Tip: “Great things in business are never done by one person they are done by a team of people.”(Steve Jobs, Co-founder, Chairman and CEO Apple Inc.)
Many small businesses such as professional practitioners, retail, service providers are organized as partnerships. Partnerships are very essential in the business world and are in fact considered as the second stage in the evolution of the business first being sole proprietorship.
A partnership is an agreement between two or more people who have decided to enter into business with the intention of earning profits.
Partnerships may be established formally by means of a partnership deed or agreement. The partnership agreement is a very important guide for partnerships to exist in harmony.
Contents of a Business Partnership Agreement
- Names of the business partners
- Nature and kind of business
- Capital contributed by partners
- Interest on the Capital (if it exists)
- Salaries paid to the active partners
- Drawings to be made by the partners
- Interest on the drawings(if it exists)
- Duties of the partners
- Valuation of good will
- Duration of the partnerships
Benefits of Starting a Business Partnership
1. Skills and Experience
Starting partnerships with people who have different qualifications
gives the business potential to thrive.
2. Risk is Spread
With an increased number of business owners, the losses incurred are
shared among many.
Different minds encourage creation of better products and services
even if they are non profit or for profit.
4. HR Development
Competence among workforce will be encouraged and this will therefore
enhance the staff’s professional skills.
5. Stability and Impact
Achieving greater reach by being effective and efficient implies an
increased and sustained development impact.
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Risks of Starting a Business Partnership
1. Implementation Challenges
Day-to-day demands of delivering a partnership program as a collaborative venture, with all the additional management, tracking, reporting and evaluation requirements that entails
2. Drain on Resources
Commitment of time and energy of key staff in partnership building and project development in addition to any additional financial or other resource contributions
3. Negative Reputation
When partnerships go wrong causing damage to the reputation or track record of individual partners by association.
4. Loss of Autonomy
The challenge of shared decision-making processes; the need for building consensus with partners before action can be taken and the implications of wider accountability (to other partners and to wider beneficiaries)
5. Unlimited Liability
Members have unlimited liability which implies that in the event of the business winding up the proceeds from the business assets cannot cover the obligations therefore partners are calledt upon to raise funds towards the debts incurred.
Types of Partners
1. Nominal Partner:
This is a person whose name is used as if he or she was a member of the firm, but who in reality is not a partner. He or she is liable to the third parties who give credit to the firm on the strength of he or she being a partner in the business.
2. Partner in Profit Only:
This is a partner who only shares the profits but does not share the losses made. He or she does not take part in the management of the business but is liable to third parties who deal with the partnership.
3. Sub Partner:
This is a partner who gets the shares of profit from the firm through one of the partners. He or she is not liable against the firm and is not liable to the third parties for the firm’s debts.
4. Dormant Partner:
A dormant or sleeping partner is a partner who does not actively take part in the day to day partnership activities. Although he or she does not participate in the daily running of the business he or she has a right to the books of accounts and also sharing of profits and losses in the agreed ratios.
5. Minor Partner:
This partner can be admitted to the benefits of the existing partnership with the consent of all the partners. A minor partner is not personally liable for the debts of the firm but he or she shares in the partnership profits and benefits.
Characteristics of Partnerships
1. Limited Life
The existence of a partnership is determined by years set in the partnership agreement.
In case such a detail is not added to the agreement then the death, bankruptcy, inability to carry out specific responsibilities or withdrawal leads to termination of the partnership.
2. Ease of Formation
Apart from registration of the business, partnerships have few requirements.
3. Transfer of Ownership
Even if it is easy to dissolve a partnership, the transfer of ownership whether to an existing or new partner, requires approval of the partners.
4. Management and Operations
Among most partnerships, partners are involved in the day to day operations of the business.
This involvement in the operations makes critical decision making easier as formal meetings are not required.
5. Number of Partners
When there are many partners within a business, day to day critical decision making gets complicated.
Therefore decision making in partnerships tends to work well with a small number of partners.
Dissolution of a Partnership
Considering profits are no longert being generated by the partnership, the partner may agree to dissolve thet partnership.
In case something tragic occurs to the business such as government intervention into the business for failing to follow regulations or death of a partner.
Growth of the business to an extent of requiring converting the partnership into a limited company for day to day operations to continue smoothly.
4. Irreconcilable Differences
Assuming the partners no longert agree on business operations within thet firm then dissolving the partnership is thet rational thing to do.
Mutual agreement between the parties when one or more of the partners retire(s) or has he’s/her partnership(s) contract expires.
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