Forms of Business Units 2
i) Temporary partnership -These are partnerships that are formed to carry out a specific task for a specific time after which the business automatically dissolves.ii) Permanent partnerships
- These are partnerships formed to operate indefinitely.
They are also called a partnership at will.
c) According to their Activity- Under this mode of classification,partnerships can either be:i) Trading partnerships
This is a partnership whose main activity is processing, manufacturing, construction or purchase and sale of goods.ii) Non – trading partnerships
This is a partnership whose main activity is to offer services such as legal,medical or accounting services to members of the public. Types of partnersPartners may be classified according to;
i) Role played by the partnersa) Active partner
He is also known as acting partner as he plays an active part in the day-to-day running of the business.b) Sleeping/dormant partner:
He does not participate in the management of
the partnership business.
Although he invests his capital in the partnership,his profit is lower as he is not active.
He is also referred to as passive or silent partner.
ii) Liabilities of the partners for the business debts:a) General partner:
He/she has unlimited liabilities.b) Limited partner:
He/she has limited liabilitiesiii) Ages of partnersa) Major partner:
This is a partner who is 18 years and above. He is responsible for all debts of the business.b) Minor partner:
This is a partner who has not attained the age of 18 years but has been admitted with the consent of other partners.
Once he reaches 18 years, he then decides if he wants to be a partner or not.
Before he attains the age of 18, he takes part in the sharing of profits but does not take part in the management of the business.iv) Capital contributiona) Nominal/Quasi partner:
He does not contribute capital but allows the business to use his/ her name as a partner; for the purpose of influencing
customers or for prestige.
-He/she can also be a person who was once a partner and has retired in form of a loan. This loan carries interest at an agreed rate.
-The quasi partner shares the profit of the business as a reward for using his/her name.b) Real partner:
He/she is one who contributes capital to the business.
-Other types of partners include secret partners, retiring partners and incoming partnersi) A secret partner:
is one who actively participates in the management of the firm but is not disclosed to the public. In most cases secret partners are also limited partners.ii) A retiring partner:
Also known as outgoing partner is one who is leaving a partnership
-He may retire with the consent of all the other partners or according to a previous agreement.iii) Incoming partner:
Is one who is admitted to an existing partnership. Formation
- People who want to form a partnership must come together and agree on how the proposed business will be run to avoid future misunderstanding.
- The agreement can either be oral (by use of mouth) or within down. A written agreement
is called a partnership deed.
- The contents of the partnership deed vary from one partnership to another depending on the nature of the business, but generally it contains:
a) Name, location and address of the business
b) Name, address and occupation of the partners
c) The purpose of the business
d) Capital to be contributed by cash partner
e) Rate of interest on capital
f) Drawings by partners and rate of interest on drawings
g) Salaries and commissions to partners
h) Rate of interests on loans from partners to the business
i) Procedures of dissolving the partnership
j) Profit and loss sharing ratio
k) How to admit a new partner
l) What to do when a partner retires dies or is expelled
m)The rights to inspect books of accounts
n) Who has the authority to act on behalf of other partners.
Once the partnership deed is ready, the business may be registered with the registrar of firms on payment of a registration fee.
In case a partnership deed is not drawn, the provisions of partnership act of 1963 (Kenya) applies. The act contains the following rights and duties of a partner:
i) All partners are entitled to equal contribution of capital
ii) No salary is to be allowed to any partner
iii) No interest is to be allowed on capital
iv) No interest is to be charged on drawings
v) All profits and losses are to be shared equally
vi) Every partner has the right to inspect the books of accounts
vii) Every partner has the right to take part in decision making
viii) Interest is to paid on any loans borrowed by partners (The % rate varies
from one country to another)
ix) During dissolution the debts from outside people are paid first then loans from partners and lastly partners capital.
x) No partner should carry out a competing business
xi) Any change in business such as admission of new partners must be through the agreement of all existing partners.
xii) Compensation must be given to a partner who incurs any loss when
executing the duties of the business.Sources of capital
i) Partners contribution
ii) Loans from banks and other financial institutions
iii) Getting items on hire purchase
iv) Trade credit
v) Ploughing back profit
vi) Leasing and renting. Advantages of partnership
i) Unlike sole proprietorship, partnership can raise more capital.
ii) Work is distributed among the partners. This reduces the workload for each partner
iii) Varied professional/skilled labour; various partners are professionals in various different areas leading to specialization
iv) They can undertake any form of business agreed upon by all the partners
v) There are few legal requirements in the formation of a partnership compared to a limited liability company.
vi) Losses and liabilities are shared among partners
vii) Continuity of business is not affected by death or absence of a partner as
would be in the case of a sole proprietorship
viii) Members of partnership enjoy more free days and are flexible than owners of a company
ix) A Partnership just like sole proprietorship is exempted from payment of certain taxes paid by large business organizations.Disadvantages of partnership
i) A mistake made by one of the partners may result in losses which are shared by all the partners
ii) Continued disagreement among the partners can lead to termination of the partnership
iii) Decision-making is slow since all the partners must agree
iv) A partnership that relies heavily on one partner may be adversely affected on retirement or death of the partner
v) A hard working partner may not be rewarded in proportion to his/her effort because the profits are shared among all the partners
vi) There is sharing of profits by the partners hence less is received by each partner
vii) Few sources of capital, due to uncertainty in the continuity of the business few financial institutions will be willing to give long-term loans to the firm.Dissolution of partnershipA partnership may be dissolved under any of the following circumstances:
i) A mutual agreement by all the partners to dissolve the business
ii) Death insanity or bankrupting of a partner
iii) A temporary partnership on completion of the
intended purpose or at the end of the agreed time.
iv) A court order to dissolve the partnership
v) Written request for dissolution by a partner
vi) If the business engages in unlawful practices
vii) Retirement or admission of a new partner may lead to a permanent or temporary dissolution
viii) Continued disagreements among the partners Incorporated Forms of Business Units
These are businesses that have separate legal entities from that of their owners.
- A co-operative society is a form of business organization that is owned by and run for the economic welfare of its members
- It is a body of persons who have joined together to do collectively what they were previously doing individually for mutual benefit.
Example In Kenya the co-operative movement was started by white settlers in 1908 to market their agricultural produce. In this case, they knew that they could sell their produce better if they were as a group and not alone Forms of Business Units page 1
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