Sometimes, persons come together and partner in order to increase the likelihood of each person achieving their set goals. By doing so, they form what is called a partnership. Let us learn more about partnerships.
LEARNING OBJECTIVES
By the end of this topic, you should be able to:
- Describe partnerships
- Explain the characteristics of partnerships.
- Discuss the formation and management of partnerships.
- Discuss the sources of capital for partnerships.
- Explain the advantages and disadvantages of partnerships.
A partnership is a type of business in which a formal agreement is reached between two or more people who agree to be co-owners, distribute activities involved in the running of the organization, and share losses or income generated by the business.
The partners that make up a partnership can be individuals, interest based organizations, businesses, governments, schools, or combinations.
FORMATION OF A PARTNERSHIP
The formation of a partnership business involves the following processes;
- Preparation of the partnership deed.
- Adoption of the partnership act.
- Application for a trading license or registration.
TYPES OF PARTNERSHIPS
Partnerships are classified into different types based on the state or country where the business operates. Discussed below are the most common types of partnerships.
- General partnership. A general partnership is made up of two or more owners to run a business. In this type of partnership, each partner has equal rights. All partners have the right to participate in decision making and management activities. Profits, debts, and liabilities are also equally shared.
- Limited partnership. In this partnership, both general and limited partners are included. General partner has unlimited liability, and manages the business as well as limited partners. Limited partners in this partnership have limited control. They do not undertake the day to day running of the firm. Limited partners mostly invest to get profit share.
- Limited liability partnership. All partners here have limited liability.
- Partnership at will. This is a type of partnership when there is no clause mentioning the expiration of a partnership.
Sources of capital for partnerships include; retained profits, leasing, renting, trade credits, partner’s contribution, hire purchase and loans from financial institutions. The management of partnerships is done by partners and hired managers.
Partnerships can be dissolved:
- Due to continuous losses.
- Due to a court order.
- After completion of the intended purpose of the partnership.
- As a result of continuous disagreements among members.
ADVANTAGES OF PARTNERSHIPS
- Work is shared among partners. This makes it easier for partners to complete tasks over a shorter period of time.
- They mostly use hired qualified managers. This makes the operations of a partnership to be more professional. There is less government control
- Losses are shared. Unlike in Public limited companies, there is little or no control in partnerships.
- They share various professionals. A partnership can be made by partners from different professions. This improves the skills available in a partnership.
DISADVANTAGES OF PARTNERSHIPS
- Profits are shared. Profits generated from partnerships are shared between partners.
- Slow decision making. Many parties are involved during decision making in a partnership. This increases the time required to make a decision.
- There is unlimited liability. Partners are responsible for debts incurred by the firm, and in case the partnership goes bankrupt, all partners are required to clear the debts even if they need to sell their personal belongings to cover the debt.
- They cannot raise capital through the stock exchange market. Partnerships unlike public limited companies do not trade on the stock exchange. This limits the amount of capital that can be raised by a partnership.
In partnerships, each partner is given a certain amount of control of the operations of a partnership and business profits. Generally, any person can become a partner in a partnership. People can form partnerships by;
- Formal agreements of partnership, written and signed
- Oral agreements.
- By default (their actions automatically define their role/status as business partners.
- Corporations can also form partnerships as partners.
DIFFERENCES BETWEEN LIMITED COMPANIES AND PARTNERSHIP
- Limited companies can sell shares while partnerships cannot.
- In limited companies, shareholders enjoy limited liabilities. Partners have limited liabilities.
- Limited companies are separate entities in the eyes of law while partnerships are not considered as separate legal entities.
- Limited companies have continuity, and are not affected by death or bankruptcy of a shareholder while partnerships are affected by death or bankruptcy of partners.
Note that, partnership is not limited to individuals only. Partnerships can also be formed between businesses, interest based organizations, governments, and schools.
SUMMARY
We’ve learned that:
- A partnership is a type of business in which a formal agreement is reached between two or more people who agree to be co-owners.
- The partners that make up a partnership can be individuals, interest based organizations, businesses, governments, schools, or combinations.
- Each partner is given a certain amount of control of the operations of a partnership and business profits.
