A partnership is more than just a legal contract between persons carrying on a joint business venture. These tailored business relationships are based on shared values and interests.
A partnership is a business framework, where 2 or more people carry on business together under the same business name. The result is a performance greater than each partner would have achieved individually At its most basic level a partnership requires no formalities or registration and is the simplest manner in which to carry on a business.
Are you considering a partnership?
Our friends at Milton and Cross Solicitors are experienced in advising individuals and corporates. They can help you structure an effective partnership, while limiting your legal exposure.
We generally categorise Partnerships are into the following classes:
- General Partnerships
- Limited Partnerships
- Joint ventures
In a general partnership (GP), each partner shares equally in the workload, liability, and profits generated and paid out to the partners. All partners are actively involved in the business’s operations. Each partner has an equal right to participate in the management and control of the partnership business, and is jointly and severally liable for the partnership’s liabilities
GP’s are treated as being transparent for tax purposes, meaning the activities of the partnership are treated as carried on by the individual partners and not by the partnership as a body. The partners are taxed individually on their share of the profits or losses.
A GP is automatically dissolved on the death or bankruptcy of any partner.
A Limited Partnership is similar in many respects to a GP. However, unlike a GP, a Limited Partnership has one or more partners that cannot participate in the management and control of the partnership’s business and that (generally) have limited liability in respect of the debts and obligations of the partnership (a “Limited Partner”).
Each Limited Partnership must also have at least one partner that has unlimited liability for the partnership’s debts and obligations and responsibility for most of the management of the partnership’s business (a “General Partner”). A General Partner can be either an individual, a corporation or in some jurisdictions another partnership.
A joint venture occurs when two or more organizations join hands together for creating synergy and gain a mutual competitive advantage. Many local companies undergo joint ventures withforeign companies. This results in technological advantages or improved geographic reach.
Joint Ventures are best when multiple partners come together to execute short-term projects. Where the venture performs well, it continues as a general partnership. Otherwise, the partners can close the venture.
Laws Governing Partnerships in Nigeria.
Businesses have used partnerships for many centuries. They were initially governed by common law rules that evolved to regulate both the dealings of the partnership with third parties, and the dealings of the partners with one another. These rules were largely codified in England by the Partnership Act 1890 (the “1890 Act”).
The common law rules encapsulated by the 1890 Act form the basis of the partnership laws in most common law jurisdictions, including Nigeria. The Corporate Affairs Commission implements the provisions of the Act.
A partnership does not constitute a legal entity. Since it does not have a legal personality, it cannot separate itself from its partners in its relations with third parties. In other words, ordinary partnerships cannot acquire rights and undertake obligations themselves separately from their partners. Thus, the firm cannot stand as a plaintiff or defendant in a lawsuit.
The parties may however restrict or predetermine their individual liabilities by signing an agreement. This clarifies each partner’s degree of participation, as well as their individual liabilities.
An evaluation of Partnership as a Business model
There are several advantages of choosing to structure a business as a partnership. These include:
- It is Fairly easy to set up and maintain over time
- Partners can pool their resources to fund the company’s start-up
- Partners can share the workload and the rewards of the business’s success
- Key employees have the potential to one day become a partner in the business.
Despite being a convenient way to do business, it brings some challenges.
- it does not really protect the partners in the event of any business setback. This is because liabilities flow through the entity to the partners in their individual capacities.
- Differences of opinion could threaten the business.
- If the payout is not in sync with each partner’s contribution to the company, disagreements can erupt.
- Unlike corporations, which help to shield owners from liability, partnerships have both joint and individual liability. That is, all partners are liable for their own actions on behalf of the company as well as the actions of the other partners.