Features and Advantages of Partnership as a Kind of Business

Denso (2004) says a partnership is an association of two to twenty persons carrying on a business in common with the view of making a profit. The partners contribute both funds and efforts to set up and manage the business sharing profit (or loss) on an agreed basis.

A partnership can also be defined as the relationship that exists when two or more persons contribute small money or money’s worth to establish, own and manage a business organization with the sole aim of making a profit.

Read Also: Scope of Management: Evolution and Theories

The partnership is an association of 2-20 persons or 2-10 persons as in the case of a bank to carry on as co-owners of a business for profit. They also share the losses that arise from such businesses.

Features of Partnership

• Ownership: It is formed by between 2-10 people and between 2- 10 people in the case of banks.
• The initial capital is contributed by partners.
• Liability: Their liability is unlimited except for a limited partners.
• Formation motives: They are formed for profit reasons.
• Sources of capital: contribution from the partners plowing back profit, loans from banks
• The method of withdrawing capital must be approved by other partners as laid down in their partnership deed.
• It has no separate legal entity.
• It has no board of directors.

Types of Partnership

We have principally two types of partnership namely; ordinary and limited partnership.

Read Also: How Brain of Girls and Boys Produces Equal Math Ability

1. Ordinary Partnership

All members or partners take an active part in the management of the business and are generally liable for any loss or risk. All partners have equal responsibility and bear all the risks of the business equally. All the partners have equal powers, unlimited liabilities, take an active part, and profits are shared equally.

2. Limited Partnership

Any member in this category, his debts are restricted to the amount of money contributed to running the business.

Not all partners take an equal part in the management of their business. But there must be a member who bears the risk and also takes an active part in the business activities.

In other words, in a limited partnership, there is at least one ordinary partner who has unlimited liability.

Kinds of Partners

We have five types of partners and including:

1. Active Partner: This is the partner(s) who take an active part in the formation, financing, and management of the business. They receive a salary for the role they play as a manager or managing director or director of the business as spelled out in the partnership deed.
2. Dormant/Sleeping Partner: This partner contributes only the money needed for the formation of the business or for running the business. He is not involved in managing the business and doesn’t receive a salary. He is only entitled to profit sharing and losses as it is agreed upon before formation.
3. Normal/Passive Partner: A normal partner is not a partner but who allows his name to be used in the partnership or who gives the public the impression that he is a partner even though he may not share in the profit of the business.
4. This is a partner appointed because of his experience, fame, or wealthy position. These members may be men and women of substance whose names are greater than silver and gold like retired army generals, politicians, civil servants, and successful businessmen.
5. Silent Partners: A silent partner is an individual who is known to the public as a partner but who does not take an active part in the management of the firm.
6. Secret Partner: A secret partner is that who is active in the affairs of the business but is not known to the public as a partner.

Sources of Funds for Partnership

The following method could be used by partners to fund their business.

• Contribution from members;
• Plowing back profits;
• Borrowing from the bank;
• Enjoying credit facilities.

Article of Partnership or Deed of Partnership

This is the document that regulates the activities of the partnership business. It is the “constitution of the partnership business aimed at guiding against or resolving disagreements.

Read Also: Introduction, Characteristics of Business and Resources Business Use

It is normally drawn by a solicitor for the partners. The partners agree and sign the document. The deed of partnership is not legally required. It is very essential. The style and contents of the deed of partnership vary from partnership to partnership. They include all or some of the following:-

• Name of the firm;
• Name of the partners;
• The place of business;
• The description of the nature of business;
• The amount of capital that each part is to contribute,
• The role of each partner in the business;
• The method of profits and losses sharing,
• The compensation, if any, the partners are to receive for services rendered to the business;
• The right of partners in the business;
• How long the business shall last;
• Partner’s rights in the business;
• How matters shall be determined either by majority vote or not;
• Provision for the admission of new members;
• The arrangements concerning withdrawals or additional  investment;
• Arrangement for the dissolution of the firm in the event of death, incompetence, or other causes of withdrawal of one or more of its members.
• Once each partner agrees to sign this document, it becomes a legal document that is enforceable in a court of law.

Advantages of Partnership

The following, are the advantages of partnership.

• Greater financial resources: Unlike a one-man, business between two and twenty persons forms a partnership. It translates into more capital for such a business compare to a one-man business.
•  By so doing ability to borrow i.e. from the bank and be approved is higher and better compared to one man. The benefits of expansion are higher because more funds are available.
• Combined Abilities and Skills: In partnership, there are various partners, with various ideas, i.e. accountants, marketers, bankers, historians, managers, etc. may come together to form a business.
• They will put into use various talents which may advance the company more compare to a one-man business, which is the only talent.
• Greater Continuity: Relative to the sole proprietorship, the partnership has a very great tendency of continuity even in death. The death of a partner may bring about a re-organization of the partnership, but the remaining members are likely to have some knowledge that will enable them to continue with the business.
• Ease of Formation: Like-one-man business, the partnership is fairly easy to organize as there are few governmental regulations, governing the formation of partnerships.
• The investment duties, privileges, liabilities, and other relationships of the partners are mutually agreed upon, and as soon as the new members and materials have been brought together, the business is ready to function.
• Joint and better decision: Two good heads are better than one and this applies to partnership business where joint and better decisions are taken.
• Creation of employment opportunities: The large-size partnership is in a vantage position to employ more in their business because of its huge financial resources.
• Employment of valued employees: To secure the advice and experience of esteemed employees. They are made partners in the firm. This is a way of enhancing their work as well as that of the firm.
• Tax advantage: Partnership enjoys tax advantage. Taxes are, therefore, levied upon the individual owners rather than upon the firm as it is not recognized as a legal entity.
• Application of Division of Labour: This is applicable in its managerial and administrative hierarchy.
• Privacy: Like sole proprietorship, partnerships are not under any legal obligation to publish their books of accounts for public consumption.

Disadvantages of Partnership

• Unlimited Liability: If the business fails in the process, assets will be sold to offset its liabilities. In a situation where the assets can not pay for the debt, the owners‟ personal belongings could be sold to offset such debts.
• The business is not a legal entity: Most partnership business has no legal backing.
• Disagreement and Resignation: The death of a partner can lead to the death of a business, especially the active partner. Most partnership ends with disagreement. Disagreements because of action or Opinion lead to a resignation which could lead to total death.
• The decline in pride of ownership: Since the partnership is owned by at least two people the pride and joy associated with ownership are reduced. Unlike in sole proprietorship where the owner enjoys great pride in his business.
• Bureaucracy leads to slow decision and policy making: Meetings that requires a quorum, may not always be formed.
• Risk of mandatory dissolution: Where a member withdraws his membership or admission of a new partner becomes necessary, the partnership will be dissolve, and another agreement reached to admit such member. The rigors involve in this are tedious, which may be a problem for such an act.
• Limited capital: This partnership cannot get more capital through shares except through members.
• Restriction on sale of interest: There is difficulty in affecting the transfer of ownership. The interest of the operation is not transferable without the consent of other partners.

The partnership is an improvement on a one-man business whose chances in business are higher in terms of finance expansion, management and continuity.

The partnership is formed between two to twenty members who agree to come together. An article of association is written to serve as a legal document. The partnership is not a legal entity and their liability is unlimited at a point of indebtedness.

The partnership is a business form between 2- 20 people who has an article of association as a guide.

Their source of finance is through partner banks and other legal sources. They are guided by their article of association as regards sharing of profit/losses.

As a member of a partnership business there is so much benefit to derive i.e. more capital compare to one man business and looking at the adage that two heads are better than one.

The problem of a partnership is mostly in areas of dissolution, distrust and liabilities are unlimited.

Read Also: Your Role as a Consumer, Wage Earner, Citizen, and Who Benefits from a Business?