A partnership can be defined as an association of two or more persons who have agreed to combine their labor, property, and skill, or some or all of them, for the purpose of engaging in legal business and sharing profits and losses between them.
Partnerships present the involved parties with special challenges that must be communicated before agreement. Overarching goals, levels of give-and-take, areas of responsibility, lines of authority and success, how success is evaluated and distributed, and often a variety of other factors must all be negotiated. Once agreement is reached, the partnership is typically enforceable by civil law, especially if well documented. Partners who wish to make their agreement affirmatively explicit and enforceable typically draw up Articles of Partnership.
A partnership is particularly very attractive if it helps to pool the talents or skills of partners for their mutual benefit. Partnerships require individuals who are compatible, honest, healthy, capable, dedicated and equally motivated to succeed. And because of the voluntary nature of partnerships, they are reliably easy to set up.
The term business in this definition includes every trade, occupation, and profession. Therefore, this article becomes very necessary for every individual to have the idea of bargaining / planning and negotiation in any kind of business level.
Humans are social beings, partnerships between individuals, businesses, interest-based organizations, schools, governments, and diverse combinations thereof, have always been and remain commonplace. In the most frequently associated instance of the term, a partnership is formed between one or more businesses in which partners (owners) co-labor to achieve and share profits and losses. Partnerships exist within, and across, sectors. Non-profit, religious, and political organizations may partner together to increase the likelihood of each achieving their mission and to amplify their reach. It is sometimes considered as alliance, governments may partner to achieve their national interests.
A partner acts as an agent of the firm in the conduct of its business. A partner must, however, exercise the highest degree of good faith in all transactions with the other partners, devote time and attention to the partnership business, and must account to the other partners for any secret profits made in the conduct of the partnership business. The liability of a partner for partnership debts is said to be unlimited, except when the partner is a limited one in a limited partnership organized in accordance with the provisions of a state statute permitting such limitation of liability.
FORMATION OF PARTNERSHIP
A partnership comes into existence by a contract entered into by the parties concerned. No formality is required but the agreement could be writing, inferior from conduct or oral. The agreement to form a partnership is known as a "Partnership Contract", the most important provision of which spells out the manner in which profits are to be distributed.
Partnerships are governed by the law of contract. It is advisable for individuals who wish to form a partnership to draw up what we called "Articles of Partnership". The article of Partnership essentially contains these items below:
• Name of Partnership
• Name and Addresses of each partner
• Statement of Business Purpose (s)
• Duration of the Partnership
• Name and Location of the Business
• Amount Invested by Each Partner
• Ratio for Sharing Profit
• Accounting Records and their Accessibility to Partners
• Specific Duties of Each Partner
• Provision or the Dissolution of Partnership and Sharing of Net Assets.
• Provision for Protection of Surviving Partners, Decedent's Estate, etc.
• Restraints on a Partner's Assumption of Special Obligations.
TYPES OF PARTNERS
There are five types of partners:
1. Active Partner: – This is the partner who participates in all the activities of the partnership.
2. Dormant or Sleeping Partner: – This is the partner who does not take an active part in the activities of the partnership but shares in the profit.
3. Nominal Partner: – This is a person who lends his name to a lends his name to the partners for a consideration.
4. Secret Partner: – This is a partner who takes an active part in the affairs of the company but he / she is not known by the public as part of the partnership.
5. Silent Partner: – This is a partner who is known by the public as part of the partnership; But he / she does not take an active part in the management of the enterprise.
ADVANTAGES OF PARTNERSHIP
1. Greater Source of Capital: – The pooling of the individual resources of each partner helps to raise a large capital. It makes it possible for an individual with the know-how, new product, invention, or new idea but no money, to work with man with money who is interested in the project.
2. Greater Specialized Management: – The ownership of a business by two or more people makes it possible for them to pool their skills and judgment for the benefit of all concerned.
3. Greater Incentive for Employees: – Employees in partnerships tend to enjoy better fringe benefit package and higher salies. They have better prospects for earned recognition and promotions.
4. Legal Recognition: – There is a partnership law that regulates the relationship between partners themselves, and between the partners and their parties that they have to deal with.
DISADVANTAGES OF PARTNERSHIP
1. Personality Clashes: – Partnership require cooperation, trust and dedication but failure on the part of one of the active partners to discharge his / her own responsibilities that could have led to personality clashes and to the end of the partnership. Partnerships are known to have ended because the members could not agree on the best course of action to take on an important issue.
2. Difficulty in Withdrawals: – The contribution of each partner ceases to be the property of the individual making the contribution. When a partner needs money, he / she can not withdraw his / her contribution or borrow money from the partnership without the express permission of the other partners. Many entrepreneurs dislike this lack of flexibility characteristic of partnerships.
3. Unlimited Liability: – Each partner is held liable for the obligations of the partnership. If one of the partners makes a costly mistake in the execution of the affairs of the partnership, creditors can sue, and if they obtain judgment against the partnership, each partner may have to sell his / her personal assets to meet the obligations.
4. Short Length of Life: – Factors like, death, prolonged ill-health, withdrawal, bankruptcy, insanity or of sorts could lead to the end of the partnership.
Conclusively, governmentally recognized partnerships may enjoy special benefits in tax policies. Among developed countries, for example, business partnerships are often favored over corporations in taxation policy, since dividend taxes only occur on profits before they are distributed to the partners. However, depending on the partnership structure and the jurisprudence in which it operates, owners of a partnership may be exposed to greater personal liability than they would as shareholders of a corporation.