iv. Partnership According to Partnership Act 1934 seetion 3(1) the law defines partnership as “The relationship that subsists between persons carrying on a business in common with a view of making a profit “A partnership is thus an extension of a sole proprietorship and in fact it necessitated by the fact. that sole trader for various reasons is notin position to carry out his business efficiently and thus profitably all alone. Thus he has to team up with other individuals in order to realize such objectives i.e. profitability and efficiency. Such individual will have in some cases known each other for some time and will agree to pool their financial and managerial resources with the aim of making a profit, which they will share on the agreed ration. FORMATION OF A PARTNERSHIP A partnership is a business arrangement in which two or more people own an entity, and Personally share in its profits, losses, and risks. The exact form of partnership used can give ‘some protection to the partners. A partnership can be formed by a verbal agreement, with no documentation of the arrangement at all. During formation partnership agreement should at least cover the following topics: i. The rights and responsibilities of each partner Whether partners are designated as general partners or limited pariners, since this impacts their responsibility for the liabilities of the partnership iii, The proportions of partnership gains and losses to be apportioned to each partner iv. Procedures related to the withdrawal of funds from the partnership, as well as any limitations on these withdrawals 93v. How key decisions are to be resolved vi. Provisions regarding how to add and terminate partners vii, What happens to partnership interests iff partner dies viii, What steps fo follow to dissolve the partnership ix. The proportions of residual cash paid out to the partners in a liquid: Other actions include: + Register the business name + Obtain an employer identification number Obtain any licenses required by governments where the partnership plans to operate, such as a sales tax license + Open a bank account in the name of the partnership File an annual informational return with the Internal Revenue Service iv. Sleeping Partner (Silent or Dormant Partner) ‘A partner who does not take an active part in the running of the partnership business and as such remains in the background of such a business. In most cases, such a partner may either be employed somewhere else or may be in other business which cannot allow such a partner to take active part in the running of such a business. Nevertheless such a partner will have contributed to the capital of the partnership business and will thus share in the profits although at a lower proportion in most cases. ARTICLES PARTNERSHIP/ PARTNERSHIP DEED Although it’s not a statutory requirement that a partnership business be formed by a written agreement, it’s usual for big partnership business, in particular those involving huge capital of. oe eae 94commitments to write articles of partnership also known as Partnership deed to safeguard the interest of each partner in the business and this will constitute a legal contract among the ‘partners, The articles of partnership must contain eleven clauses. CONTENT OF A PARTNERSHIP DEED ‘The nature of the business to be carried out The capital and property ofthe firm and respective capital contributions of each partner ‘The sharing of profits and losses by the partners ‘The rules as tothe rte of interest on capital and drawings of partners The provision for proper accounts and their audit The powers of each partner The ground for dissolution of the partnership. ‘The method of determining the value of goodwill on retirement or death of a partner ‘The method of determining the amount payable to an outgoing or a deceased partner ‘The power of expulsion of a partner The arbitration clauses i.e. how the disputes amongst partners should be resolved. DISSOLVING PARTNERSHIP Although the partnership deed or articles of partnership contain the regulations of termination/dissolving partnership nevertheless in the absence of or subject to , these regulations » partnership may be dissolved in the following ways: When the fixed time, if any, as stated inthe articles of partnership. Or partnership agreement or deed, has expired but it can continue as a partnership at will If the partnership was specifically entered into for a given venture, transaction, or undertaking, the completion or achievement of such will automatically dissolve the partnership. If the partnership is a partnership “at will” ( ie for no fixed period) it ean be dissolved by any partner giving notice to the remaining partner or partners of his intention to dissolve the partnership 95av. By mutual consent of all partners y. Bybankruptcy or death of any given partner J vic Hany one partner allows his share in the partnership to be charged or attached under court order for private debts vii, any event occurs which makes the partnership business illegal to carry on. This applied, irrespective of the contents of the partnership agreement or deed which will in this case be “frustrated” AUTOMATIC OR COMPULSORY DISSOLUTION OF A PARTNERSHIP Section 39 of the partnership Act lays down the following grounds under which a partnership will be compulsory dissolved by the courts of law: - 1. Ifanyone of the partners becomes insane or of a permanent unsound mind. 2. Ifany one partner becomes permanently incapable of performing his partnership duties, e.g, through incapacitation due to accident or any other disability 3, Where a partner has acted in a manner which is prejudicial to the carrying of the firms business and his discontinued association with the partnership business would bring the name of the firm into disrepute 4, Where a partner has been found to be guilty ofa breach of the partnership contract, ‘5. Where the firm has been operating at a loss. 6. When any circumstance arises which renders it fair and equitable that the partnership business be dissolved, e.g. a situation of mutual hostility is incompatible partnership spirit. LIMITED PARTNERSHIP By virtue of the limited partnership act, the lities of certain specific partners may be limited to some extent. The provisions of this Act are as follows: - Nn 1. The number of partners in a limited partnership is restricted to twenty. 2. Ina limited partnership there must be one or more general partner who ar liable for all t the debts and other liabilities of the firm+, \waddition to the general partner or partners, there will be one or more limited partners. ‘\n the case limited partners are persons who at the time of commencement of the partnership business, contibuted money or property, taken at a certain value as capital , and are not liable for the debts and other liabilities of the firm beyond such amounts as they will have contributed. However, a limited partnership must be registered as such with the registrar of businesses and failure to do this will expose limited partners to unlimited liabilities as in the case with general partners .In all, the dissolution of the usual partnership business does not apply to limited partnership. Advantages 1. Usually the business can benefit from the talent of individual partners, which are pooled together to ensure utmost efficiency and a profitable business Since a partnership will be owned by a number of partners such can poll their savings together to boost the capital base of the partnership and thus enable it to undertake its financial operation Decision making process in a partnership business is done by unanimous stand of all the partners and this may lead to sound decisions. This will boost the profitability of partnership business, as it will ensure efficient and sound business policies and practices Partnership have high growth as opposed to sole proprietorships because not only will the business benefit from different managerial talents of individual partners but also the ambition of partners to make maximum profits from their ventures 5. Such businesses are usually able to raise more finances than sole traders due to the goodwill or financial influence of one or more of the partners, and this can enable the business to expand its operation and eam more profits for its partners Disadvantages 1. There is a likelihood that partners may not pool their talent equally and this may lead to apathy among partners who put in more effort in the running of their business than others 7yet may be sharing in profits in equal proportions: ‘his may frustrate active partners and be sharing in profits in equal proporti may ft ive pe ‘and yet may ‘and usually lead to dissolution in a number of partners 2, ‘There may be lack of mutual trust amongst partners in particular among silent partners i i artners, who will view active partners with suspicion. This may create discord among pé which may also lead to its dissolution In some cases partners may disagree over important policy matters and such disagreements may delay the decision making process of the business. This may interrupt the smooth running of the business, which may lead to reduced efficiency and thus low profitability Some of the active partners may use the partnership assets to achieve their personal gains at the expense of the interest of dormant or limited partner Partnership business may have a short life span in that it may be dissolved due to a number of factors e.g, death, disability and bankruptcy of a partner. Which may lower the ness from third Parties point of view e.g, lenders, investors ete who may be reluctant to commit their ‘money in such partnership at least in the long run ‘morale of partners. This may also reduce the goodwill of such a busi For an unlimited liability type of partnership the unsound actions or conduct of any one Partner can put th interests of other partners a stake and inthe extreme such actions may lead tothe dissolution of the partnership, thus making other Partners suffer for actions of one partner ¥. Sole proprietorship. business suffer serious losses resulting in inability to Pay its creditors, the sole trader will be called upon to make good the loss from his private resources, even to the extent of selling his “ery Personal belongings. This is no doubt an extreme, but the very fact that it may happen is 98Advantages 1 ‘Simple to start and dissolve since there are no legal formalities to undergo before he can start such a business. All that is required is to obtains a trading license allowing him to conduct such type of business He enjoys top secrets of his business success or failure and the secrecy is even more important in competitive market where the business will se different techniques to enable it to survive in the industry. Unfortunate some of these techniques may be ‘unethical e.g. production techniques, marketing, workers motivations ‘The profits made by sole traders will depend ‘upon the ability and handwork of the sole trader. This usually motivates the sole trader to work extra hard to earn himself maximum, profits, Since he runs the business himself, he will be able to supervise his employees more closely and also try to motivate them to work extra hard This in turn will enable him to boost his sales and thus profits He is also the sole decision maker in which case those situations calling for abrupt decisions making will suit him. This is very important in high risk areas where the owner has to make abrupt decisions to avert any impending catastrophe Due to the small size of the business the sole trader is in a better position to co-ordinate all activities in the business and avoids bureaucracy, which is associated with big business. A sole trader can therefore pu different talents where they suit best and this ‘may lead to a profitable sole proprietorship iemh = Due to the size of the business the owner can give his personal attention and touch to his customers, This means that a sole trader has to develop a good personality conducive to a good clientele relation and such will not only boost his goodwill but will also increase his profits The owner can change his business at any time to cater for changing needs such as in tastes, social change, or any other changes,. This means that he can even change the 5 location to look for an ideal one. 99Disadvantages \.. The economic life of a sole trade type of business is usually equal to the life of the sole Proprietor. This means that usually the death of the sole trader leads to the dissolution of the business either immediately or in the near future, The lack of continuity on the part of sole proprietorship means that such a business can not attract long term finances to finance its long term plans which limits the expansion and growth of such business - The sole proprietor has unlimited liability. This means that under situations where the Professional advice or they are ignorant ‘heir ability to run an efficient and profitable business + Since the traditional sources of finance of such bus; businesses and may reduce their level of profitability Usually the owners of such businesses may not have 100ising capital vie Methods of raising ca? to a wide range of finances from such sources as: a company that give shareholders the right to vote in the income in the form of dividends from the corporation's Joint stock companies are OPS 1. Ordinary share - shares o company’s meeting and also an profits, The number of ordinary shares an investor owns is proportional to the percentage of ownership he/she has in a company. >. Retained earnings. The portion of profits not distributed among the shareholders but retained and used in business is called retained earings. It is also referred to as ploughing back of profit. This is one of the important sources of internal financing used for fixed as well as working capital. 3. Preference share capital. Preference share is a share, which does not entitle the holder to the right to vote on a resolution or to any right to participate beyond a specific amount in any distribution whether by way of dividend, or on redemption, in a winding-up, or otherwise. Investors may subscribe for preference shares if they do not require voting rights in the company, but want the advantage of receiving fixed profits and are looking for a relatively more secure investment since preference shareholders are entitled to receive repayment of capital after creditors of the company in priority to ordinary shareholders. Debenture finance. Is an acknowledgment that the company has borrowed an amount of money from the public, which it promises to repay at a future date. Companies use debentures when they need to borrow the money at a fixed rate of interest for its expansion. Debenture holders are, therefore, creditors of the company. Secured and Unsecured, Registered and Bearer, Convertible and Non-Convertible, First and second are four types of Debentures 5, Loan of all terms from banks and other financ! stitutions 6. Hire purchase finance- Hire purchase (HP) or leasing isa type of asset finance that allows firms or individuals to possess and control an asset during an agreed term, while paying rent or instalments covering depreciation ofthe asset, and interest to cover capital cost, Asses ae defined as anything of monetary value thats owned by afin or an individual. Assets listed ona firm's balance sheet can include tangible tems such as 101ate, as well as intangible items such as property rights inventories, equipment and real es or goodwill : 1. Factoring, Ths a type of finance in which a business would sel its aecounts receivable (invoices) to a third party to meet its short-term liquidity needs. Under the transaction between both parties, the factor would pay the amount due on the invoices minus its commission or fees. The terms, as well as the nature of factoring, could differ from financial institution. The advance rate could vary from 80 per cent to about 90-95 per cent of the total invoice amount. Once the factor collects payments from the creditors, it Pays back the rest of the money after deducting its fee or commission. The only benefit of factoring is that a company doesn't have to wait for two or three months and can address its liquidity needs by approaching a financial institution. 8. Invoice discounting, Invoice discounting is a way to finance your business by using Unpaid invoices as collateral. Instead of waiting for clients to pay invoices, a lender will loan a percentage of your expected revenue upfront, Invoice discounting differs from invoice factoring because you are still responsible for chasing the invoice and making Sure it gets paid, whereas with invoice factoring, that process is typically handled for you. 9. Trade credits. This is an arrangement to buy goods and/or services on account without making immediate cash or cheque payments, 10. Lease finance, This is where the owner of an asset gives another person, the right to use that asset against periodical payments. The owner of the asset is known as lessor and the user is called lessee. The periodical payment made by the lessee to the lessor is known as lease rental. Under lease financing, lessee is given the right to use the asset but the ownership lies with the lessor and at the end of the lease contract, the asset is returned to the lessor or an option is given to the lessee either to purchase the asset or to renew the lease agreement. 11. Provision for depreciation- A depreciation provision allows a company to account for the gradual decline in the value of its fixed assets over time, thus allowing the company's financial statements to accurately reflect the current value of its investments in those assets. 10212. Provision for taxation- a tax Provision is the estimated amount of income tax that a company is legally expected to pay tothe IRS forthe current year.