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Legal Infrastructure for Business: Partnership

 

A partnership is a business structure set up by two or more partners who put together financial resources, skills and time and become joint owners, sharing profits and losses.

Partnerships are formed through an agreement that is usually written (this is what is recommended as well), but sometimes verbal as well.

There are eight types of partners and the value they bring to the business differs.

Types of Partners:

1. Active partners– these are those shareholders and co-owners who are active in the functioning of the business.

2. Secret partners– these partners are not revealed to the general public although they have the same kind of responsibilities and are involved in the overall running of business.

3. Silent partners– these people are partners only in that they provide capital and resources for the business and so are eligible for a share in the profit as well. Other than this they have no part to play in the business and do not participate in its management and running.

4. Sleeping partners– these people share in the liabilities and debts but are not known as partners to the public and also have no managerial role to play in the workings of the business.

5. Nominal partners– they do not share in the profit or loss of the business but generally are invested in the business’s success. They lend their name to the business for networking and recognition.

6. Senior partner– this is someone whose investment in the business surpasses other partners and so has a bigger share in the profit/loss of the business as well. A senior partner will usually be someone with experience and will participate in the management of the business.

7. Junior partner– this is someone who has invested less than the senior partner and so consequently has less of a share in the profit/loss as well.

8. Minor/Juvenile partner– children can legally not be made part of a business where operations are concerned. However, a minor can be made partner with consensus between other partners and permission of the legal guardian. This minor/juvenile partner then has a share in the profits made by the business.
Let’s take a look at the pros and cons of this kind of business structuring.

Pros of Business Partnerships:

1. Efficient Management

With multiple people dedicated to making a business work and with direct stakes in the success or failure of the business, there are more ideas and a diverse skill set available.

 

No one person is good at everything. Therefore, when multiple brains come together for the achievement of a common goal, the results have a better chance of being favourable.
Multiple types of experiences and expertise come together and problem solving and work distribution can be done more efficiently.

2. Greater capital at the business’s disposal

More people coming together and pooling their resources means that there is more capital at the disposal of the business and also more liquidity.
It becomes easier to manage money and make emergency payments when there is more than one source available (unlike sole proprietorship business).
In partnerships should an amount of money be required that no existing partner can provide, a new partner, one who can supply that capital, can be added as well. Hence, there is more option and one person does not have to carry the loan alone.

3. Greater borrowing capacity

Each partner has their own assets and properties to back them up. When a number of such people come together, that business is considered a strong one and they are more likely to secure loans.

 

Furthermore, paying back those loans and debts also becomes less stressful because there is a more diverse set of assets and resources at the business’s disposal.

Cons of Business Partnerships:

1. Shared control

Having multiple stakeholders can mean disagreements regarding big decisions. Since everyone has their money and reputation at stake, there are multiple opinions on all the big moves.
This can lead to disagreements and, as it happens often, even falling out among partners.
Decisions on loans, expansion, products etc. often tend to get fairly complicated.

2. Complicated withdrawal process

At any given time, should a partner wish to withdraw from the business, they cannot do so and transfer their shares to another without the agreement of all the rest. This means that until everyone agrees to let them withdraw and someone agrees to buy their shares for them, that individual cannot leave the business.

 

This type of company offers shares to the public with limited liability. It is often started through meeting the minimum capital requirements of the Company Act. When you hear about people buying shares in companies, they are basically buying them in these public limited companies.

These are the four types in a nutshell.

For a detailed explanation of the individual types take a look at the following blogs and you will find one blog per topic that should hopefully make all aspects of that structure clear.

We try to keep these blogs as accessible as possible, but if you have questions about anything discussed here, please feel free to ask!

  A partnership is a business structure set up by two or more partners who put together financial resources, skills …

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