7.2 - Partnerships

Partnerships are between individuals who choose to own a business on a joint ownership. The number of partners must be between 2 and 20. Most partnerships have unlimited liability, and every partner is responsible for the business.

Ordinary partnerships are the most common which businesses engage in. Since all parties involved are partners, there's an equal sharing of profit. Capital is mostly equally shared and the roles which are played each partner are of equal importance to the business.

Partnerships are beneficial when it comes to borrowing money from the banks. This is because, if there's ever a problem, the bank can draw on the assets of all the partners for the repayment. Sole traders can enter into partnerships because of the shared liability and borrowing privileges which as sole traders, they cannot benefit from.

Skills, expertise and knowledge of partners can help the business immensely. With more ideas and scope for creativity, the partnerships can be a profitable venture for all parties.

A deed of partnership is a contract which states the details involved in the partnership and the role of each partner. It includes the following information:

• Name of partners
• Purpose of forming a partnership
• Capital invested by each partner 
• Profit and loss sharing
• Number of votes by partners in meetings
• Details of how the partnership can be wound up or terminated
• Withdrawal of share of profits by partners
• Process for exiting or entry into the partnership for new and existing partners

Liability and Legal Issues of Partnerships

Partnerships can have more than 20 partners, but some must be sleeping partners who do not actively participate in the running of the business. Such partners have limited liabilities. Nevertheless, one of the partners must have unlimited liability. 

Partnerships can also be limited liability partnerships where all the partners who are involved in the business have limited liability. 

The legal issues that surround partnerships are similar to the sole traders. A few legal documents are required to establish a partnership. It needs only 2 people to set up. With the ordinary partnerships, there's no need for accountants and solicitors. However, in practice, partnerships are drawn up by a solicitor. Also, accountants are used to sort out issues pertaining to tax. 

Limited liability companies are rather complex and there's certainly a need for auditors to regularly check the account which are sent to the Registrar of Companies. 

Limited liability companies will also find it easier to borrow money from financial institutions that with sole trader businesses. 

When a partner exits a partnership, it should automatically come to an end and a new partnership should be formed by the remaining partners in the business. It's usually quite difficult to exit a partnership and there are issues relation to the division of capital. 

In a partnership, the partners cannot transfer their shares without the consent of the other partners. 

The deed of partnership should also clearly define the responsibilities of the partners in the business.