A partnership, defined as a business carried out in common with a view of making profit. A partnership arises when two or more people co-own a business and then share in its profits and losses. For any business to function effectively, partnerships must be formed in order to establish everyone’s roles and their liabilities. In a partnership, each person contributes something to the business i.e. capital, ideas, property as well as personal liability. There are numerous forms of partnerships available to business owners. In this article we’ll look at what makes up a few of these partnerships.
GENERAL PARTNERSHIPS (GPs)
General Partnerships are voluntary associations designed to carry on a business for profit. One of the main advantages of this partnership is that there are hardly any formalities to its formation. Express agreement to create a General Partnership is not required. As long as the parties intend to have a business relationship, in the eyes of the law it is considered a partnership. This type of partnership is mainly ideal for small family businesses.
An example of a General Partnership would be if Wambui and Nafula opened a bakery together and they named the bakery W&N Bakery. By opening a bakery together, Wambui and Nafula are both General Partners in the business.
The disadvantage of this type of business association is that each General Partner is personally liable for any losses suffered by the business; even if the losses exceed the individual partners’ initial investments to the business.
LIMITED PARTNERSHIPS (LPs)
This partnership is designed to combine the informalities of the partnership with the capital raising advantages of the corporation. This form of partnership is mainly used by venture capitalists who want a share in the profits of a business but do not want to be part of the management.
A great example of where this Partnership is used is in the film industry. The director, writer and editor of a movie serve as the General Partners. Companies who invest money into the movie production are the limited partners. This means that if the movie flops, the General Partners (director, editor, etc.) will bear the burden of the financial loss while the investing companies will only be liable for the amount they invested and nothing more.
The main advantage of a Limited Partnership is that shareholders are able to enjoy the profits of a business without becoming personally liable for the debts accrued by the business. Hence the term ‘Limited Partnership’ because shareholder’s liability is limited to their initial capital investment.
LIMITED LIABILITY PARTNERSHIPS (LLPs)
A Limited Liability Partnership is the same as a Limited Partnership save for the fact that both General and Limited partners have limited liability. This partnership form is mainly used by corporations. Medical partnerships, law firms and accounting firms are common examples of Limited Liability Partnerships.
The main advantage of a Limited Liability Partnership is that it is an entity separate and distinct from its owners. This means that the corporation has the capacity to sue or be sued in its own name.
The existence of Limited Liability Partnerships are not threatened by the death, bankruptcy or retirement of an individual owner. Shareholders have limited liability and are not personally liable for the corporation’s debts; their loss is limited to their capital investment in the business.
A franchise is a contractual relationship where a franchisor develops a product, service or pattern of marketing and the franchise then becomes an outlet in what appears to be a regional, national or international chain. KFC, Woolworths etc. are some examples of franchises.
The parties in a franchise are the Franchisor (business owner) and the Franchisee (person or business that operates using the trademark and business model system licensed from the franchisor).
This partnership form would be ideal for any small business looking to expand as it would gain the financial resources of the franchisor. A small business that sells fast food can form a franchise partnership with a bigger company in the same business e.g. Chicken Inn or Galitos and become of a well-established franchise.
The main advantage of a franchise is that the franchisee is granted the right to use the well known and highly advertised trademark owned by the franchisor. This increases their business opportunities and brand recognition because they are represented by a bigger and well-known brand or company.
When you start your own business venture, you have a number of decisions to make. What are you going to offer, who is your target market and the kind of business structure you’ll have. If you don’t want to run your business alone. Then you might want to consider forming a partnership. Consider any of the partnership types in this article and find the best fit for your business.