PARTNERSHIP BUSINESS

By:  SENATHON IPIA






Definition of Partnership
A partnership is a business owned by 2 to 20 persons and may be a separate legal entity from its owners or not.

Owners of a partnership business are referred to as partners.

Note: Every partnership business has between 2 to 20 partners, except for partnership involving accountants in an accounting firm, or lawyers in a law firm – they are permitted to be more than 20 partners.

Types of Partnership
1. General Partnership or Ordinary partnership: A partnership firm that is NOT a separate legal entity, so all the partners have unlimited personal liability for the debts of the business.

The business CANNOT sue and be sued in its own name. And the personal property of the partners would be added or used to settle the business liabilities if the business assets are NOT adequate to settle the business liabilities.


2. Limited liability Partnership: A partnership firm that is a separate legal entity, so all the partners have limited personal liability for the debts of the business.
If the business fails or collapses or folds, the partners only lose the money contributed as capital.

A limited liability partnership is a separate legal entity, that is, a body corporate. It can sue and be sued in its own name. Its limited liability status means that the liabilities of the business would only be settled from the business assets. With these, it means that a limited liability partnership is just like a company, except that it is limited to 20 owners.

The name of a limited liability business would end with the letters "LLP". Example: Senaipia, LLP 

3. Limited Partnership:  A partnership firm that is NOT a separate legal entity, but there is at least one partner with limited personal liability; other have unlimited personal liability for the debts of the business.

Limited partnership is therefore a combination of limited liability partnership and general partnership.



Deed of Partnership
This is the partnership agreement. It is a document that states the rights and obligations of each partner and the profit or loss sharing ratio.

Examples of the rights are:
(i) every partner must have access to the partnership books of account.
(ii) right to have a refund for personal money spent in the business.

(iii)  interest to be paid to partner (s) that provide loans/advances to the partnership, as well as other matters.

  
Examples of the obligations are:
(i) every partner much share in the liabilities of the business, except for a limited liability partnership or limited partner.
(ii) a duty of every partner NOT to disclose the business confidential information or document to outsiders.

Note: As expected, the contents of the deed of partnership begin with the name, nature and place of the business and names of the partners. 

Kinds of Partner
There are 6 kinds of partners in partnership businesses:

1. Limited Partner: A partner that has limited personal liability for debts of the business.
2. General Partner or Unlimited Partner: This is a partner that has unlimited personal liability for the debt of the business.  This is because he/she participates in the day-to-day running of the business (i.e. management) of the business. {If you’re involved in doing something, then you should be held liable}.

If a general partner participates in the running of the business, it therefore means that he/she is also an active partner.

3. Active Partner: A partner that participates in the day-to-day running of the business.

Hint: Remember, the word “active” means deep involvement. So, contributing money as capital and also participating in running the business is complete involvement, and that’s being active.

4. Dormant Partner or Sleeping Partner:  A partner that does NOT participates in the day-to-day running of the business. A sleeping partner can also ask to be stated as a limited partner in the partnership agreement, because if he/she is NOT involved in running the business, then he/she should NOT be held liable for the debts of the business.

5. Nominal Partner or Passive Partner: A partner that contributes only his name to the business. He/she is usually a very important person (VIP) in the society. The business merely uses his/her influential name as a business advantage.

Hint: The word ‘nominal’ implies name. So nominal partner implies a partner by name only.

6. Quasi Partner: A partner that has retired from the business but leaves his contribution as loan in the business.

Hint: Notice that limited partner & general partner are opposites; while active partner & dormant partner are opposites.

Note: “Principal partner” or “senior partner” is NOT a kind of partner but the rank or position a partner holds in a partnership business. In fact, “principal partner” is used to mean the head of the partnership business.

Features/Characteristics of  Partnership
1. Ownership: It is owned by 2 to 20 persons, except for a partnership involving members of a professional body involving accountants or lawyers, which can be more than 20 persons (i.e. more 20 lawyers in a law firm, or more than 20 accountants in an accounting firm).

2. Ordinary partnership or limited partnership is not a separate legal entity from its owners; limited liability partnership is a separate legal entity from its owners:

3. Unlimited joint personal liability for partners in ordinary partnership or limited partnership; but limited liability for partners in limited liability partnership.

4. Deed of Partnership: This is agreement of the partnership. It is a document that defines matters such as the rights and obligations of each partner and the profit or loss sharing ratio.

5. Motive (reason) for the formation: To make profit

6. Sources of capital: Contribution from the partners, loans from the partners, and ploughed-back profits, banks loans, etc.


Advantages of Partnership
1. More capital is generated by individuals pooling their resources together.

2. Partnership brings together different skills and expertise from the individuals who are partners.

3. Partnership makes specialization easy, since each partner brings different skills and expertise into the business.

4. The risk of managing a business is shared between or among individuals.

5. The business may continue even with the retirement or death of a partner.

Disadvantages of Partnership
1. Capital of partnerships is still inadequate, because it cannot issue shares.

2. Unlimited liability: In some partnerships, personal property of the owners may be added or used to settle business debts.

3. There may be discontinuity of some partnerships after the death or retirement of a partner.

4. Slowness in decision making because every partner has to be consulted before decision is made, unlike sole proprietorship that has fast decision making since it is one man.


Sources of Capital or Finance of Partnership
The money used to start and run partnership business comes from:
(i) contribution from the partners
(ii) loans from partners
(iii) loans from banks or co-operative societies
(iv) Ploughed-back profits.


Registration of Partnership
A registered partnership business is one that has been registered by the Corporate Affairs Commission as a partnership business. It could be registered as general partnership, limited partnership, or limited liability partnership.

THANKYOU 

For more, send e-mail to: senaipia@gmail.com, or call: +2347052802574

Senathon Ipia is a Chartered Accountant with the Institute of Chartered Accountants of Nigeria (ICAN).