This is a relationship between persons who engage in a business with an aim of making profits/ an association of two or more persons who run a business as co-owners. The owners are called Partners.
It is owned a minimum of 2 and a maximum of 20 except for partnership who provide professional services e.g medicine and law which have a maximum of 50 persons.
Characteristics of partnership
- Capital is contributed the partners themselves
- Partnership has limited life that is it may end anytime because of the death, bankruptcy or withdrawal of partners.
- Each partner acts as an agent of the firm with authority to enter into contracts.
- Partners are co owners of a business, having an interest or claim in the business.
- Responsibility, profit and losses are shared on an agreed basis.
- All partners have equal right to participate in the management of the business. This right arises from the interest or claim of the partner as a co owner of the business.
Types of partnership
Partnerships can be classified/ categorized in either of the following ways:
- According to the type/liability of partners
- According to the period of operation
- According to their activities
- According to the type or liability of partners
Under this classification, partnerships can either be:
- General/ordinary partnership- Here all members have unlimited liability which means in case a partnership is unable to pay its debts, the personal properties of the partner will be sold off to pay the debts.
- Limited partnerships- In limited partnership members have limited liabilities where liability or responsibility is restricted to the capital contributed.
This means that incase the partnership cannot pay its debts; the partners only lose the amount of capital each has contributed to the business and not their personal property. However, there must be one partner whose liabilities are unlimited.
- According to the period/duration of operation
When partnerships are classified according to duration of operation, they can either be;
- Temporary partnership-These are partnerships that are formed to carry out a specific task for a specific time after which the business automatically dissolves.
- Permanent partnerships- These are partnerships formed to operate indefinitely. They are also called a partnership at will.
- According to their Activity- Under this mode of classification, partnerships can either be:
- Trading partnerships
This is a partnership whose main activity is processing, manufacturing, construction or purchase and sale of goods.
Non – trading partnerships
This is a partnership whose main activity is to offer services such as legal, medical or accounting services to members of the public.
Types of partners
Partners may be classified according to;
- Role played the partners
- Active partner: He is also known as acting partner as he plays an active part in the day-to-day running of the business.
- Sleeping/dormant partner: He does not participate in the management of the partnership business.Although he invests his capital in the partnership, his profit is lower as he is not active. He is also referred to as passive or silent partner.
- Liabilities of the partners for the business debts:
- General partner: He/she has unlimited liabilities.
- Limited partner: He/she has limited liabilities
- Ages of partners
- Major partner: This is a partner who is 18 years and above. He is responsible for all debts of the business.
- Minor partner: This is a partner who has not attained the age of 18 years but has been admitted with the consent of other partners. Once he reaches 18 years, he then decides if he wants to be a partner or not. Before he attains the age of 18, he takes part in the sharing of profits but does not take part in the management of the business.
- iv) Capital contribution
- Nominal/Quasi partner: He does not contribute capital but allows the business to use his/ her name as a partner; for the purpose of influencing customers or for prestige.
-He/she can also be a person who was once a partner and has retired in form of a loan. This loan carries interest at an agreed rate.
-The quasi partner shares the profit of the business as a reward for using his/her name.
b) Real partner: He/she is one who contributes capital to the business.
-Other types of partners include secret partners, retiring partners and incoming partners
i) A secret partner: is one who actively participates in the management of the firm but is not disclosed to the public. In most cases secret partners are also limited partners.
ii) A retiring partner: Also known as outgoing partner is one who is leaving a partnership
-He may retire with the consent of all the other partners or according to a previous agreement.
iii) Incoming partner: Is one who is admitted to an existing partnership.
-People who want to form a partnership must come together and agree on how the proposed business will be run to avoid future misunderstanding.
-The agreement can either be oral (use of mouth) or within down. A written agreement is called a partnership deed.
-The contents of the partnership deed vary from one partnership to another depending on the nature of the business, but generally it contains:
- Name, location and address of the business
- Name, address and occupation of the partners
- The purpose of the business
- Capital to be contributed cash partner
- Rate of interest on capital
- Drawings partners and rate of interest on drawings
- Salaries and commissions to partners
- Rate of interests on loans from partners to the business
- Procedures of dissolving the partnership
- Profit and loss sharing ratio
- How to admit a new partner
- What to do when a partner retires dies or is expelled
- The rights to inspect books of accounts
- Who has the authority to act on behalf of other partners.
Once the partnership deed is ready, the business may be registered with the registrar of firms on payment of a registration fee.
In case a partnership deed is not drawn, the provisions of partnership act of 1963 (Kenya) applies. The act contains the following rights and duties of a partner:
- All partners are entitled to equal contribution of capital
- No salary is to be allowed to any partner
- No interest is to be allowed on capital
- No interest is to be charged on drawings
- All profits and losses are to be shared equally
- Every partner has the right to inspect the books of accounts
- Every partner has the right to take part in decision making
- Interest is to paid on any loans borrowed partners (The % rate varies from one country to another)
- During dissolution the debts from outside people are paid first then loans from partners and lastly partners capital.
- No partner should carry out a competing business
- Any change in business such as admission of new partners must be through the agreement of all existing partners.
- Compensation must be given to a partner who incurs any loss when executing the duties of the business.
Sources of capital
- Partners contribution
- Loans from banks and other financial institutions
- Getting items on hire purchase
- Trade credit
- Ploughing back profit
- Leasing and renting.
Advantages of partnership
- Unlike sole proprietorship, partnership can raise more capital.
- Work is distributed among the partners. This reduces the workload for each partner
- Varied professional/skilled labour; various partners are professionals in various different areas leading to specialization
- They can undertake any form of business agreed upon all the partners
- There are few legal requirements in the formation of a partnership compared to a limited liability company.
- Losses and liabilities are shared among partners
- Continuity of business is not affected death or absence of a partner as would be in the case of a sole proprietorship
- Members of partnership enjoy more free days and are flexible than owners of a company
- A Partnership just like sole proprietorship is exempted from payment of certain taxes paid large business organizations.
Disadvantages of partnership
- A mistake made one of the partners may result in losses which are shared all the partners
- Continued disagreement among the partners can lead to termination of the partnership
- Decision-making is slow since all the partners must agree
- A partnership that relies heavily on one partner may be adversely affected on retirement or death of the partner
- A hard working partner may not be rewarded in proportion to his/her effort because the profits are shared among all the partners
- There is sharing of profits the partners hence less is received each partner
- Few sources of capital, due to uncertainty in the continuity of the business few financial institutions will be willing to give long-term loans to the firm.
Dissolution of partnership
A partnership may be dissolved under any of the following circumstances:
- A mutual agreement all the partners to dissolve the business
- Death insanity or bankrupting of a partner
- A temporary partnership on completion of the intended purpose or at the end of the agreed time.
- A court order to dissolve the partnership
- Written request for dissolution a partner
- If the business engages in unlawful practices
- Retirement or admission of a new partner may lead to a permanent or temporary dissolution
- Continued disagreements among the partners