The second shop: Lena's bakery is two years old and the Saturday queue reaches the corner. She wants a second shop across town, but she cannot afford it on her own, and she cannot be in two places at once.
A second owner: Marco, who has run her market stall since the first winter, puts in $20 000 of his savings and joins her as an owner. From that day the bakery has two owners. It is a partnership.
A partnership is a business owned by two or more people (usually up to twenty) who run it together and share its profits. Like a sole trader, it has no legal existence separate from its owners: the business is its partners. In 1.2.1 the bakery was Lena. Now it is Lena and Marco.
Owned and run together
- Two or more owners, each usually working in the business.
- Decisions are made jointly: the lease on the second shop needs both signatures.
- Profits are shared between the partners.
More money behind it
- Each partner brings capital, so there is usually more than one person could put in.
- A bank lends more to two owners with two incomes (greater borrowing capacity).
Answerable for all the debts
- Partners usually have unlimited liability: a business debt can be paid from their own savings and homes.
- One partner's debt in the business's name is every partner's debt.
Private and simple
- The accounts stay private; nobody outside the business reads them.
- Little regulation and low set-up costs, a little above a sole trader's.
What changes, and what does not: Compared with the sole trader in 1.2.1, one thing changes: there is more than one owner, so the money, the skills, the decisions and the profit are all shared.
One thing does not change. Unlimited liability. Lena's savings were on the line when she ran the bakery alone. They still are, and now Marco's are too.
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Lena put in the shop, the ovens and the name. Marco put in $20 000 in cash. Lena bakes six days a week; Marco will run the second shop.
Three questions they must settle
- When the year's profit is $60 000, who gets what?
- If Marco wants out in three years, who owns the second shop?
- If they disagree about a new oven, who decides?
Write it down before you need it: Partners answer those questions in a written agreement (a deed of partnership) before the business opens. In many countries, if there is no deed the law treats the partners as equals: profits split equally, whatever each one put in or how many hours each one worked.
The deed is the partners' own rules, written while they still agree on everything.
| What the deed settles | Why it matters | In Lena and Marco's deed |
|---|---|---|
| Capital each partner puts in | Sets who owns how much of the business | Lena: the shop and ovens, valued at $40 000. Marco: $20 000 in cash |
| How profit and loss are shared | Stops the argument at the end of the first good year | Two thirds to Lena, one third to Marco |
| Who decides what | Day-to-day choices need no meeting; big ones need both | Either can spend up to $2 000; anything more needs both to agree |
| What each partner can draw | A monthly amount to live on, before the year's profit is known | $2 500 a month each |
| What happens if a partner leaves or dies | Without this the partnership ends and has to be wound up | The other partner can buy the share at a valuation, and the business carries on |
| How disagreements are settled | Two owners can deadlock; one owner never could | A named accountant decides if the partners cannot |
The fifth row matters more than it looks. A partnership is its partners, so when one leaves or dies the partnership legally ends unless the deed says how the others carry on. A sole trader's business ends with the sole trader. A partnership can end with any one of its owners, which is why the deed says what happens next.
Active partner: money and work
- Puts capital in and works in the business every day.
- Takes decisions. Lena and Marco both sign the lease and both choose the bread.
- Shares the profit in the proportion the deed sets.
Sleeping partner: money only
- Puts capital in and takes a share of the profit, but takes no part in running the business (also called a silent partner).
- No say in the daily decisions. Lena's aunt Marta puts in $15 000 for the second shop's fit-out and reads the accounts twice a year.
- Still liable. In an ordinary partnership Marta's liability is as unlimited as the others'.
Three people, two kinds of partner: Lena and Marco run the bakery: active partners. Marta funds part of it and stays out of the kitchen: a sleeping partner.
All three share the profit in the shares the deed sets, and all three carry the debts.
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Lena was a sole trader for two years. Everything here is a comparison with that: what she gains by sharing the bakery with Marco, and what she gives up.
Better than one owner
- More capital. Two savings accounts, and two incomes to borrow against. The second shop opens this year, not in five.
- More skills and ideas. Marco knows the market trade; Lena knows the ovens. Each covers what the other cannot.
- The load is shared. Someone else can open on a Tuesday. Illness or a holiday no longer closes the shop.
- Risk spread. A bad year is split two ways instead of landing on one person.
- More credibility. A supplier or a bank sees two owners answerable for the bill, not one.
Worse than one owner
- Profit is shared. The $60 000 that was all Lena's is now two thirds Lena's.
- Decisions are shared. Lena cannot buy the new oven without asking. Disagreements slow things down and can end the partnership.
- Liable for each other. One partner's mistake is every partner's debt. The diagram below shows how.
- No continuity. If one partner leaves or dies, the partnership ends unless the deed says otherwise.
Marco signs
one partner acts
- Orders a $20 000 oven for the second shop in the bakery's name
- Lena is not asked
The partnership owes it
the debt is the business's
- The business is its partners, so the debt belongs to all of them
- Whoever signed, the bakery owes $20 000
The business cannot pay
a slow first winter
- The second shop sells less than expected
- The bakery's account is empty before the oven is paid for
Every partner pays
the bill reaches their savings
- The supplier can claim the whole $20 000 from Lena's own savings, or Marco's, or Marta's
- Each partner's own money is on the line for a decision one of them made
The partner you choose is the risk you take: A partnership runs on trust, because the law makes each partner answerable for the others. Lena is safer with Marco in one way (the risk is spread) and less safe in another (his mistakes reach her savings). Both are true at once.
What the deed cannot do: The deed cannot remove unlimited liability. It can only say how the partners share a loss between themselves afterwards.
So is a partnership better than a sole trader? For Lena's second shop, yes: she could not have opened it alone. For a business one person can run and fund, the price of a partner (shared profit, shared say, shared liability) may not be worth paying. The answer depends on the business, and that is what the longer questions ask you to weigh.
How this comes up: Short questions tied to a case, two marks each. Know the three shapes below, and the difference between a feature and an advantage.
The three short questions
- State two features of operating as a partnership, for two marks.
- Explain one advantage of a partnership compared with a sole trader, for two.
- Define the term deed of partnership, for two.
A feature
- What a partnership is: more than one owner, joint decisions, shared profit, unlimited liability.
An advantage
- Why that is good for the business.
The two-mark pattern
- State two features. A few words each: owned and managed by more than one person; the partners usually have unlimited liability. Stop there.
- Explain one advantage compared with a sole trader. Name it, then say why it beats one owner: more capital, because each partner puts money in, so the business can grow faster than one person's savings allow.
- Define the term. What kind of thing, then what it does: a written agreement between partners setting out profit shares, roles and what happens if one leaves.
The trap: vague, or the wrong side: 'Shared resources' is too vague to be a feature. Say which resource is shared: capital, skills, the workload, the risk.
The second trap is answering the wrong side. Asked for an advantage of a partnership over a sole trader, 'keeps all the profit' is the sole trader's advantage. Say what two owners have that one does not.
State two features of a partnership.
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