Cambrige Notes: Partnership Business

Characteristics/Features

• A partnership is an unincorporated association of two or more individuals to carry on a business for profit. General partnerships are usually made up of 2-20 partners. Special partnerships such as those formed by professionals who are not allowed to form companies e.g. Accountants, Dentists etc. can have 2-∞ people.
• The operation of a partnership is governed by an agreement (written or oral) known as a partnership deed.
• The partners normally have unlimited liability which means that they may lose personal assets in settlement of business debts.
• The partnership is not usually a separate legal entity meaning that the death of any one of the partners will result in the dissolving of the partnership.

Partnership deed.

• An agreement between the partners in a business.
• It contains the names of the parties involved in the partnership, the duration of the partnership, business to be conducted and name of the partnership.
• It also contains provisions on matters such as: the duties of each partner, the salaries payable (if any) to each partner, the amount of capital each partner is supposed to contribute, interest to be earned on capital (if any) and the partner’s profit sharing ratio as well as matters partners’ voting rights and the procedure to be followed in dissolving the partnership and admittance of new partners.

Partnership Act of 1890

• Whenever there is no partnership deed the provisions of the partnership Act of 1890 apply. According to this law:
• Partners are not entitled to a salary,
• the capital accounts earn no interest,
• Capital is to be contributed equally by all partners,
• profit and losses are to be shared equally and all partners have equal voting powers.
• Loans from partners earn 5% interest per annum.

Limited Liability Partnership

• Is a partnership, similar to a general partnership, with the exception that one of the partners has limited liability.
• In a limited liability partnership at least one of the partners must be a general partner with unlimited liability.
• Some of the partners at accounting firms like Deloite and Touche are limited liability partners which means that they cannot lose their private assets in settlement of partnership debts.

Dormant partner– is a partner that does not take part in the day to day running of the business but is still entitled to their profit share in the business.

Advantages

•  Additional skills from each member can lead to specialization and division of labour e.g. in a law firm one person specializes in tax law, another partner in family law and another in civil law.
• Consultation between partners leads to better/quality decision making.
• More capital can be raised than in the case of sole traders.
• Losses are shared equally amongst partners cushioning the partners from heavy losses.
• Easy to set up. (It can be done using an oral agreement.)

Disadvantages

• Partners have unlimited liability. (At least one partner has unlimited liability in a limited liability partnership.)
• Delayed decision making can result in case of disputes between partners.
• The partnership is dissolved if one partner dies or leaves.
• The partner has to share profits.
• There is a limit to the amount of capital that can be raised since the number of partners is limited at 20 for some partnerships.
• Estate duties have to be paid upon the death of one of the partners.

To access more topics go to the O Level Business Studies Notes page.