Types Of Organization Structure- Partnership ( Part 2 of 3)

Various Type Of Organization Structure

A business may be carried on in any one of the following form:

1. Sole proprietorship (Part 1 of 3)

2. Partnership

3. Limited Company

CHARACTERISTIC OF A PARTNERSHIP:

1. A partnership is not a legal entity such that the partnership has to sue or be sued in the names of the partners;

2. The liability of each partner is unlimited;

3. A partnership must comprise of at least two members. The maximum number allowed is twenty;

4. Partnerships are governed by the relevant Partnership Act. If the partners do not make their own agreement, or if their own agreement does not cover any particular matter specified in the Partnership Act, provisions of the Partnership Act dealing with that particular matter will become applicable.

Advantages of a Partnerhip:

1. Like the Sole proprietorship, disclosure of financial statements to the general public are not required;
2. Easy to form compared to a limited company;
3. higher capital is available compared to a sole proprietorship;
4. taking advantage of the different expertise and skill of the different partners;
5. low cost of formation;
6. Tax advantage;
7. partnerships not subjected to many regulations compared to limited companies

Disadvantages of a Partnership:

1. Lack of flexibility unlike the one-man show of a sole proprietorship;

2. Still cannot avoid the unlimited liability like the sole proprietorship;

3. Limited life when one of the partners withdraws or dies, then the partnership will dissolve by itself;

4. Conflicts amongst the partners might affect the stability of the partnership;

5. Capital though higher than a sole proprietorship but still limited compared to a limited company.

Salient Points to note:

The general practice is to have some form of agreement between the partners setting out their rights, duties and liabilities. This agreement is referred as the Partnership Deed.

The normal clauses in a Partnership Deed includes the following:

• Names of the partners and firm’s name;

• Nature of the business;

• Term of the partnership;

• Capital to be introduced by each partner;

• Profit and loss sharing ratios;

• Arrangements as to partners’ drawings and salaries;

• Arrangements regarding interest on capital, advances and drawings;

• Provisions regarding the retirement or death of a partner;

• Method of valuing goodwill upon retirement or death of a partner and

• Other details to be observed by partners.