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Leveraging Partnership For Growth

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A business partnership is a specific kind of legal relationship formed by an agreement between two or more individuals to carry on a business as co-owners with the common view of making profit.  Section 1(1) of the Partnership Law of Lagos State, 2015 defines Partnership as the relationship which subsists between persons carrying on a business in common with a view to profit.  In a partnership, each person contributes something to the business — such as ideas, money, property, or some combination of these. The partnership income tax is paid by the partnership, but the profits and losses are shared among the partners based on their agreement.

In a partnership, each person contributes to all aspects of the business, sharing the profits and losses of the business as well. Some partnerships include individuals who work in the business, while other partnerships may include partners who have limited participation and also limited liability for the debts and lawsuits against the business.  A partnership, as different from a company, is not a separate entity from the individual owners. The maximum number for a partnership is twenty (20) people save for legal partnership and accountancy partnership.

TYPES OF PARTNERS

  • General or Active Partners: This class of partners actively participates in the management of the business and has liability for the partnership debts.
  • Sleeping or Dormant Partners: They are more or less investors. They contribute capital, share profits and losses of the business but do not take part in the management of the going concern. Sleeping partners are liable for the liabilities of the business like other partners.
  • Nominal Partners: A nominal partner is one who lends his name to the firm. He does not contribute any capital neither does he shares profits of the business. He is known as a partner to the third parties. On the strength of his name, the business may get more credit in the market or may promote its sales. A nominal partner is liable to those third parties who give credit to the firm on the assumption of that person being a partner in the firm.
  • Special or Limited Partners: The liability of these partners is limited only to the amount of capital which they contribute or agree to contribute.

TYPE OF PARTNERSHIPS

  1. General Partnerships

A general partnership involves two or more owners carrying out a business purpose. General partners share equal rights and responsibilities in connection with management of the business, and any individual partner can bind the entire group to a legal obligation. Each individual partner assumes full responsibility for all of the business’s debts and obligations.

  1. Limited Partnerships

A limited partnership allows each partner to restrict his personal liability to the amount of his business investment. Not every partner can benefit from this limitation — at least one participant must accept general partnership status, exposing himself to full personal liability for the business’s debts and obligations. The general partner retains the right to control the business, while the limited partners do not participate in management decisions.

  1. Limited Liability Partnerships (LLP)

Individual partners in a limited liability partnership are neither personally responsible for the wrongful acts of other partners nor for the debts or obligations of the business. The partners in an LLP may enjoy personal liability protection for the acts of other partners but each partner remains liable for his own actions.

FORMING OF PARTNERSHIPS

  • Registration: As with any business structure, a formal registration of the business is required in the formation of a partnership. Section 574 of Companies and Allied Matters Act, 1990 mandates every partnership to register with the Corporate Affairs Commission as a business name within twenty-eight (28) days of commencement of business.
  • Partnership Agreement: Partnerships are usually formed by an agreement between two or more individuals to pool resources and/or ideas towards a common business purpose with the aim of making profits. A partnership agreement may be oral, in writing, by deed or even by conduct. It is however significant to have the agreement documented. A partnership agreement should detail the responsibilities of the partners, how decisions are made, set out the formula for sharing profits and losses, state how disputes are resolved and prescribe the mode of dissolving the partnership. It’s a good idea to consult a lawyer experienced with small businesses for help in drafting the agreement.

ADVANTAGES

  • Access to more capital.
  • Diversity of ideas, perspectives and opinions
  • Access to a wider network of contacts
  • Greater borrowing capacity
  • Shared responsibility

DISADVANTAGES

  • No distinct legal personality.
  • Unlimited liability
  • Risk of disagreements and friction among partners.
  • Slower decision making
  • Profit sharing

CONCLUSION

A partnership is commonly formed where persons with complementary ideas, skills and/or talents decide to create a good business team. It is quite often a good choice of legal structure for running a small business with a reasonably low turnover. The way a partnership is set up and run as well as the way it is governed and taxed often make it the most appealing form of business.

If you have any enquiries about this article or require further information, please contact the writer – eki.durojaiye@lawbrief.org

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