Partnerships

A partnership is a relationship that exists between two or more persons jointly carrying out a business with the objective of making a profit. Each of the persons is called a partner and the business is referred to as a firm.

A number of people work together and there is no separate identity of the partnership from individual partners.

Each partner contributes money, property and labour and in turn they share in the profits and losses of the business.

Partnership can be formed by agreement between the partners when they want to use their personal names to constitute the name of the firm. If the partners want to use a name different from their own, the firm’s name must be registered with the Registrar General’s office.

Partnership is either permanent or temporary. A permanent partnership is intended to continue indefinitely since the date of termination is not known at the time of formation. A temporary partnership is formed for either a specific purpose or period upon whose expiry is automatically dissolved.

Types of partnerships

They are of two types: General and Limited.

General partnership

All partners are required to have at least one general partner who will carry the burden of the financial liabilities of the entire organization.

Limited partnership

This requires that there must be at least one general partner and one or more limited

partners. Limited partners provide capital without assuming financial liability beyond the amount they have invested in the organization.

NOTE: Normally, a partnership can have a minimum of two and a maximum of twenty members.  In some instances, especially in firms which offer personal and professional services, the membership can go to a maximum of fifty provided each member is a professionally qualified person as in the case of a firm of practicing lawyers, engineers, accountants, etc.

The partnership terms are governed by the Kenya’s Partnership Act, 1963 or a

Deed of agreement. Where the Deed exists, it operates instead of the terms of the Act. The Deed of agreement defines the following terms and conditions under which the partnership will operate:

• Name and purpose of business.
• Location of business and commencing date.
• Name, address and occupation of each partner.
• Status or type or each partner e.g. limited, general, active, dormant, minor or quasi.
• Capital to be contribute and what ratios.
• Interest rate to be paid to capital (if any).
• Remuneration of partners.
• How profits and losses will be shared.
• Drawings allowable each year.
• Duties and rights of each partner
• Admission, withdrawal and expulsion of partners.

In the absence of a Deed of partnership, or in the event of an ambiguity in it, the provisions of Partnership Act will apply. The Major provisions of the Act are the following:

• Capital must be contributed equally and profit shared equally.
• No interest should be credited on capital.
• No interest should be charged on drawings.
• Each partner should taken an active part in management of partnership and no salaries should be payable.
• All decisions should be made on the basis of majority opinions.
• Major changes like change of purpose and introduction of new partners should be on the agreement of all partners.
• Books of account must be kept at the principal place of business.
• Loan advances by partners will be made at an interest rate stipulated in the partnership Act.
• How partners should be reimbursed if they incur liabilities on behalf of partnership.
• All partners have the right to inspect all books of accounts.
• The partners cannot carry out any competing business.
• On dissolution of a partnership settlement should be as follows:-
• Loan repayment
• Capital repayment
• Surplus repaid on equal profit sharing basis.

Types of Partners

General partner: Has unlimited liability for the firm’s debts.

Limited liability partner: Has limited liability in the partnership.

Active partner: This is a partner sharing in capital contribution, management and shares in the profit liabilities of the business. He may be given a fixed area of responsibility e. g. sales. He is disclosed to the public as being a partner.

Secret partner: A limited partner who actively participates in the management of the firm and is not disclosed to the public as being a partner.

Silent partner: Refers to a limited partner who does not participate actively in the management of the firm and is disclosed to the public as being a partner.

Nominal partner: Is not one of the owners or actual partners of the firm but allows his name to be identified with the business. He does contribute any capital or take any part in the management of the firm. He however becomes liable for the firm’s obligations in unlimited basis.  The nominal partner lends his name be used for by the business for a fee. The business benefits because it uses the partner’s name for promotional purposes. Such a partner must therefore be a well known person who can enhance firm’s prestige and reputation.

Quasi partner: Is one who is presented to the public as a partner although he contributes no capital and does not participate in the management of the firm. He may share the profits and liabilities of the firm.

Minor partner: This is a person serving as a partner while he is under the statutory majority age of eighteen years. As a minor, his liability is limited to his capital and on attaining the statutory majority age, he will rank as an active partner with unlimited liabilities.

 Advantages of Partnerships

Ease of formation: Formation is easy because all that is needed in a partnership is an agreement between partners (written or oral) therefore making it free from complicated legal requirements.

Additional sources of capital: Partners can sometimes raise more capital than a sole trader since ownership vests in a group of two or more (maximum twenty). It is also more creditworthy than a sole trader.

Broader management base: Each partner may have expertise in different functions of the firm such as finance and sales. This leads to increased performance and profitability. Decision making and consultations are shares for mutual benefits.

Ease of expansion: Expansion can be done very easily by increasing the size of partnership including addition of specialists’ skills.

Sharing losses and liabilities: Liabilities are better spread to a number of persons thus reducing the burden on any one person. This encourages more people to join partnerships because the risks are less than in sole proprietorship.

Duration: Partnerships have longer durations than sole proprietorship because death or retirement of one partner cannot interrupt the partnership where the partnership has more than two partners and also where provisions have been made to perpetuate the partnership.

Disadvantages of partnership

Unlimited liability: This means that if assets of the partnership are not sufficient to pay debts, the partners are obliged to pay from their personal resources.

Difficulty in making decisions: Authority is divided and decisions may be difficult to reach due to consultations and this will lead to lose of opportunities.

Lack of continuity: It has a limited and uncertain life. It can be terminated when partners disagree or one dies or it is incapacitated.

Sharing of profits: This leads to minimization in direct benefits accruing from personal efforts especially where some partners may be contributing more than others.

Frozen investment: It is difficult for a partner to withdraw his investments and this leads to dissatisfaction and lack of commitment.

Limited access to capital: They have difficulties in obtaining large sums of capital especially long term financing leading to poor development of projects.

Dissolution of Partnership

A partnership may be dissolved in the event of the following circumstances:

• If a temporary partnership (joint venture) at the time of specified period or on completion of the purposes of the enterprise.
• If a partner notifies the other partner in writing of his intension to dissolve the partnership.
• If a partner suffers mental ailments, is declared bankrupt or dies.
• If the business becomes unlawful (a law is introduced banning the activities)

A court can dissolve a partnership on application from a partner or any interested party.  If a partner acts contrary to the deed and damages interests of the firm, where a partnership cannot run at a profit, where the prevailing circumstances make it only fair and just to dissolve the partnership.