A typical Small and Medium Enterprise (SME) in Nigeria is confronted by several challenges, both external and internal. The list is endless. From the harsh economic climate, worsening value of the Naira against major world currencies, counterproductive regulatory policies to factors such as irregular power supply, dilapidated or non existent infrastructural facilities, double taxation, hyper inflation, high interest rates, etc. A peculiar problem of an internal nature that could also bedevil the SME institution is adoption of the wrong business model which in itself could spell doom for the survival of the SME from inception.
Typically and in most cases, an SME, whether small or medium, is synonymous with the one man venture. In a one man venture, be it the self-employed model or the business owner type, the business is built around one man. He creates the idea. He establishes the business. He runs the business and enjoys in full, the proceeds of the business. He bares the entire liability and profitability of the business. In local parlance, he eats alone and of necessity dies alone. He practically sinks and swims with the business.
Aside from the above, the one man business model suffers several disadvantages. Income generation is generally restricted. He also finds it difficult to specialize and thereby realize true efficiencies. He is unable to attract or hold those clients whose work often requires large time commitments or diverse business skills. Once the solo player gets ill, then the business too becomes ill. Any talk of vacation for the solo player? That is out of the question. Most times the solo player gets exhausted from work burn outs. In the event of bad climes, such as the one we are right now, the solo business man has no partner to share obligation to fund the business with him.
The intendment of this modest piece therefore, is to examine the partnership model of business in its ramifications and proffer same model as a tool for the sustenance and effective running of an SME irrespective of its line of business.
Section 3 of the Partnership Law of Lagos State Cap P1, LLSN 2015 defines “Partnership” as the relationship which subsists between persons carrying on business in common with a view of profit. The connotation of this definition is that partnership is a relationship which subsists between persons. In the words of the Nigerian Supreme Court in the case of Alade v. Alic (Nig.) Ltd. (2010) 19 NWLR (Pt. 1226) 111:
“A partnership business is a voluntary association of two or more persons who jointly own or carry on a business with the sole aim of making profit.”
Per Rhodes-Vivour, J.S.C. (P. 37, paras. B-C)
Thus, sole proprietorships under the control and authority of one man but which masquerades as partnership, with fanciful and bogus names, as you have in most businesses today, are actually no partnership in reality and in the actual sense of the word. For an association of persons to qualify as a partnership, it must have the following characteristics: there must be a business, the business must be carried on in common by two or more persons and the intention must be to make profit.
The question whether a partnership subsists or does not subsist between particular persons is a question of law and fact and not just a question of fact. However, the factors used in measuring/determining the existence of a partnership include the following:
- Joint tenancy, tenancy in common, joint property, common property or part ownership does not of itself create partnership.
- The receipt by a person of a share of the profit of a business is prima facie evidence that he is a partner in the business (this is distinguished from the so called “salaried” partner).
- Receipt of such share of profit or payments contingent or varying with profits does not of itself make a person a partner especially if:
- debt or other liquidated amount is being paid by installments out of profit.
- a contract of employment allows an employee or agent to share out of
- a widow or a child of a deceased partner is being paid annuity from profit
- a loan is given on the understanding that the rate of interest shall vary with profit
- receiving annuity from profits of a business in consideration of the sale of goodwill of the business
- Executors who carries on business under the terms of their testators will are not partners.
Essentially, there are two types of partnership, the limited partnership and limited liability partnership. The limited partnership is a partnership composed of one or more persons (called general partners) who control the business and are personally liable for the partnership debts, and one or more persons (called limited partners) who contribute capital and share profits but who cannot manage the business and are liable only for the amount of their contribution. The purpose of a limited partnership is basically to enable persons to invest their money in a business without taking an active part in managing the business, and without risking more than the sum originally contributed, while securing the co-operation of others who have ability and integrity but insufficient in money. In a limited liability partnership, a partner is not liable for the negligent act committed by another partner or by an employee not under the partners supervision. Section 62 of Partnership Law of Lagos State enjoins all registered partnerships to use the abbreviations “LP” for Limited Partnerships and “LLP” for Limited Liability Partnership, after the partnership name.
The factors in determining the differences between a partnership and a company limited by shares are multifarious. Some of these include, firstly, the issue of limitation of liability. Generally members of an incorporated company are not personally liable for the debts of the company, the liability of a member is limited by shares or by guarantee (or unlimited if it is an unlimited company). But generally, partners in a partnership are personally liable for the debts of the partnership. In terms of number of members, the minimum number of persons required to form a company is two while the maximum in the case of a private company is fifty and unlimited number of persons for a public company; whereas for a partnership, the minimum number required to form a partnership is two and the maximum number of twenty except for a firm of lawyers, accountants and co-operative societies (see Section 19 of the Companies and Allied Matters Act 2004). In terms of agency relationship, each partner is an agent of the partnership and so each partner can act for the partnership in transaction within the scope of the partnership but there is no such agency relationship between a company and its members. Again, a partnership operation requires no minimum capital pre-condition which is a requirement in a limited liability company. The operational document of a company limited by shares are the memorandum and articles of incorporation while for a partnership, it is the partnership agreement of deed.
Talking about the partnership agreement, which in itself could be oral, written or by deed, it is always advisable for partners to draw up a formal agreement as this helps in minimizing incidence of bad faith and it prevents the presumptions of law which may be at variance with the intention and desire of the partners. The written and express terms of the partnership agreement, apart from making the terms readily available and enforceable, the written and express terms form the bench mark of reference in time of disputes in the partnership.
A properly drafted deed of partnership will make adequate provision for items such as parties, commencement date, the name and style of the partnership, the nature of business (which must be fully and precisely described as it determines the extent to which each partner has implied or apparent authority to bind the firm and other partners), limits of authority of the place of business, the capital of the business, annual accounts, profit and loss, payment of salaries, accounts of the partnership, bankers and signatories to the bank account, property of the partnership, duration (state the life span or else the presumption of partnership at will apply), powers, rights and duties of partners, termination, covenants, arbitration, retirement, suspension and expulsion, notices, etc, etc.
As the law anticipates that what has a beginning must have an end, the law makes adequate provision for the dissolution of a partnership. This is expressly provided for under Sections 31-34 of the Partnership Law of Lagos. Dissolution of a partnership could be either of the following ways: dissolution by expiration of notice, dissolution by death, bankruptcy, or change, dissolution by the illegality of the partnership and dissolution by the court (wherein a partner can apply to the court to dissolve the partnership where it is carrying on for example, business at a loss.
It is important to note that once a partnership is dissolved, the partnership properties including the goodwill are sold and proceeds applied in payment of the debts and liabilities of the firm and any surplus assets are applied in payment of what may due to each partner. Where the assets are insufficient to discharge the debts and liabilities of the firm, the partners bears the deficiency in the proportion in which they were entitled to share profits.
For the SME, the partnership model will promote and enhance team work, division of labour, time sharing, specialisation, pulling together of financial and intellectual resources, proper work environment and ultimately employer and employee work satisfaction.
By Theophilus Orumor Esq.
*Orumor is a Solicitor at The Law House and can be reached via: firstname.lastname@example.org