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partnership and its importance

Updated on December 17, 2015

A partnership exit when two to twenty persons having similar economic interest come together to set up a business purposely to make profit. This form of business organization is very common.


  1. It is owned by two to twenty persons.
  2. Liability: The liabilities of the partners are limited.
  3. Sources of capital: From the contribution of the partners.
  4. Motive of formation is for profit making.
  5. Method of withdrawing capital or sharing profit. There must be approval by other partners laid down on their partnership deed.
  6. No board of directors. It has no board of directors and the managerial functions are performed by the members according to how it has been shared.


  1. ORDINARY PARTNERSHIP. In this, all partners have equal responsibility and bear all the risk of the business equally. All the partners have equal powers, unlimited liabilities take active part and profit is shared equally.
  2. LIMITED PARTNERSHIP. In this type of partnership, all the partners do not take equal part in the management of the business. The liability of the partners is limited to the capital they contributed. In adherence to the partnership law, one of the partners in a limited partnership is made the overall risk bearer or active partner and who has unlimited liability in the business.


  1. ACTIVE PARTNERS: As the name implies, this is the partner who takes active part in the formation, financing and management of the business. If it is agreed upon and written in their partnership deed, salary is paid to active partners who plays the role of a manager in the business.
  2. SLEEPING PARTNERS: This partner only contributes part of the capital used in the formation and running of the business but does not take part in the management and organization of the business. He takes part in the sharing of profits and loss of the business as specified in the partnership deed. This partner is not paid any salary as he does not take part in the organization and management of the business.
  3. NORMINAL OR PASSIVE PARTNERS: This partner exist only in the name or word because he contributes nothing but his name in the formation of the business. Partners of this nature are only men and women of substance whose names are greater than silver and Gold, men like Bill gates, Dangote, Stevekal, warren Buffett, brain Tracy. These people because they allowed their names to be used in forming the business share in the profits and liabilities of the business if the partnership deeds provide for that.


For the functioning of the partnership and for it to be effective and efficient, partners draft rules and regulations that will guide the business unit. These agreement, rules and regulations guiding the members of a partnership business are known as partnership deed. The deed contains some or all of the following:

  1. Name of partners.
  2. The name and nature of the business formed.
  3. The amount of capital contributed by each partner.
  4. The role of each partner in the business
  5. How profits and losses are to be shared.
  6. Whether or not salaries shall be paid to any or all the partners.
  7. How matters shall be determined either by majority vote or not.
  8. How long the business shall last.
  9. The right of partners in the business.
  10. Whether interest is allowed on capital and at what rate.

In the absence of partnership deed, the section 24 of compromise and allied matters decree part b states that

  1. Profits and loss shall be shared equally.
  2. Interest is allowed on capital at 3%.
  3. A partner who works in the business shall not be entitled to any remuneration.


  1. SUFFICIENT CAPITAL: Here, two to twenty people come together and pool their resources together in order to form the business.
  2. JOINT AND BETTER DECISION: It is been said that two good heads are better than one and the same applies in partnership where joint and better decisions are taken.
  3. INCREASE IN PRODUCTION: This is as a result of the fact that the business has more capital at hand.
  4. POSSIBILITY OF EXPANSION: More capital will make it possible for the firm to expand.
  5. CRESTION OF EMPLOYMENT OPPORTUNITIES: This is as a result of the volume of money that has been invested in the business which will require lots of hands to run.
  6. The exist of a member may not affect the business. This is because there are other partners who play active role in the smooth running of the business.
  7. It can withstand competition.


  1. SLOW DECISION MAKING: This is as a result of the fact that many people must be consulted before any decision or policy is taken or made.
  2. DECREASE IN PERSONAL INTEREST: This is an adherence to the saying that a goat owned by more than one person always sleeps outside.
  3. Exit of a partner may end the business. If the partner that left as a result of death or resignation happens to be an active partner especially in limited partnership, the business may collapse.
  4. Disagreement between partners may end the business.
  5. Introduction of a new partner may bring an end to the business.


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