A partnership is a legal business structure in which two or more individuals or entities collaborate to jointly operate and manage a business for profit.
Characteristics of partnership
- Membership-The logical minimum number in partnership is 2 with a maximum of 20 but the number can go up-to 50 if they are professionals.
- It is not an incorporated association.
- Each partner is an agent of the other in the firm.
- It can sue or be sued in its registered name.
- It exists with an aim of making profit.
- A partner’s liability to debts and obligations of the firm is generally unlimited.
- Death, insanity or bankruptcy of partners may lead to dissolution.
Advantages of partnership
Some of the advantages of partnership as a form of business include;
- They are easy to form since they do not require many legal formalities
- Business resources are easy to acquire through contribution from the partners
- In case of professional firms there is specialization of labour
- Losses are shared among the partners
- Management duties are shared among the partners
Disadvantages
- Liabilities of partners for debts and obligations of the firm is unlimited i.e. partners are liable to use personal assets if the firm is insolvent.
- Sharing of profits reduces the amount available to individual partners.
- A single partner’s mistake affects all partners.
- Disagreements between partners often delay decision-making.
- Tends to rely on a single partners effort to manage.
- Death, bankruptcy, or insanity of a partner may lead to dissolution.
Partnership deed
If the partners decide to register the partnership they will be required to have a partnership deed.
Such document will contain the following;
- Nature of business
- Contribution of the partners. (capital)
- Profit sharing ratio
- Rules for determining interest on capital
- Method of calculating goodwill
- Power of partners
- Accounts and audit
- Expulsion of Partners
- Procedure for settlement of disputes