What Is a Partnership? A Guide For Nigerians

A partnership is a kind of business where a formal agreement between two or more people is created. They agree to be co-owners, allocate responsibilities for running an organization, and share the profits or losses that the business creates. These qualities of partnerships are formalized in a document known as a partnership deed.

What Is a Partnership?

A partnership is a formal arrangement between two or more parties to manage and operate a business and share its earnings.

There are various sorts of partnership arrangements. In particular, in a partnership business, all partners share responsibilities and earnings equally, but in others, partners may have restricted liability. There is also the so-called “silent partner,” in which one party is not active in the day-to-day operations of the business.

How Does a Partnership Work?

Some partnerships contain individuals who work in the business, while other partnerships may have partners who have limited engagement and also limited liability for the business’s debts and any litigation filed against it.

A partnership, as opposed to a corporation, is not a separate entity from the individual owners. A partnership is similar to a sole proprietorship or independent contractor firm since, with both of those types of businesses, the business isn’t separate from the proprietors for liability purposes.

The partnership itself does not pay income tax. After profits or losses are shared among the partners, each partner pays income tax on their individual tax return.

Types of Partnerships

A partnership, broadly speaking, can be any project that several people undertake together. Governments, charitable organizations, businesses, or private individuals may be the parties. A partnership’s objectives can also differ greatly.

When discussing a for-profit endeavor run by two or more people, the three main types of partnerships are general partnerships, limited partnerships, and limited liability partnerships.

Limited Partnership

All partners in a general partnership are equally liable financially and legally. The debts that the partnership incurs are also personally liable to the individuals. Equal shares are also given to profits. In a partnership agreement, the mechanics of profit sharing will almost certainly be spelled out in writing.

An expulsion clause should be included when creating a partnership agreement, outlining the reasons for ejection.

Limited Liability Partnerships

Professionals, including accountants, attorneys, and architects, frequently choose limited liability partnerships (LLPs) as their business structure. Through this agreement, partners’ personal responsibility is restricted. As a result, other partners’ assets are not put at danger, for instance, if one partner is sued for malpractice.

There is also a distinction between equity partners and paid partners in some legal and accountancy firms. The latter has a higher level of seniority than associates but no ownership interest. Typically, they receive bonuses based on the company’s financial success.

Limited Liability Company

The blend of general partnerships and limited liability partnerships is a limited partnership. A general partner is required, who bears full personal responsibility for the partnership’s obligations. The responsibility of at least one silent partner is constrained to the amount invested. Typically, this silent partner stays out of the partnership’s management and day-to-day operations.

Finally, a brand-new and relatively unusual type is the strangely called limited liability limited partnership. This limited partnership offers its general partners a greater level of protection from liability.

Partners and Taxes

Although there is no official federal law that defines partnerships, the Internal Revenue Code (Chapter 1, Subchapter K) contains comprehensive guidelines on how they are taxed at the federal level.

Partnerships do not pay income tax. The partners, who are not regarded as employees for tax purposes, take on the tax liability.

The tax treatment of individuals in partnerships may be more favorable than if they had established a corporation. In other words, both corporate profits and dividends given to owners or shareholders are subject to taxation. Contrarily, profits from partnerships are not subject to this type of double taxation.

Benefits and Drawbacks of Partnerships

By enabling the partners to combine their resources and labor, a successful partnership can contribute to the success of a business. The majority of sole proprietors lack the time and resources necessary to manage a successful business on their own, and the startup phase can take up the most time.

By forming a partnership, the parties can take advantage of one another’s labor, resources, and skills. A clever partner can also offer new viewpoints and insights that will aid in the expansion of the company.

But joining a partnership also carries an additional risk. The partners may also take on liability for any losses or debts incurred by the other partners in addition to splitting profits. Additionally, there is a greater likelihood of mismanagement or conflict. It might be more difficult to come to an agreement on the sale of the company when the time comes to leave.

Pros

Partners can combine their resources, expertise, and labor.
Task sharing between partners promotes better work-life balance.
The firm can benefit from the experience and fresh viewpoints of more partners.

Cons

Additional liabilities or debts may be brought by partners.
There is a higher probability of dissension or poor management.
The business may become more challenging to sell.

Partnerships by Country

All common law countries, including the U.S., the U.K., and the Commonwealth nations, recognize the fundamental types of partnerships. The laws governing them vary, though, depending on the jurisdiction.

The U.S. has no federal statute that defines the various forms of partnership. However, every state except Louisiana has adopted one form or another of the Uniform Partnership Act; so, the laws are similar from state to state. The standard version of the act defines the partnership as a separate legal entity from its partners, which is a departure from the previous legal treatment of partnerships.

Other common law jurisdictions, including England, do not consider partnerships to be independent legal entities.

What is a Partnership Deed?

A partnership deed is a partnership agreement between the partners of the firm which describes the terms and circumstances of the partnership between the partners. The goal of a partnership deed is to provide a clear understanding of the roles of each partner, which ensures the smooth running of the activities of the firm.

The Partnership comes into the limelight when:

There is an outcome to the agreement among the partners.
The agreement can be in written or oral form.

The Partnership Act does not require that the agreement be in writing. Wherever it is in the form of writing, the document, which incorporates provisions of the agreement, is called ‘Partnership Deed.’

It usually comprises the attributes of all the characteristics influencing the association between the partners, counting the aim of trade, the contribution of capital by each partner, the ratio in which the gains and losses will be divided by the partners, and privilege and entitlement of partners to interest on loans, interest on capital, etc.

Registration of Partnership Deed

All the rights and duties of each member are recorded in a document called a Partnership Deed. This deed may be written or oral. However, an oral agreement is useless if the company has to deal with taxes. The following are some crucial elements of a partnership deed:

The company’s name.
Addresses and names of the partners.
Nature of the business.
The tenure or duration of the partnership.
The amount of capital to be contributed by each partner.
The drawings that can be made by each partner.
The interest to be allowed on capital and charged on drawings.
Rights of partners.
Duties of partners.
Remuneration to partners.
The method utilized for calculating goodwill.
Ratio of sharing profits and losses

Contents of the Partnership Deed

All of the clauses and legal points of the partnership deed are included when creating the document. The essential rules for future endeavors are also included in this deed, which can be cited as proof during disputes or legal proceedings. The following should be included in a general partnership deed.

All partners will decide on the firm’s name.
Names and contact information for each firm partner.
the start date of the company.
Existence of the company.
capital contribution made by each partner.
Ratio of how partners split profits.
duties, responsibilities, and authority of each firm partner.
The money owed to partners in the form of salary and, if applicable, commission.
the procedure for accepting or leaving a partner.
The method utilized for calculating goodwill.
The process that must be followed when a partner disputes something.
What to do if one of the partners becomes insolvent.
Account settlement procedures in the event of a firm’s demise.

The Value of a Partnership Deed

Here are a few significant benefits of a well-written deed:

It oversees and manages the partners’ obligations, rights, and liabilities.
Prevents conflict between the partners.
Avoids uncertainty about the profit and loss sharing ratio among the partners.
Individual partner’s responsibilities are specified clearly.

The partnership deed also defines the remuneration or salary of the partners and working partners. However, interest is paid to each partner who has put capital into the business.

What Is a Partnership Agreement?

A partnership agreement is an internal business contract that sets certain business practices for the partners of a company. This contract helps create standards for how the partners will manage corporate obligations, ownership and investments, profits and losses, as well as company management. While the word partners normally refers to two people, in this context there’s no limit to how many partners can create a commercial partnership.

Partnership agreements go by several names, depending on the state and industry. You might know partnership agreements as:

Articles of Partnership
Agreement for a Business Partnership
Partnership Agreement creation
Agreement for Partnership Formation
Agreement for a General Partnership
Partnership Arrangement

In order to keep the business running smoothly, partnership agreements provide answers to “What happens if…” concerns before they arise in practice. The following are the three primary forms of partnership agreements:

General: All partners in a general partnership split assets, profits, and liabilities equally.
Limited: Limited partnerships safeguard members whose capital contributions are not equal. In this approach, the partner(s) who provide the most capital or assets gain the most profit and bear the greatest liability, compared to the partner(s) who contribute the least capital or assets, who also bear the least profit and liability.
Limited liability partnerships perform much the same tasks as general partnerships, with the exception that the partners are only subject to limited personal liability while still owning an equal stake in the business and its revenues.

Whether your partnership is general, limited, or limited liability, agreements help define limits and expectations.

Advantages Of A Partnership Agreement

For business owners who establish partnerships, there are numerous advantages. The following are a few of the most notable advantages:

#1. Business Outline

The agreement clearly lays out each aspect of the firm and specifies how the partners are to oversee it, which helps prevent confusion once the enterprise is up and running.

#2. Clearly defined roles

The partnership agreement outlines each partner’s personal obligations with regard to capital, earnings, losses, and liabilities, as well as management and control of the business.

#3. The type of mediation

A partnership agreement’s potential to prevent future disputes is its main advantage. All parties should be aware of their obligations, given that all expectations and responsibilities have been laid out.

Potential Disadvantages

You might not think it’s important to draft a partnership agreement when you first start your business because the allocation of tasks and resources among partners may appear straightforward. Unfortunately, without one, your company can experience problems down the road.

#1. Federal law

Different rules govern partnerships in each state. In the event of a partner’s death or another change to the partnership, state law will automatically control the future of your business if you don’t make an agreement, regardless of your intentions or wishes.

#2. Disputes

Future disputes involving how the company is run are possible. The business could suffer without documentation describing the objectives, obligations, and expectations of the partners.

#3. Tax repercussions

Without a detailed breakdown of each partner’s contributions in those limited or limited liability partnerships, the state may infer that each partner owns the same percentage of the business and tax them accordingly.

Components of A Partnership Agreement

Most partnership agreements have certain components in common. Make sure to include the following categories in your draft:

Name

Include your company’s name.

Purpose

What does your company do?

Partners’ details

Give the names and contact details of each partner.

Capital investments

Describe the capital each partner contributed (cash, assets, physical goods, property, etc.).

Possession stake

Give the exact share of the business that each partner holds.

Loss and profit allocation

Explain how the company will split revenue and the percentage of profit and loss allotted to each partner.

Administration and Voting

Define individual roles, clarify decision-making and voting procedures, and describe how the partners will run the business.

Changes to the partners

To add new partners, remove partners who want to leave, and remove partners who don’t want to leave. Establish particular rules.

Dissolution

Describe how you would liquidate the company and distribute any earnings in the event of a dissolution.

Elections for partnership taxes

A representative of the partnership should be in charge of all tax communications.

Death or impairment

Give specific guidelines for how, in the unlikely event of a partner’s demise or disability, their ownership in the company should be liquidated or dispersed.

When To Use A Partnership Agreement

Two or more parties who are forming a for-profit commercial arrangement use partnership contracts. A partnership agreement is almost generally created by the partners either before starting a business or shortly after doing so. Although it’s preferable to have the agreement established and signed prior to starting your firm, some partners draft partnership agreements after the fact to make sure everyone is aware of how the company functions.

Format Of A Partnership Agreement

When creating a partnership agreement, you have a variety of alternatives. You could begin by researching the state’s regulations through your Department of State because each state has its own laws governing formal business partnerships. Another choice is to look for templates that you can use to create your own partnership agreement by simply filling them out or using them as a reference. Finally, you can speak with a lawyer who focuses on contract law. Contract attorneys can assist you in drafting a unique partnership arrangement.

What Sets a Partnership Apart From Other Business Organizational Structures?

A firm that involves two or more people (the partners) is structured as a partnership. The terms and conditions of a business connection, including the division of ownership, responsibilities, and profits and losses, are outlined in a written contract (the partnership agreement) between all of the partners. In partnerships, a corporate relationship and obligation are outlined and explicitly defined.

However, unlike LLCs or companies, partners are personally liable for any partnership debts. As a result, creditors or other claims may pursue the personal assets of the partners. As a result, anyone looking to enter a partnership should be very picky about their partners.

What Are 5 Characteristics Of A Partnership?

Both parties must be able to communicate effectively, be reachable, and adaptable, and deliver mutually beneficial results. These characteristics are essential for making the most of your collaboration arrangements.

In Conclusion

A legal arrangement called a partnership enables two or more people to share ownership of a company. These partners split the costs, obligations, and potential losses as well as the ownership and profits. A well-planned partnership can increase a new company’s chances of success, whereas a poorly-planned one might lead to mismanagement and conflicts.