Last Updated on December 2, 2021 by Ope Quadri
According to the Company and Allied Matters 2020, a partnership business is a business that is formed between two to 20 people in which they agree legally to set up and manage a business outfit with the sole aim of making a profit.
In this case, the business is formed by partners who legally agree to pool their resources, finances, and managerial skill among others together to establish a business venture.
The people who signed the agreement are called partners. They share the profit, losses and risk of the business.
Types of partners
In Economics, there are five types of partners, they include:
- Nominal or Quasi partner
- Dormant partner
In the registration process of limited partnership in one of our guides, we pointed out the difference between a limited partner and general partner.
So, what are the pros and cons of setting up a partnership business? Is it the best form of business?
Advantages of Partnership
Some of the merits of partnership business include:
- Sufficient setup capital
- Better production
- Joint decision making
- Better management
- Sharing of risks and liabilities
- Chance of continuity
- Increased efficiency
- Division of Labour
- Possibility of expansion
- Loan facilities
Sufficient Setup Capital
A partnership business has more access to financial resources than a one-man business because of the caliber of people that agree to form the business, unlike a sole proprietorship which only relies of personal savings.
The fact that up to 20 people can come together to form this business makes it have enough capital for its running.
In business management, the three major things to run a business successfully are 1) Money, 2) skill, 3) management.
This is one of the merits of a partnership business because there are capital, skill, and better management put in place which in the long run leads to better production.
Joint Decision Making
There is a popular saying that, “Two good heads are better than one”. In this case, better results are derived when two or more partners put their heads and resources together and make joint decisions for the enterprise.
Unlike a one-man business that solely relies on his instincts, partnership business is better managed, it is a combination of skills, abilities, and strength.
When one runs out of ideas, other partners are there to offer a piece of advice and guidance, most especially when the partnership is formed by a team of professionals who have long years of experience before coming together to form the business.
The burden is reduced because the partners can share risks and liabilities among themselves.
Chance Of Continuity
When the founder of a one-man business dies, the business has 98% of collapse because his kids might not be interested or may not have the required skill to continue with the running of the business.
This is an advantage partnership has over the sole proprietorship. When one partner dies, other partners can continue. The death of a partner isn’t the end of the business.
A partnership can easily obtain loans from financial institutions since they are jointly liable. The loan can be used for the expansion of business
Imagine a financial advisory firm that has a retired banker, a real estate company owner, an oil expert, and a professional human resource manager.
There would be better efficiency when each of the partners manages his area of specialisation. This leads us to the next point
Division of Labour
When an accounting officer oversees the inflow and outflow of expenses, an HR expert who is also a partner monitors workers’ performance and rewards, this is called a division of labour.
The principle of division of labour can be applied in the managerial and administrative hierarchy of a partnership business to achieve a better result.
Possibility of Expansion
If the resources of the partners are enough to set up the business, there are better chances of expansion of the business when income flows in.
Disadvantages of Partnership
Considering the pros of a partnership business, it suffices to say that it’s a good business, right? But it comes with cons, they include:
- Unlimited Liability
- May Be Unable to Raise up Enough Capital
- Difficulty in Management
- Risk of Dissolution
- Limited Growth
- Domino Effect
The general partners are liable for the debts of the partnership business up to the full extent of their estate.
May Be Unable to Raise up Enough Capital
Partners cannot invite the public to raise capital most especially when the partnership is already is 20.
Apart from that, members of the public are always afraid to invest because of its unlimited liability.
Difficulty in Management
Despite the fact that CAMA 2020 clearly defines the roles of the partners, there could still be an issue of limited partners who may want to interfere in the activities of the general partners who are saddled with day to day running of the business because everyone might want to contribute their quota
Risk of Dissolution:
The deaths of key partners may lead to the end of the business. Another issue is the bankruptcy of a partner may lead to the dissolution of the business.
The growth of the partnership will be limited to the managerial ability of the partners.
Distrust on the part of limited partners may frustrate the general partners thereby leading to disagreement, this may hinder the growth of the business.
While the limited partner waits to share in the income, the recklessness of the general partner can in the long run lead to the collapse of the effect or affect profit.
Before forming a partnership business, ensure that partners who have agreed to commit their resources and share the same goal with you.