Partnership – SS1 Commerce Lesson Note (Third Term)

A partnership is a business owned by two or more persons (usually not more than twenty) who contribute money and skill and share the profits.

• Legal view: it is the relationship between persons carrying on a business in common to make a profit.
• Business view: the partners together set up, own and manage the business.
• Example: a law firm run by three solicitors, or a family shop owned by two brothers.

Behavioural objectives

By the end of the lesson, students should be able to:

1. define a partnership and state when it is suitable;
2. explain a partnership deed and list its contents;
3. state the features of a partnership and name the types of partners;
4. list the advantages and disadvantages of a partnership;
5. state the rights of partners and the sources of capital for a partnership;
6. state the reasons why a partnership may be dissolved.

When is a partnership suitable?

A partnership is suitable where a small group needs to pool skill and moderate capital to run a business.

• Short-term ventures: the partners join for a limited project.
• Family or friends: ownership and control should not pass to outsiders.
• Skilled services: success depends on the knowledge of experienced members, e.g. solicitors.
• Small capital: the business does not need the large capital of a limited liability company.
• Contractual capacity: every partner is legally able to enter into a contract.

How is a partnership formed?

A partnership can be formed without special formalities, but the partners usually sign a written partnership deed.

What is a partnership deed?

A partnership deed is a written agreement made by the partners that states the rules guiding the business.

What are the contents of a partnership deed?

1. Name of the firm (the name of the partnership business).
2. Names of the partners.
3. Nature of the business of the firm.
4. Capital of the firm and the amount each partner will contribute.
5. How profits and losses are to be shared.
6. Duration of the partnership.
7. Circumstances that will dissolve the partnership.
8. Procedure for dissolution.
9. Procedure for admitting new partners.
10. Methods of settling disputes.

What is a partnership at will?

A partnership at will is a partnership with no fixed period agreed for its duration.

• Ending it: any partner can end it by giving notice to the others.
• Contrast: a fixed-term partnership ends when the agreed period expires.

What are the features of a partnership?

The features of a partnership are the main characteristics that set it apart from other forms of business.

• Number of owners: it is owned by two to twenty partners.
• Capital: the partners contribute the initial capital.
• Sharing: profits and losses are shared by the partners.
• Unlimited liability: partners are liable for the debts of the firm without limit.
• No separate legal personality: the firm is not a legal entity, so it cannot sue or be sued in its own name.
• Easy formation: no special formalities are required.
• Agency: each partner is an agent of the firm.
• Profit motive: it is formed to make a profit.
• Management: partners take part in running the firm.

What are the types of partners?

There are five common types of partners: active, sleeping, nominal, general and limited.

What are the advantages of a partnership?

The advantages of a partnership are the benefits owners gain from combining resources.

• Increased capital: more money is available because several persons contribute.
• Better decisions: decisions are taken jointly.
• Shared risk: risks and liabilities are spread among the partners.
• Easy formation: no legal formalities are required.
• Specialisation: management is shared and division of labour is applied.
• Privacy: partners are not legally required to publish annual accounts to the public.
• Competition: a partnership can withstand competition better than a one-person business.
• Time off: partners have more room for holidays, sick leave and rest.
• Expansion: there is greater scope for growth than in a sole proprietorship.

What are the disadvantages of a partnership?

The disadvantages of a partnership are the problems that come from shared ownership and unlimited liability.

• Unlimited liability: partners must pay the debts of the business, even from private property.
• Limited capital: it cannot raise as much capital as a company.
• No legal entity: the firm cannot sue or be sued in its own name.
• Binding acts: the action of one partner binds the other partners and the firm.
• Disagreements: quarrels between partners can end the business.
• Reduced pride of ownership: ownership is shared.
• Lack of continuity: the death or retirement of a partner can dissolve the firm.
• Shared profits: each partner receives only part of the profit.

What are the rights of partners?

The rights of partners are the legal entitlements each partner has in the firm, unless the deed says otherwise.

• Profit: the right to share in the profits.
• Management: the right to take part in managing the business.
• Books: the right to inspect and copy the books of account.
• Indemnity: the right to be repaid expenses or losses incurred on behalf of the business.
• Agency: the right to act as an agent of the business.
• Interest on advances: a partner who lends money beyond his agreed capital is entitled to 5% interest per annum from the date of the advance.

What are the sources of capital for a partnership?

The sources of capital for a partnership are the places from which the firm obtains money to start and run the business.

• Partners’ contributions: money each partner puts in.
• Loans from partners: extra money lent to the firm by a partner.
• Bank finance: loans and overdrafts from banks.
• Trade credit: goods bought now and paid for later.
• Retained profits: profits ploughed back into the business.
• Other credit facilities: hire purchase and leasing.
• Government agencies: grants or loans from bodies such as NDE.

How is a partnership dissolved?

Dissolution is the ending of the existence of a partnership business.

A partnership may be dissolved for any of these reasons:

1. Expiry of term: the period fixed for the partnership ends.
2. Death: a partner dies.
3. Bankruptcy: a partner is declared bankrupt.
4. Mutual consent: all the partners agree to end it.
5. Insolvency: the business cannot pay its debts.
6. Illegality: an event makes the partnership illegal.
7. Insanity: a partner becomes of unsound mind.
8. Notice: one partner gives notice to dissolve (in a partnership at will).
9. Court order: a court orders the dissolution.
10. Completion of venture: the single project the partners formed it for is finished.

Evaluation

1. Define a partnership.
2. What is a partnership deed? State five items it contains.
3. State four features of a partnership.
4. List four reasons why a partnership may be dissolved.
5. Distinguish between a sleeping partner and an active partner.

Assignment

1. State four advantages and four disadvantages of a partnership, and list four sources of its capital.