Partnership Definition, Characteristics, Formation and Funding
Table of Contents
A partnership is a business arrangement where two or more individuals or corporate bodies, called partners, agree to own and run an entity’s operations, sharing both the resultant profits and losses. A partnership may either be a service provider like a law partnership firm or provide goods.
In a partnership, there is co-owning of management. Co-owning extends further to incomes or even losses made by the partnership body in question. Partners may either be general partners or limited partners given in the deed while forming the partnership. Various forms of partnership businesses are available for aspiring partners to form.
Can a Company Enter into Partnership?
Yes, a company can enter into a partnership. The reason is simple; companies are artificial persons. An artificial person can enter into a partnership alongside a natural person. Companies are identified as artificial persons under their memorandum of association and hence a company is eligible to enter into a partnership.
Can a Partnership Company Enter into Partnership?
No, a partnership company is neither a natural person nor an artificial person. Partnerships are considered as an extension of either the natural person or the artificial person who forms a partnership.
Characteristics of a Partnership
1. Limited life span
A partnership is formed with a specific purpose with a well-defined period of operations.
Usually, a major partner’s death, insanity, or insolvency terminates the partnership operations unless clearly defined by the partnership deed.
2. Partners are agents
In a partnership, all the partners are agents of the partnership. Any contract signed by one of the partners mutually binds all other partners in the business. Although a partnership may limit a partner’s ability to contract, this only proves efficient if the third party is aware.
3. Unlimited liability
If the partnership incurs debts and other liabilities, the partners may be called on to give their assets to settle such claims. In any case, the partnership’s assets cannot fully settle the debts. This is the case for general partnerships.
However, a limited partnership has two types of partners, with at least one general partner while the other partners may have limited liability, protecting them from using their assets in case the partnership runs into debts.
4. Ownership and control is by partners
A partnership is run and managed by the partners making the business and the owners one entity. A partnership is inseparable from partners. Partnerships do not exist as artificial entities but rather as an extension of partners.
5. Definite membership
The minimum number of people to form a partnership is two. The maximum number of partners was 10 and 20 for those in banking. However, the maximum number was increased to 100 by the Companies Act 2013.
How to Form a Partnership
Partnerships are easy to form. Generally, it may be formed through the following steps:
Step 1: Choosing the best type of a partnership
This is a crucial step since it addresses the partnership’s where, when, and why questions.
This step requires the prospective partners to draft out a mission and a vision for the partnership, which will guide them on the best structure of a partnership to adopt.
Step 2: Signing partnership deed (Agreement)
The partners should then sign a partnership deed or an agreement, and it should contain:
- Partners and terms of contractual obligations
- Division of the partnership among the partners
- Management and other key responsibilities
- Problems solving and dispute management
- Appropriation of profits and losses
The partnership agreement is a legally binding document used to register partnerships.
Step 3: Naming the business entity
The partnership’s name should reflect the partnership’s operations or, consequently, a name chosen after consultations among the partners and agreed upon. The name, however, should not be that of an already existing business entity or a state-owned organization.
Step 4: Registration of the partnership
The relevant certification should be availed to the registrar for proofreading and registration. The type of partnership should be designated after the partnership’s name specifying whether it is a limited partnership, limited liability partnership, or a general partnership.
Step 5: Business commencement
The partnership may begin operations after being awarded the certificate of registration.
How do Partnership Raise Funds?
Sources of funds for a partnership are:
1. Personal savings
This is the amount an individual has at their disposal. A prospective partner may surrender such savings to start a partnership.
2. Retained earnings
Profits made by their partnership may be appropriated back into the partnership to help in funding.
3. Working capital
This is a short-term fund. It is obtained by subtracting the firm’s current liabilities from the current assets. This is used to finance the short-term goals of the firm.
4. Bank loans
The partners may approach a commercial bank for a loan. However, the partner taking the loan may still have to pay the loan back if the partnership becomes bankrupt due to unlimited liability.
5. Sale of assets
The partnership may dispose of some of its assets to obtain finance to run the firm.