When two or more people join forces to own and run a business, their
business is known as a partnership and they are called partners. Partnerships
often occur in professional services such as doctors, solicitors etc.
Partnerships will either adopt the name of the partners or trade under
a suitable trading name.
As in the case of a sole trader the partnership has unlimited liability,
this means that each of the partners are liable for the whole of any
debt that the partnership incurs. This means that each of the partners
is liable for not only the business debts that they create but also
those of each and every person that is a partner in the partnership.
In the UK partnerships are controlled through the Partnership Act 1890. If the
partners do not draw up partnership agreement detailing the rights and
obligations of each of the partners, then the Partnership Act will be
used to determine the matter in the event of a dispute. In practice
partners will often draw up a partnership agreement. A partnership agreement
is a written document and will either be in the form of a Deed of Partnership
or Articles of Partnership. Both of these types of partnership agreement
will usually be constructed by a solicitor and cover the following;
Induction and retirement of partners
Voting rights of each partner
The amount of money each partner is investing in the business
How the profit will be distributed amongst the partners
The procedures that will be used to settle disputes/difference of
opinions between partners.
Advantages and Disadvantages of Partnerships
The advantages of a partnership over a sole trader is that resources,
whether money, expertise or skills is often greater than that of a sole
trader. This is because there is more than one person contributing to
the business. However as each of the partners will have their own opinion
there is a potential for disputes which could prove to be detrimental
to the business and the profits need to be split between each partner.