January 29, 2022


Accounting + Finance Blog

Classification of business: Partnership

Classification of business: Partnership

Earlier, we have discussed sole proprietorship as a class of business. Another class of business is a partnership. Here, many people decided to come together to establish a business. This may be as a result of a lack of capital and technical skills.

In this article, we will define the partnership business and explain the definition in detail. In the next two articles, the types of partnerships and partners will be explained as well as their source of capital. Let’s begin!

Definition of the partnership business

A partnership is a relationship that subsists between two or more persons, carrying on business together with the view of making a profit.

It can also be defined as a business organization formed by a minimum of two and a maximum of 20 persons running a business together with the primary goal of profit-making.

Key Explanations

A partnership is a business. People going into partnership do so because they want to run a business and not a charity.

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It is about relationships. A husband and his wife can form a partnership business. Brothers and sisters can as well form this kind of business. Friends can come together to form a partnership.

The minimum number of persons to form a partnership business is two persons. The legal maximum is 20 persons. However, if the business is a bank, then the maximum is 10 persons.

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Skill limitation is one reason why a group of people runs a partnership business. For example, a law firm is usually run as a partnership business. One partner may specialize in business law while the other may specialize in international law.

The goal of the partners is to make a profit. This is the primary reason for owning and managing a business. Profit-making objectives have driven many businesses and it is what makes businesses survive for a long period of time.

The Good Side of the Partnership business

More cash flow. A partnership is managed by a minimum of two persons, therefore, when these two persons support the business with their personal fund, there will be enough cash flow for the business to continue until it starts making profits.

Failure will be minimized. Another good side of a partnership firm is the reduction of risk of failure. As more people run the business, each of the partners will support themselves. If one feels like quoting, the other partners may be of encouragement to continue.

Variety of skill sets. Each partner has their skill set. One may be specialized in accounting, thereby preparing the books of account for the business. The other may be specialized in law, this will help fight legal cases and run the business to avoid illegality.

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While the third partner may be good at marketing the firm product. A fourth partner may be wealth and provide the cash needed to continue running the business and so on.

Better decisions. As more than one person will come together to make a decision, there are high chances of making better decisions.

The Bad Side of Partnership

Slow decision making. When there is an issue regarding a particular policy of the business, a single pardecision-makinge the decision to adjust the policy. This will make decision making slow. The partners have to sit together to make the decision slow.

Fraud by a partner. A partner may steal the money earned in the partnership business. This will bring the partnership business to an end. And may result in mistrust. The remaining partner may not trust each other making it difficult to continue.

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A partner error can affect all the partners. An error of one partner affects all other partners. If a partner successfully makes a business deal with a client. Assuming, later on, it was found out that the client engaged in illegal business. All the partners will be affected by that wrong business deal.

To wrap it up, the partnership business is run by two to 20 persons. The main goal is profit. But managing the business together makes for beer decision making and easy survival. However, the danger may be a fraud and a slow decision-making process.