Partnership Definition: Types, Advantages & Disadvantages

This post will educate you on partnership definition, types, advantages and disadvantages we have in a business organisation.

Not only that, how to reach an agreement before venturing into one.

Throughout our lives, partnership with family members, friends and spouses, business partnership do not usually entail as much affection as these other relationship, but to some people, they are equally natural.

Although there is no legal maximum, most partnerships have only two partners.

Often, it represents a pooling of special managerial skills and talents at other times, it results when a sole proprietor takes on a partner for the purpose of obtaining more capital.

Partnership Definition

This is type of business organisation, characterized by the existence of two or more owners, or partners, at least one of whom must accept unlimited liability for the acts and obligations of the partnership.

It is distinguished by the existence of two or more owners, at least one of whom has unlimited liability for the debt of the business.

Those partners who agree to accept unlimited liability are known as general partners. 

They enjoy all the benefits of the partnership.

Types of Partnership

All partners need not to be equal, some may be fully active in running the business, whereas others may have a much more limited role.

General Partners

This is one who assumes full shared responsibility for operating a business.

He or she also assumes unlimited liability for its debts, incurred by other general partner without his or her knowledge or consent.

To ensure that the liabilities of the business are legally assumed by at least one person  the uniform partnership act requires every partner to have at least one general partner.

General partners are active in the day to day running of business, and each partner can enter into contracts on behalf of all the others.

Although a partnership business pays no income tax, each partner is taxed on his or her share of the profit in the same way a sole proprietor is taxed.

To avoid future liability, a general who withdraws from the partnership must give notice to creditors, customers and suppliers.

Limited Partner

A limited partner is that who contributed capital to a business, but is not active in managing or running the business.

The partners liability is limited to the amount he or she has invested in the business.

In return for their investment, limited partners share in the firms profit.

Because of potential liability problems, not all state allows limited partnership.

In those that do, prospective partners must file formal articles of partnership and publish a notice regarding the limitation in at least one newspaper.

They must also ensure that that at least one partner is a general partner.

Partners can also be silent, secret, dormant or nominal, depending on the individual’s involvement in the business or the special abilities he or she brings to the firm.

These types of partners have the following characteristics;

  1. Silent partner: Active in management, may be known to the public as a partner.
  2. Secrete Partner: Active in management but not known to the public or held out as a partner.
  3. Dormant Partner: Neither active nor known or held out as a partner.
  4. Norminal Partner: Not a party to the partnership agreement of a true partner in any sense. By adding his or her name to the partnership, a nominal partner becomes liable as if his or her name to the partnership.

Advantages of Partnership

Partnership definition and types

Partnership have many advantages that cause business owners to choose these types of ownership.

The most important advantages of partnership are described below.

Ease and low cost of formation

Like sole proprietorship, it is relatively easy to form.

The legal requirements are often limited to registering the name of the business and purchasing any necessary licenses or permits.

It may not even be necessary to prepare written articles of partnership.

However, it is generally a good idea to get the advice and assistance of an attorney when forming a partnership.

Available of capital and credit

Partners can pull their funds so that their business has more capital than would be available to a sole proprietorship.

This additional capital, coupled with general partners unlimited liability, can form the basis for a good credit rating.

Banks and suppliers may be more willing to extend credit or grant sizable loans to such a partner than to an individual owner.

This does not mean that partnership can borrow easily all the money needed.

Many have found it hard to get long term financing simply because lenders worry about the possibility of management disagreement and lack of continuity.

But in general, partnership have greater assets and so stand a better chance of obtaining the loans they needed.

Combined business skills and knowledge

Partners often have complementary skills.

The weakness of one partner in finance, for example may be offset by another partner’s strength in that area.

Moreover, the ability to discuss important decisions with another concerned individual often takes some of the pressure of everyone and leads to more effective decision making.

Possible tax advantage

Another advantages of partnership is possible tax advantage.

Like sole proprietor, partners are taxed only on their individual income from the business.

The special taxes that corporations must pay are not imposed on partnerships.

Also, at certain levels of income, the new federal tax rate are lower for individuals thank for corporations.

Disadvantages of partnership

Although partnership have many advantages when compared with sole proprietorship and corporations.

They also have some disadvantages which anyone thinking of forming it should consider.

Unlimited liability

Unlimited liability is one major disadvantages of partnership.

As we noted, each general partners is personally responsible for all debts of the business, even if that particular partner did not incur those debts.

General partners thus run the risk of having to use their personal assets to pay creditors.

Limited partners, however, risk only their original investment.

Lack of continuity

Partnership are terminated if any one of the general partners dies, withdraws, or is declared legally incompetent.

However, that partner’s ownership share can be purchased by the remaining partners.

In other words, the law does not automatically provide that the business shall continue, but articles of partnership may do so.

For Example

The partnership agreement may permit surviving partners to continue the business after buying a deceased partner’s interest from his or her estate.

However, if the partnership loses an owner whose specific skills cannot be replaced, it is not likely to survive.

Effects of management disagreement

Not all partners work, and very few smoothly all the time.

Business partners with ego, ambition, and money on the line are especially susceptible to friction.

If the division of responsibilities among serveral partners is to successful, the partners must work together as a team.

When partners begin to disagree decisions, policies, or ethics, distrust may build and get worst as time passes often to the point where it is impossible to operate the business successfully.

To help avert such disagreement, a number of issues must be settled before forming the partnership.

Partnership Agreement

Some countries require partners to draw up articles of partnership and file them with the secretary of the state or country.

Articles of partnership is a written agreement, listing and explaining the terms of the partnership.

Even when it is not required, an oral or written agreement among partners is legal and can be enforced in the court.

The partnership agreement should state who will make the final decisions, what each partners duties will be, the contribution each partner will make.

What happens if the partner wants to dissolve the partnership or dies.

The break up of a partner can be as complicated and traumatic as a divorce, and it is never too early to consider what could happen in the future.

When entering into an agreement, partners would be wise to let a neutral third party, a consultant, an accountant, a lawyer, or a mutual friend in the dispute that might arise.

With no intense personal stake in the dispute, a third party can look beyond personal opinion and emotion to seek solution for the company.

Each partner should agree to abide by the work of the third party’s decisions.

Don’t miss:

This is where i end it on partnership definition, types, advantages, and disadvantages. Your opinions are welcomed.

Leave a Comment