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What are Partnerships?

A few weeks ago, a friend asked me to join her on a venture to start a business, to say that I was excited is an understatement because I have never owned a business. Ideally, the plan was for us to be partners. Legally, a partnership is a contractual, expressed or implied between persons carrying on a business in common with a view of profit.

Partnerships are not limited to trade, business, occupation, or profession. This means that a partnership can be formed for any reason. A partnership is governed by the Partnership Act, 2010 which limits a partnership to not more than 20 partners for occupations and trade and 50 partners for professionals as long as they share a common vision. 

Many times, as you are starting a business, it may be hard for you to come up with all the capital all at once. Partnerships hold this over many businesses as it is easier to start off your business when you combine efforts with a friend or a colleague. After all, the saying does say that two heads are better than one- in this case maybe 20 heads. If you desire to form a partnership, it may be tricky to pick and choose the best one that suits your intentions. Here is a breakdown to help you decide.

Credit: Keypersonline

“Great things in business are never done by one person; they’re done by a team of people.”

Steve Jobs

There are three forms of partnerships in Uganda, these include;

1. General Partnership

A general partnership is a for-profit entity that is created by a mutual understanding between two or more parties. A general partnership can be quite informal. All it takes is a shared interest, perhaps a written contract (though not necessary), and a handshake. The most obvious risk that comes with a general partnership is that of legal liability. In a general partnership, all partners share liability for any issue that may arise.

2.  Limited liability partnership

A limited liability partnership (LLP) is a type of partnership where all partners have limited liability. All partners can also partake in management activities. With LLPs, a partner is not held liable for any negligent act committed by another partner or by an employee, not under the partner’s supervision. Under the law, ‘liability’ can be shared, existent upon partners or other actors. LLPs are limited to 20 partners, who contribute a share capital and are not liable for any debts and obligations beyond their share contributions to a business. The partnership is a separate legal entity from its partners making it a ‘body corporate’. This means that such a partnership exists as an individual. It can sue or be sued in its capacity, it can own a business, trade-in, contract or employ workers in its capacity.

3. Limited partnership.

This is a partnership made up of two or more partners, the general partner oversees and runs the business while limited partners do not partake in managing the business. However, the general partner of a limited partnership has unlimited liability for the debt, and any limited partners have limited liability up to the amount of their investment. This means that in case any issues arise, the general partner will surely take the fall.

Any other partner, known as limited (or silent) partners, provides capital. Thes partners do not make any managerial decisions and are not responsible for any debts beyond their initial investment. Quite a tall order if I am to say so myself. 

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Like everything, each partnership form comes with its own set of advantages and disadvantages. However, it is safe to say that these pros and cons are highly dependent on the amount of liability each partner has as to the partnership and the freedom a partner has to work independently from the partnership itself. Upon great deliberation, though a general partnership seemed the most feasible, my friend and I decided on a Limited Liability partnership. 

Below are a few features as to why we made this choice over the others; 

  1. LLP partners can employ personal employees. A partner can acquire the services of any person as long as he clearly states that that employee is not the partner. The intention is to have the partnership operate without interference from partners’ personal decisions which may affect its legality.
  2. The acts of a partnership will be imputed on the partners as individuals should they hold out to act as the partnership’s representatives.
  3. LLPs operate in structures formed from a partnership deed that binds the partners. A partnership deed is a partnership agreement between the partners of the firm which outlines the terms and conditions of the partnership between the partners. The purpose of a partnership deed is to provide a clear understanding of the roles of each partner, which ensures the smooth running of the operations of the firm.
  4. LLPs provide flexibility that allows partners to venture into diverse businesses without influence from each other unless such ventures breach the Partnership Agreement.
  5. Limited Liability Partner can assign his contribution to the partnership to an assignee who assumes the latter’s position in the partnership. This is done with consent from the general partner(s).
  6. Last but not least, LLPs are professional.