Partnership II – SS1 Commerce Lesson Note (Third Term)

A partnership is a business formed by between 2 and 20 persons who contribute capital and share profits according to an agreement.

Behavioural objectives

1. Name the two main types of partnership.
2. State the characteristics of an ordinary partnership.
3. Describe active, sleeping (dormant) and nominal partners.
4. State the characteristics of a limited partnership.
5. List the demerits of being a limited partner.

What are the types of partnership?

There are two main types of partnership: the ordinary (general) partnership and the limited partnership.

• Ordinary partnership: all partners have unlimited liability and take part in management.
• Limited partnership: it must be registered and has at least one general partner with unlimited liability.

What is an ordinary (general) partnership?

An ordinary partnership is a partnership in which every partner has unlimited liability and takes part in running the business.

What are the characteristics of an ordinary partnership?

• Membership: it has between 2 and 20 persons.
• Exception to the limit: under the Companies Act, the limit of 20 does not apply to professional firms such as solicitors, accountants, jobbers and brokers.
• Formation: no special formality such as registration is needed.
• Capital: it comes from money contributed by the partners.
• Unequal contributions: some partners may contribute more money than others.
• Liability: partners have unlimited liability.
• Profits: they are shared according to the agreement in the partnership deed.
• Powers of partners: each partner is the agent of the others in the partnership business.
• Binding actions: all partners are bound by what one partner does within the scope of the business.
• Management: all partners take part in managing the business.
• Legal status: it is not a separate legal entity.
• Dissolution: it is automatically dissolved by the death, bankruptcy or insanity of a partner.

What are the types of ordinary partners?

There are three types of ordinary partner: active, sleeping (dormant) and nominal (quasi) partners.

Who is an active partner?

• Role: he takes an active part in the management and administration of the business.
• Sharing: he shares the profits and losses with the other partners.

Who is a sleeping (dormant) partner?

• Capital: he contributes capital to the firm.
• Sharing: he shares in the profits or losses.
• Management: he takes no part in the day-to-day running of the firm.

Who is a nominal (quasi) partner?

• Role: he only allows his name to be used as a partner.
• No contribution: he puts in no capital and takes no part in management.
• No sharing: he does not share in the profits or losses.
• Purpose: he is usually a prominent person whose name improves the goodwill and image of the firm.

How do the three partners compare?

What is a limited partnership?

A limited partnership is a registered partnership with at least one general partner who has unlimited liability and one or more limited partners.

What are the characteristics of a limited partnership?

• Membership: the number of partners is the same as for an ordinary partnership.
• Formation: it must be registered with the Corporate Affairs Commission.
• Failure to register: every limited partner becomes liable as a general partner.
• Capital: it is contributed by the partners.
• Liability of limited partners: they lose only the capital they contributed, so their personal belongings are safe.
• Liability of general partners: there must be at least one general partner with unlimited liability.
• Profits: they are shared among general and limited partners according to the deed.
• Powers: limited partners cannot bind the firm in any trading contract.
• Binding actions: any action of the general partners binds all the other members.
• Management: limited partners cannot take part in management.
• Rights of limited partners: they may inspect the books of account and offer advice.
• Legal status: it is not a separate legal entity.
• Dissolution: it is automatically dissolved by the death, bankruptcy or insanity of a partner.
• Withdrawal of capital: a limited partner cannot withdraw his capital without the consent of the other partners.

What are the demerits of being a limited partner?

The demerits of a limited partner are the limits placed on his power, his control and his capital.

• No management: he must not take part in managing the firm.
• Registration: he must be registered with the Registrar, Corporate Affairs Commission.
• No binding contracts: he has no power to make contracts on behalf of the firm.
• New partners: they can be admitted without his consent.
• Capital locked in: he cannot take back his capital without the consent of the other partners.

What is the difference between an ordinary and a limited partnership?

An ordinary partnership has only general partners with unlimited liability. A limited partnership has at least one general partner and limited partners whose liability stops at their capital.

Evaluation

1. Name the two main types of partnership.
2. State four characteristics of an ordinary partnership.
3. Distinguish between an active partner, a sleeping partner and a nominal partner.
4. Explain the liability of a limited partner.
5. State three limitations of a limited partner.

Assignment

Akanni and Bello are sole proprietors. Akanni proposed that their businesses 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.