S S 1 Commerce Class Notes: Partnership

Core Concepts

What is a Partnership?

A Partnership is a business association owned by two or more people (usually between 2 and 20 members, though limited to 10 for banking businesses) who agree to run a business together to make a profit. It is governed by the Partnership Act of 1890. This form of business arises to overcome the capital and management limitations of a Sole Proprietorship.

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Types of Partners

Partners contribute differently to the business. The main types include:

• Active Partner: Takes an active part in the daily management and running of the business.
• Sleeping (Dormant) Partner: Contributes capital and shares in profits/losses but does not participate in daily management.
• Nominal (Quasi) Partner: Contributes only their famous name or reputation to help the business attract customers. They do not contribute capital or manage the business.
• Limited Partner: A partner whose liability is limited only to the amount of capital they invested in the business.

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The Partnership Deed

To prevent disagreements, partners usually draw up a legal document called a Partnership Deed (or Articles of Partnership). This document outlines the rules governing the business, including:

• Capital contributed by each partner.
• How profits and losses will be shared.
• The duties and salaries (if any) of partners.
• Arrangements for admitting new partners or dissolving the business.

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Advantages and Disadvantages of Partnership

Advantages

1. More Capital: Multiple partners pool their money together, raising more capital than a single owner.
2. Better Decision Making: Partners bring different skills, experiences, and ideas to the business.
3. Privacy: Unlike public limited companies, partnerships are not legally required to publish their financial accounts to the public.

Disadvantages

1. Unlimited Liability: Except for limited partners, if the business goes bankrupt, the partners' personal assets (like cars or houses) can be sold to pay off business debts.
2. Disagreements: Conflicts can arise between partners regarding decision-making and profit sharing.
3. Lack of Continuity: If a key partner dies, retires, or goes insane, the partnership is legally dissolved unless otherwise stated in the deed.

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Real-World Application & Practice

Real-Life Example: In Nigeria, many professional service firms, such as law chambers in Lagos or pharmacy stores in Abuja, operate as partnerships where experienced professionals pool their resources and reputations to serve more clients.

Home Practice: Imagine you and a classmate want to start a local phone-repair partnership; write down three rules you would include in your "Partnership Deed" to ensure you do not fight over money or work duties.