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Formation of partnership:
1. Definition
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A partnership is a formal arrangement by two or more parties to manage and
operate a business and share its profits.
2. Classification
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General partnership: A general partnership is the most common type of partnership.
It refers to a relationship in which all partners contribute to the day-to-day
management of the business. Each partner will have the authority to make business
decisions and even legally bind the company in contracts.
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Limited Partnership: is a relationship where one or more partners are not involved in
the day-to-day management of the business.
 A limited partner(s) sometimes known as a “silent partner,” will serve solely as an
investor in the business, with the funds that they contribute being the extent of their
liability. However, since the limited partner does not have decision-making power
in the company, withdrawing funds – even just the amount they’ve already contributed
– cannot be done without the approval of a general partner.
 At least one general partner mans the day-to-day operations of the business. A
general partner may invest money into the company. However, a general partner may
also be personally liable for the debts of the company, while the limited partner is
not.
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A limited liability partnership (LLP) limits individual responsibility for wrongful acts
of other partners and personal liability for the business’ debts. This particular
partnership structure is usually used for the larger professional service businesses and
added personal asset protection. This structure, however, does not protect partners from
liability for their malpractice.
3. Benefits of partnership
Business Structure
Expensive to register
Difficult to set up
Sole Trader
Partnership
Company
No
No
Yes
No
No
Yes
Complete control
Yes
No
No
Limited Liability
No
No
Yes
Easy to raise capital
No
Yes
Yes
Tax benefits
No
Yes
Yes
Yes
No
No
over decision-making
Can I retain all
profits made?
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Increase the chance of success: Each partner will bring to the table their expertise,
experience, and brainpower, offering different perspectives and bringing new, fresh
ideas to the business
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Easy to raise capital: Investors and creditors are far more likely to go into business
with a partnership than with an individual
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Tax benefits: Businesses as partnerships do not have to pay income tax; each partner
files the profits or losses of the business on his or her own personal income tax return.
This way the business does not get taxed separately.