🤝 Partnerships
Big Idea: A partnership is a business owned by two or more people who share responsibilities, profits and risks. It's governed by a deed of partnership.
Key features
- Owned by two or more partners (usually 2–20)
- Usually governed by a deed of partnership — a legal document setting out roles, profit share, and responsibilities
- Partners typically have unlimited liability — each partner is personally responsible for ALL partnership debts
- Profits are shared according to the agreement in the deed of partnership
- Decision-making is shared among partners
- No separate legal identity from the partners (in most countries)
Deed of Partnership: A written agreement between partners covering: how profits are shared, roles and responsibilities, what happens if a partner leaves, how disputes are resolved, and how much capital each partner contributes.
Advantages of partnerships
- More capital available — multiple partners can invest money
- Shared workload and responsibilities — partners can cover different areas
- Combined skills and expertise — one partner may be strong in finance while another excels in marketing
- Shared decision-making — reduces pressure on one person
- Easy to set up — fewer legal requirements than a company
Disadvantages of partnerships
- Unlimited liability — partners are personally liable for ALL debts, including debts caused by other partners
- Profits must be shared — each partner gets a portion, not the full amount
- Potential disagreements between partners — conflicts over direction, workload or profit share
- Partners are liable for each other's business decisions — one bad decision affects everyone
- No legal continuity — partnership may dissolve if a partner leaves or dies
Types of partners
- Active/general partners — involved in running the business day-to-day and have unlimited liability
- Silent/sleeping partners — invest money but do NOT take part in daily management. Still have unlimited liability
- Limited partners — can only lose the amount they invested (limited liability) but are NOT allowed to manage the business
A sleeping partner puts in money but stays quiet. A limited partner has limited liability but limited control. These are different things! 😴
Two friends start a restaurant. One works as head chef (active partner) while the other invested $50,000 but keeps their day job (sleeping partner). Both share profits, but the sleeping partner has no say in daily decisions.
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🎯 What exams commonly ask
- 'State two features of a partnership' (2 marks)
- 'Explain one advantage of a partnership over a sole trader' (2 marks)
- 'Explain the role of a deed of partnership' (2-4 marks)
- 'Compare partnerships with limited companies' (longer answers)
Model answers
'State two features': (1) A partnership is owned by two or more people who share profits. (2) Partners typically have unlimited liability, meaning they are personally responsible for all business debts.
'Explain one advantage over a sole trader': A partnership has access to more capital because multiple partners can invest their personal funds, which means the business can grow faster or invest in better equipment than a sole trader who relies on one person's savings.
When explaining advantages over a sole trader, always make the COMPARISON explicit. Don't just describe the partnership — say why it's better THAN a sole trader.