Form of Business Organization

PARTNERSHIP

A type of business organization in which two or more individuals pool money, skills, and other resources, and share profit and loss in accordance with terms of the partnership agreement. In absence of such agreement, a partnership is assumed to exit where the participants in an enterprise agree to share the associated risks and rewards proportionately .

Advantages of Partnership

Capital – Due to the nature of the business, the partners will fund the business with start up capital. This means that the more partners there are, the more money they can put into the business, which will allow better flexibility and more potential for growth. It also means more potential profit, which will be equally shared between the partners.

Flexibility – A partnership is generally easier to form, manage and run. They are less strictly regulated than companies, in terms of the laws governing the formation and because the partners have the only say in the way the business is run (without interference by shareholders) they are far more flexible in terms of management, as long as all the partners can agree.

Shared Responsibility – Partners can share the responsibility of the running of the business. This will allow them to make the most of their abilities. Rather than splitting the management and taking an equal share of each business task, they might well split the work according to their skills. So if one partner is good with figures, they might deal with the book keeping and accounts, while the other partner might have a flare for sales and therefore be the main sales person for the business.

Decision Making – Partners share the decision making and can help each other out when they need to. More partners mean more brains that can be picked for business ideas and for the solving of problems that the business encounters.

Disadvantages of Partnership

Disagreements – One of the most obvious disadvantages of partnership is the danger of disagreements between the partners. Obviously people are likely to have different ideas on how the business should be run, who should be doing what and what the best interests of the business are. This can lead to disagreements and disputes which might not only harm the business, but also the relationship of those involved. This is why it is always advisable to draft a deed of partnership during the formation period to ensure that everyone is aware of what procedures will be in place in case of disagreement and what will happen if the partnership is dissolved.

Agreement – Because the partnership is jointly run, it is necessary that all the partners agree with things that are being done. This means that in some circumstances there are less freedoms with regards to the management of the business. Especially compared to sole traders. However, there is still more flexibility than with limited companies where the directors must bow to the will of the members (shareholders).

Liability – Ordinary Partnerships are subject to unlimited liability, which means that each of the partners shares the liability and financial risks of the business. This can be off putting for some people. This can be countered by the formation of a limited liability partnership, which benefits from the advantages of limited liability granted to limited companies, while still taking advantage of the flexibility of the partnership model.

Taxation – One of the major disadvantages of partnership, taxation laws mean that partners must pay tax in the same way as sole traders, each submitting a Self-Assessment tax return each year. They are also required to register as self-employed with HM Revenue & Customs. The current laws mean that if the partnerships (and the partners) bring in more than a certain level, then they are subject to greater levels of personal taxation than they would be in a limited company. This means that in most cases setting up a limited company would be more beneficial as the taxation laws are more favorable.

Profit Sharing – Partners share the profits equally. This can lead to inconsistency where one or more partners aren’t putting a fair share of effort into the running or management of the business, but still reaping the rewards.

KINDS OF PARTNERS

1. CAPITALIST - one who contributes money or property to the common fund2. INDUSTRIAL - one who contributes only his industry or personal service3. GENERAL - one whose liability to 3rd persons extends to his separate property4. LIMITED - one whose liability to 3rd persons is limited to his capital contribution5. MANAGING - one who manages the affairs or business of the partnership6. LIQUIDATING - one who takes charge of the winding up of partnership affairs upon dissolution7. PARTNERS BY ESTOPPEL - one who is not really a partner but is liable as a partner for the protection of innocent 3rd persons8. CONTINUING PARTNER - one who continues the business of a partnership after it has been dissolved by reason of the admission of a new partner, retirement, death or expulsion of one of the partners9. SURVIVING PARTNER - one who remains after a partnership has been dissolved by death of any partner10. SUBPARTNER - one who is not a member of the partnership who contracts with a partner with reference to the latter's share in the partnership11. OSTENSIBLE - one who takes active part and known to the public as partner in the business12. SECRET - one who takes active part in the business but is not known to be a partner by

outside parties13. SILENT - one who does not take any active part in the business although he may be known to be a partner14. DORMANT - one who does not take active part in the business and is not known or held out as a partner

RELATIONS CREATED BY A CONTRACT OF PARTNERSHIP

1. Relations among the partners themselves2. Relations of the partners with the partnership3. Relations of the partnership with 3rd persons with whom it contracts4. Relations of the partners with such 3rd persons

Kind of Partnership

1. As to Activity

Trading partnership – one whose main activity is the manufacture and sale or the purchase and sale of goods.

Non-Trading partnership – one which is organized for the purpose of rendering services

2. As to Object

Universal partnership of all present property – one in which the partners contribute at the time of the constitution of the partnership, all the properties which actually belong to each of them.

Universal partnership of all profit – one which comprises all that the partners may acquire by their industry or work during the existence of the partnership and the usufruct of movable or immovable property.

Particular partnership – one which has for its object determine things, their use or fruits or a specific undertaking or the existence of a profession or vocation.

3. As to liability of partners

General co-partnership – one consisting of general partners who are liable prorata and sometimes solidarily with their separate property for partnership liabilities.

Limited partnership – one formed by two or more persons having one or more general partners and one or more limited partners, who as such are not bound by the obligations of the partnership. The word “limited” or ltd” is added to the name of the partnership to inform the public that it is a limited partnership.

4. As to Duration

Partnership at will – one for which no term is specified and is not formed for a particular undertaking or venture and which may be terminated any time by mutual agreement of the partners or the will of one alone.

Partnership with a fixed term – one in which the term or period for which the partnership is to exist is agreed upon. It may also refer to a partnership formed for a particular undertaking and upon the expiration of that term or completion of a particular undertaking  the  partnership is dissolved.

5. As to representative to others

Ordinary partnership – one which actually exists among the partners and also as to third persons.

Partnership by estoppel – one in which in reality is not a partnership but it is considered as one only in relation to those who by their conduct or omission are precluded to deny or disprove the partnership’s existence.

6. As to legality of existence

De jure partnership – one which has complied with all the requirements for its stablishment.

De facto partnership – one which failed to comply with one or more of the legal requirements for its establishments.

7. As to Publicity

Secret partnership – one wherein the existence of certain persons as partners is not made known to the public by any of the partners.

Open partnership – one wherein the existence of certain persons as partners is made known to the public by the members of the firm.

Sources of Finance for a Partnership

Personal Savings

One of the primary sources for funding a partnership is the individual savings of each partner. Depending on the partnership agreement, equal partners may contribute an equal amount of their personal funds into starting and running the business. Other partnership agreements make each partner responsible for a certain percentage, so one partner may contribute 20 percent of the funds required to start and run the partnership, while another partner may only be responsible for 10 percent of the money needed.

Small Business Loan

A partnership may also approach a bank or other financial institution to apply for a small business loan. Partners may wish to start by approaching banks where they have personal accounts because it can be easier to obtain a business loan with a bank where you have an existing relationship. When a partnership obtains a business loan, each partner is responsible for the repayment of the loan, according to the percentage of responsibility in the partnership agreement. For example, if a partner has 20 percent ownership in the partnership, then this partner is responsible for repaying 20 percent of the loan taken out for the businesses.

Small Business Line of Credit

A partnership is also eligible to apply for a business line of credit. The same repayment options apply to a line of credit that applies to a small business loan. The difference between the two is the line of credit allows the partnership to access money as needed rather than in a lump sum, which is how the business loan funds.

Additional Partners

For existing partnerships looking to grow or expand the business, another source of funding may be to bring in additional partners into the business. These partners can be active partners or silent partners. Active partners can invest their own money in the business and have a say in the operation of the business. Silent partners are similar to investors, where they invest their money in the partnership, but they are not involved in the daily operations.