Unlike sole proprietorships, where only one person owns and manages the business, a general partnership involves multiple partners who share ownership, responsibilities, liabilities, and profits.
This business model is widely used by professionals, small business owners, and individuals who prefer to pool resources, skills, and capital to grow their business together.
What is a General Partnership Business? Key Insights for Aspiring Entrepreneurs
Are you planning on starting a general partnership business in Nigeria? If you are, then you’re in the right place. Keep reading to find out all the details concerning this business structure.
What Is a General Partnership?
A General Partnership is a legal business agreement between two or more contributing individuals, each sharing in both profits and losses, paying taxes on income received, and having unlimited liability of the firm.
Partners in a general partnership can be natural persons, legal persons, and organizational units without legal personality. Additionally, the establishment of a general partnership is possible by at least two entities.
Is a General Partnership right for your business?
Although several types of partnership structures exist, the General Partnership is the starting point. This is because they all share the same basic traits but have additional stipulations. These additional provisions change the General Partnership from its specific definition. Limiting one or more partners in some way or structuring the partnership in such a way as to limit the partnership's overall liabilities are a few examples of these changes.
Of all business structures, General Partnerships are among the most common. They are also one of the least complicated because they have so few restrictions.
If you are going into business with another partner, a general partnership might be a good solution for your business. Professionals like general partnerships because of how simple they are to set up.
As great as a general partnership can be, it does, however, come with risks — mainly liability. In the event you make any mistakes, such as incur debt, you and your partner(s) are liable.
Likewise, if your partner does anything negative without your permission, such as signing an agreement with a software company, you will still be obligated to fulfill the terms of the agreement.
Ultimately, the business structure you choose depends on your relationship with your potential business partners and how much liability you are willing to take on.
key Elements of a General Partnership
The key characteristics of a general partnership are as follows:
- It’s the default structure for partnerships: Just like sole proprietorship is the default business structure for individual business owners, a general partnership is the default for multi-owner businesses.
- Joint Liability: Similar to sole proprietors, partners in a general partnership take on personal responsibility for the business.
That means equal liability for debts or legal action. Partners can adjust the split of both profits and liabilities in their partnership agreement, but an equal split is the default.
- Pass-through taxation: A general partnership itself does not pay income taxes. Instead, each partner reports their share of the partnership's profits or losses on their individual tax returns.
- Multiple Ownership: A general partnership is owned by two or more partners who share equal or agreed-upon stakes in the business. Each partner’s ownership share can depend on their financial contribution, role, or expertise they bring to the partnership.
- Shared Profits and Losses: The partners agree on how to distribute profits and losses. This can be done equally, or according to the percentage of capital each partner has invested in the business.
- No Legal Distinction: A general partnership does not create a separate legal entity distinct from its partners. The partners and the business are considered one and the same in the eyes of the law. This means that the partnership does not have a distinct legal personality.
- Unlimited Liability: In a general partnership, each partner has unlimited liability for the debts and obligations of the business. This means that personal assets can be used to satisfy business debts if the partnership assets are insufficient.
Advantages of forming and running a General Partnership
It’s hard to go it alone. A general partnership allows partners to spread the load among themselves. While other entity types are available to a business with multiple owners, the general partnership structure is especially lightweight.
- A general partnership is less expensive and easier to set up than a corporation or limited liability partnership (LLP).
- As a pass-through entity, the partnership pays no taxes.
- No external financial reporting/annual report is required.
- A general partnership is simple to dissolve.
Disadvantages of a General Partnership
Although general partnerships have strong advantages, there are disadvantages to consider before forming this type of legal entity. These are the main disadvantages of a general partnership:
- Personal assets aren’t protected: Unlike Limited Companies, general partnerships are not considered separate business entities. This means the partners are not protected from lawsuits brought against the business. Additionally, personal assets may be seized to cover unpaid debts.
- Partners are liable for each other: Each partner is liable for the other’s actions and debts, which makes it the riskiest part of starting a general partnership — and also means it’s very important to know the people you plan to go into business with.
- Limited Life Span: A general partnership may dissolve if one of the partners withdraws, passes away, or decides to leave the business. While some partnerships include provisions for continuity, the business is typically dependent on the relationship between the partners.
- Potential for Disagreements: Potential partner conflicts if specific operational rules are not outlined in the partnership agreement.
- Lack of legal personality: Making share transfer more challenging compared to a limited liability company (LTD).
Fiduciary duties of Partner in a Partnership
Partners in a general partnership are bound to enact particular fiduciary duties in order to be considered to be acting in the best interests of the partnership and its partners:
A duty of loyalty and care
Partners in a business partnership owe each other a fiduciary duty of loyalty and care. This means that partners must act in the partnership's best interests and not in their own self-interest. Partners must not take advantage of their position or use the partnership’s assets for personal gain.
A duty of good faith and fair dealing
Partners must also act in good faith and deal fairly with each other. This means partners cannot secretly engage in activities that harm the partnership. For example, a partner cannot secretly buy property the partnership was planning to purchase.
The duty of disclosure
Partners have a duty to disclose material information to the other partners. This duty exists even if the information is not favorable to the partnership. For example, if a partner knows of a potential problem with a supplier, he or she must disclose this information to the other partners.
A duty of obedience
Partners must obey the partnership agreement and any lawful decisions made by the partnership. If there is no partnership agreement, partners must obey any decisions made by most partners.
A duty of account
Partners must keep accurate records of the partnership’s finances and transactions. Partners are entitled to inspect the partnership’s books and records at any time.
General Partnership Registration Requirements
Here are the requirements for registering a Partnership Business Name with the CAC:
- Proposed Business Names: At least two (2) options (1st choice and alternative).
- Partners: A General Partner must have at least two partners.
- Capital Contributions: The amount each partner will contribute to the partnership.
- Business Objectives: Description of the nature and objectives of the business.
- Partners' Details: Provide full names, addresses, occupations, and means of identification for all partners.
- Business Address: Proposed business address (can be a home address or a separate business location).
- Partnership Agreement: A draft agreement outlining the partners' rights, duties, and responsibilities.
Steps to Register a General Partnership in Nigeria
Registering a general partnership in Nigeria requires a systematic process to ensure legal recognition and compliance with the Corporate Affairs Commission (CAC). Here’s a step-by-step guide to help you navigate the registration process:
1. Choose a Business Name
The first step is selecting a unique name for your partnership. This name should not conflict with any existing registered businesses. Conduct a name availability search on the CAC portal to ensure that the name is available.
2. Draft a Partnership Agreement
Though not mandatory for registration, drafting a partnership agreement is essential. It outlines the roles, responsibilities, profit-sharing ratio, and duties of each partner. A written agreement helps avoid disputes and ensures clarity in decision-making processes.
3. Complete the CAC Business Name Registration Form
You will need to complete the Business Name Registration Form on the CAC website. Provide the necessary details such as the partnership’s proposed business name, the nature of the business, the principal office address, and personal details of all partners.
4. Provide Identification Documents
Partners must provide identification documents such as: Valid means of identification (e.g., International Passport, Driver’s License, National ID), Passport-sized photographs.
5. Submit the Form and Pay the CAC Fees
After completing the registration form and ensuring all necessary documents are in order, submit the application online through the CAC portal. Pay the required registration fee, which includes the CAC filing fee.
6. Obtain Your Certificate of Registration
Once your application is processed and approved, the CAC will issue a Certificate of Business Name Registration for the partnership. The certificate confirms that the partnership is legally recognized and can commence operations under Nigerian law.
7. Register for Tax Identification Number (TIN)
After obtaining the business name certificate, you must apply for a Tax Identification Number (TIN) through the Federal Inland Revenue Service (FIRS). This is essential for filing taxes.
8. Open a Corporate Bank Account
With your Certificate of Registration and TIN, you can proceed to open a corporate bank account in the name of the partnership for business transactions.
How Long does it take for Partnership Business Name Registration in Nigeria?
The registration of a General Partnership Business Name typically takes between 2 to 7 working days. The process involves several key steps:
- Name Reservation: Initially, you need to reserve your business name with the Corporate Affairs Commission (CAC), which can be done online. This usually takes about 1-2 days.
- Filing Application: Once your name is reserved, you can file your application for registration. This step includes submitting the required documents and forms, which can typically be processed within 2-7 working days.
- Certificate Issuance: After your application is approved, you will receive your Certificate of Registration, which officially recognizes your business as a Partnership.
Factors that might influence the timeline include the efficiency of document submission and any additional requirements specific to your business type. It’s advisable to ensure that all documents are prepared accurately to avoid delays in the registration process.
General Partnership vs. Sole Proprietorship
General Partnership vs. Limited Partnership
Here’s a comparison of the key differences between a General Partnership and a Limited Partnership, with the main difference being the presence of limited partners and their restricted role in management and liability:
| Feature | General Partnership | Limited Partnership |
|---|---|---|
| Ownership | Owned by two or more general partners who share control equally. | Owned by at least one general partner and one or more limited partners. |
| Management | All partners actively manage the business. | General partners manage the business; limited partners are passive. |
| Liability | General partners have unlimited personal liability for debts and obligations. | General partners have unlimited liability; limited partners’ liability is restricted to their investment. |
| Participation in Decision-Making | All partners participate in decision-making and management. | Limited partners cannot participate in management; only general partners can. |
| Profit Sharing | Profits and losses are shared equally or based on the agreement. | Profits are shared based on the agreement, but limited partners typically only receive a return on investment. |
| Role of Limited Partners | N/A, as there are no limited partners. | Limited partners invest capital but do not engage in day-to-day management. |
| Continuity | Dissolves upon the exit or death of a partner unless specified otherwise. | Can continue if limited partners exit, as long as general partners remain. |
| Legal Entity | Not a separate legal entity; partners are personally liable. | Not a separate legal entity; general partners are personally liable, but limited partners are not. |
| Regulation | Fewer regulatory requirements; less formal structure. | More regulated than general partnerships; requires formal documentation like partnership agreements. |
| Registration | Requires business name registration with the Corporate Affairs Commission (CAC). | Requires partnership registration and must meet specific CAC requirements for limited partnerships. |
| Investment Attraction | Limited capacity to attract large investors due to personal liability of partners. | Can attract investors (limited partners) who prefer to limit their liability to their investment. |
| Taxation | Each partner is taxed on their individual share of profits. | Both general and limited partners are taxed on their share of profits, but only general partners bear full responsibility. |
| Exit Strategy | Partners can exit by dissolving the partnership or per the agreement. | Limited partners can exit without dissolving the partnership; general partners’ exit can cause dissolution unless otherwise stated. |
Examples of General Partnership Business
General Partnerships are particularly suited for some types of businesses. Here are some examples of industries that commonly, but not always, utilize the General Partnership business structure:
- Doctors, practitioners, and other medical practices
- Musical groups
- Law firms
- Tattoo parlors
- Accounting firms
- Art Galleries
- Businesses consisting of family and friends
In all these examples, it is easy to see why the General Partnership is the business structure of choice. Each individual earns their own share of the collective value of the company while benefiting from the possibility of larger market reach and reducing various business risks by sharing them among several qualified members.
Conclusion
In summary, a general partnership is a beneficial form of business for those who value flexibility and direct involvement in business operations.
However, before establishing one, it is crucial to thoroughly consider all legal and financial aspects and potential risks to avoid unforeseen problems in the future. Proper preparation and a good partnership agreement can significantly increase the chances of success for this form of business activity.
Register your General Partnership Business in Nigeria
Here's how SplashDict's team of CAC-accredited consultants can help:
