turn, push the business forward.

Also Read: All you need to know about commercial banks in Nigeria

Disadvantages of a Partnership Business

There’s always a downside to each of the forms of business organizations. Here are the disadvantages of a partnership business.

Partnership disadvantages
  • Unlimited Liability: Most of the partners are liable for the debts of the business up the the full extent of their assets.
  • The business is not a separate legal entity: It cannot sue and be sued in its own name.
  • Disagreement between partners may arise: Unlike a sole proprietor who has full autonomy over his business, there is disagreements between partners.
  • Manipulation of Records: Some of the partners (especially the active partners) can use false records to gain advantage of others.
  • Action of one partner is binding on others: One partners through his recklessness can put other partners in a mess, and this may destroy the business.
  • The death of one partner may lead to the end of the partnership business.

Partnership Business Structure (Summary)

It is obvious that Partnership business as more potentials than a sole proprietorship, but still it has its limitations.

Also, the source of capital for this type of business is majorly the partners contributions. Other sources include loans and overdrafts, trade credits, contributions of new partners, etc.

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