Edited by Sarah Owoeye and Toluwalase Solanke
- Lesson Objectives
By the end of the lesson, students should be able to:
- Explain the rights of partners.
- Outline steps involved in the formation of a partnership.
- Discuss advantages of partnerships.
- State the disadvantages of partnerships.
Table of Contents
Rights Of Partners
1. Right To Share Profits
Every partner has the right to share in the business’s profits according to the agreement stated in the partnership deed. If there are no specific agreements, profits are usually shared equally regardless of the capital contributed. This right is important because it ensures that all partners are rewarded for their investment and effort in running the business.
2. Right To Take Part in Management
Partners, especially active partners, have the right to take part in the daily management and decision-making of the business. This includes participating in meetings, making business decisions, and contributing to the strategic direction of the firm. However, in some cases, sleeping or limited partners may waive this right depending on the terms of the partnership agreement.
3. Right To Inspect Books of Account
Every partner has the right to access, examine, and inspect the business’s financial records. This right ensures transparency and builds trust among partners. By allowing this, partners can monitor how the business is performing and ensure that no one is misusing funds or hiding financial information.
4. Right To Be Indemnified
Partners have the right to be reimbursed (indemnified) for any reasonable expenses or losses they incur while conducting business activities on behalf of the firm. For example, if a partner travels to secure a business deal or pays a supplier with personal funds, the partnership must refund those costs. This protects partners from suffering financially while working for the partnership’s benefit.
5. Right To Be Consulted Before Major Decisions Are Made
Before any major decisions are made—such as bringing in a new partner, expanding to a new location, or taking a large loan—each partner has the right to be consulted and also give their opinion. No single partner should make critical decisions alone unless authorised. This right promotes fairness, mutual respect, and joint ownership of business outcomes.
Formation Of a Partnership
The steps to forming a partnership include:
1. Commencement Of Business
Once the agreement is in place, the deed is prepared, capital is contributed, and registration (if needed) is completed. The partnership can now start operating officially. The partners begin running the business, managing daily operations, selling products or services, and earning income according to their agreement.
A Deed of Partnership usually includes:
- Names of partners
- Name of firm and nature of business
- Amount of capital contributed
- Sharing ratio for profit and loss
- Duties and responsibilities of each partner
- Duration of partnership
- Procedure for admitting or removing a partner
Advantages Of a Partnership
1. More Capital Than a Sole Proprietorship
One of the major advantages of a partnership is that it allows more people to contribute money, which means the business can raise more capital compared to a sole proprietorship. Each partner may bring in a share of the capital, and when combined, this can be used to buy equipment, rent better space, or expand operations. With more funds available, the business has a better chance of succeeding and growing.
2. Shared Responsibilities and Ideas
In a partnership, the workload and responsibilities are shared among the partners. This means no single person carries the full burden of managing the business. Each partner can focus on their areas of expertise, such as marketing, finance, or operations. Also, when several people bring in their ideas and knowledge, it can lead to better decisions and more creativity in solving business problems.
3. Easy To Form and Operate
Forming a partnership is generally easy and requires fewer legal processes than starting a company. In many cases, it starts with a simple agreement between the partners. While it is helpful to write a deed of partnership, it is not compulsory in some countries. The day-to-day running of the business is also more flexible because decisions can be made quickly, especially if the partners trust one another.
4. Division Of Labour Based on Skills
Each partner in a partnership can be assigned roles based on their skills, talents, or experience. For example, one partner may be good at accounting, another at customer service, and another at sales. This specialisation improves efficiency and allows the business to run more smoothly. It also ensures that the workload is shared fairly, and each aspect of the business is well managed.
5. Greater Borrowing Capacity Than Sole Traders
Because a partnership usually has more assets and more than one person responsible for repaying loans, it may be easier for the business to get loans or credit from banks. Lenders are more confident in giving money to a business that has multiple owners, especially when each partner brings financial strength and good business records. This access to external funding can help the business grow faster.
Disadvantages Of Partnership
1. Unlimited Liability
One major disadvantage of a partnership is that general partners have unlimited liability. This means that if the business runs into debt or is sued, the personal assets of the partners—such as their cars, houses, or savings—can be used to settle the business’s obligations. This poses a serious financial risk, especially if the partnership makes a loss or faces a legal issue.
2. Disagreements And Conflict
Partnerships involve multiple people making decisions. This can lead to disagreements. Partners may have different ideas, management styles, or visions for the business. If not well managed, these disagreements can lead to serious conflicts that may harm the smooth operation of the business or even result in the dissolution of the partnership.
3. Shared Profits
In a partnership, profits are shared among all the partners according to the agreed ratio, regardless of how much effort or time each partner puts in. This can lead to dissatisfaction, especially if one partner feels they are doing more work than others but receiving the same or less in return. It may also reduce motivation for hard work.
4. Liability For Other Partners’ Actions
Each partner is an agent of the firm and can bind the business in contracts or financial obligations. This means that one careless or dishonest partner can make decisions that negatively affect the whole partnership. Even if other partners are not involved in the mistake, they are still legally responsible and can suffer financially.
5. Uncertainty Of Continuity
The continuity of a partnership is not guaranteed. If one partner dies, becomes bankrupt, or withdraws from the business, the partnership may have to be dissolved unless stated otherwise in the partnership agreement. This makes partnerships less stable compared to companies that have a separate legal existence from their owners.
Final Thoughts
Partners have rights such as sharing profits, participating in decisions, and accessing the firm’s financial records. Partnerships are formed through an agreement, usually with a Deed of Partnership, and capital contribution by members.
Partnerships allow for more capital, shared skills, easier management, and shared risks. Disadvantages include unlimited liability, potential conflicts, shared profits, and the effect of a partner’s exit on the business.
Read also: Telecommunications & Mobile Payment: A Perfect Partnership
