Definition of Partnership

A partnership consists of two or more persons who bind themselves to contribute money or industry to a common fund, with the intention of dividing the profits among themselves.

Features of Partnership

Voluntary Association

Taxable Entity

Limited Life

Legal Entity

Unlimited Liability

Co-ownership of Property

Mutual Agency

Elements of a Partnership
A partnership firm has the following elements: There must be a valid contract, whether oral or written. A partnership must be put up by persons having legal capacity to contract Their contributions must be in the form of money, property or service. The purpose of the business is to divide the profit among them

Role of Partners
1. The partners are co-owners of the partnership property. It means that when a partner invests his land or building, this ceases to be his personal property. Instead, this becomes joint property of all the partners. 2. The partners have unlimited liability. The partners become individually liable for all partnership debts in the event that the partnership assets are not sufficient to cover up its liabilities. 3. The partnership is bound by the acts of any of the partners since they are considered agents of the partnership for the purpose of carrying its activities.

Kinds of Partnerships
As to nature of business a. Trading Partnership also known as business partnership, it buys and sells finished merchandise or manufacture goods as its primary operational activity. Examples of these partnerships are groceries, stores and factories. b. Non-Trading Partnership renders service only for a fee. Examples are vulcanizing service, computer rentals laundry business or practice of profession.

Kinds of Partnerships
As to purpose a. Commercial partnership engages in trading, merchandising or manufacturing of goods for a profit. A partnership rendering service may be classified as a commercial partnership if it engages in service activities other than the practice of a profession. b. General professional partnership organized for the exercise of a common professional, and usually renders service based on the partners acquired profession. Examples are CPAs, medical doctors, and lawyers.

Kinds of Partnerships
As to object a. Universal partnership 1) Of all present property partners contribute all their present property to a common fund with the intention of dividing among themselves the property and all the profits they may acquire therewith. 2) Of profits the partners retain ownership of the things they have placed into the common fund. Their actual contribution will be their industry and the use of the things they have placed into the common fund. As a result, only the profits that the partners may acquire by their industry during the existence of the partnership will be divided among themselves b. Particular partnership a partnership which has for its object determinate things, their use or fruits, or a specific undertaking or exercise of a profession or vocation.

Kinds of Partnerships
As to liability a. General partnership comprised of general partners or a combination of general and industrial partners. They are personally liable for the partnerships debts after the exhaustion of its assets. b. Limited partnership comprises both limited and general partners. Only the limited partner shall be liable to the extent of his contribution to the partnership. At least one of the partners must be a general partner to assume the partnership's unpaid liability.

Kinds of Partnerships
As to liability a. General partnership comprised of general partners or a combination of general and industrial partners. They are personally liable for the partnerships debts after the exhaustion of its assets. b. Limited partnership comprises both limited and general partners. Only the limited partner shall be liable to the extent of his contribution to the partnership. At least one of the partners must be a general partner to assume the partnership's unpaid liability.

Kinds of Partnerships
As to duration a. Partnership at will formed for a particular undertaking and may be terminated any time by the will of any of the partners or by mutual agreement of the partners. In other words, this partnership has no fixed period of existence. b. Partnership with a fixed term formed with a specified period of existence.

Kinds of Partnerships
As to legality of existence a. De jure partnership established and organized in accordance with all the legal requirements for its existence. b. De facto partnership established and organized without complying with the legal requirements for its existence.

Kinds of Partners
As to Contribution a. Capitalist partner contributes money or property to the partnership b. Industrial partner contributes only his skills, knowledge, industry or personal service to the partnership c. Capitalist-Industrial partner contributes only his skills, knowledge, industry or personal service to the partnership

Kinds of Partners
As to Liability a. General partner assumes unlimited liability, i.e., he is liable for the partnership debts to the extent of his personal assets. b. Limited partner liable to the extent of his capital contribution to the partnership

Kinds of Partners
As to Participation a. Managing partner appointed to run the business if the partnership. His appointment may either be in the Articles of Co-Partnership or may come after the formation of the partnership b. Silent partner known as the partner but does not take active participation in running the affairs of the partnership c. Liquidating partner appointed to liquidate partnership assets and settle unfinished transactions of the partnership after dissolution.

Kinds of Partners
As to Third Persons a. Secret partner not known as partner but takes active part in running the partnership business b. Dormant partner not known as partner and does not take active part in the partnership business c. Nominal partner or Ostensible partner a partner in name only by permitting the use of his name either accommodation or for consideration. He is subject to liability by the doctrine of estoppel

Partnership Contract
The relation of partners arises from contract and not from status, operation of law or inheritance. The agreement of partnership whether in oral or in writing becomes a contract that binds all the partners.
The contracts of partnership basically includes the following agreement: Who the partners are What the business will do Where the business will be located When the partnership will begin Which job will be done by each partner How much a partner can invest or withdraw How the income or loss is to be shared What will happen if the business is to end

Advantages of Partnership Firm

Easy to form: Like sole proprietorships, partnership businesses can be formed easily without any compulsory legal formalities. It is not necessary to get the firm registered. A simple agreement or partnership deed, either oral or in writing, is sufficient to create a partnership.

Availability of large resources: Since two or more partners join hands to start a partnership business, it may be possible to pool together more resources as compared to a sole proprietorship. The partners can contribute more capital, more effort and more time for the business Contd.

Advantages contd.
Better decisions: The partners are the owners of the business. Each of
them has equal right to participate in the management of the business. In case of any conflict, they can sit together to solve the problem. Since all partners participate in the decision-making process, there is less scope for reckless and hasty decisions.

Flexibility in operations: A partnership firm is a flexible

organization. At any time, the partners can decide to change the size or nature of the business or area of its operation. There is no need to follow any legal procedure. Only the consent of all the partners is required.

contd.

Contd.
Sharing risks: In a partnership firm all the partners share the
business risks. For example, if there are three partners and the firm makes a loss of Rs.12,000 in a particular period, then all partners may share it and the individual burden will be Rs.4000 only. Because of this, the partners may be encouraged to take up more risk and hence expand their business more.

Benefits of specialization:Since all the partners are owners of the

business, they can actively participate in every aspect of business as per their specialization, knowledge and experience. If you want to start a firm to provide legal consultancy to people, then one partner may deal with civil cases, one in criminal cases, and another in labor cases and so on as per the individual specialization. Similarly, two or more doctors of different specialization may start a clinic in partnership.

Contd.
Protection of interest of each partner:
In a partnership firm, every partner has an equal say in decision making and the management of the business. If any decision goes against the interest of any partner, he can prevent the decision from being taken. In extreme cases an unsatisfied partner may withdraw from the business and can dissolve it. In such extreme cases the partnership deed is required. In absence of the partnership deed, no legal protection is given to the partners.

Disadvantage of Partnership Firm

Unlimited liability:All the partners are jointly liable for the debt of the
firm. They can share the liability among themselves or any one can be asked to pay all the debts even from his personal properties depending on the arrangement made between the partners.

Uncertain life:The partnership firm has no legal existence separate

from its partners. It comes to an end with death, insolvency, incapacity or the retirement of a partner. Further, any unsatisfied or discontent partner can also give notice at any time for the dissolution of the partnership.

No transferability of share:If you are a partner in any firm, you

cannot transfer your share or part of the company to outsiders, without the consent of other partners. This creates inconvenience for the partner who wants to leave the firm or sell part of his share to others.

Contd.

Contd.
Lack of harmony: In a partnership firm every partner has an equal right to participate in the management. Also, every partner can place his or her opinion or viewpoint before the management regarding any matter at any time. Because of this, sometimes there is a possibility of friction and discontent among the partners. Difference of opinion may lead to the end of the partnership and the business. Limited capital: Since the total number of partners cannot exceed 20, the capital to be raised is always limited. It may not be possible to start a very large business in partnership form.

Rights of Partners
1. Right over specific partnership property. 2. Right to share in the profits resulting from business operation. 3. Right to share in the remaining assets upon partnership liquidation. 4. Right to co-manage the partnership. 5. Right to ask that the book be kept in the principal place of business

Accounting for Partnership Formation

In general, the accounting principles and procedures used in recording partnership transactions with outside parties are the same as those of sole proprietorships and corporations. The difference, however, lies in the owners equity accounts. In sole proprietorship, there is one capital account and one withdrawal account because there is only one owner of the business. On the other hand, the capital accounts and drawing accounts of a partnership business are more than one depending on the number of partners in the association. The corporations equity section, however, does not contain the capital and drawings accounts of individual stockholders. Instead, it contains the capital stock and retained earnings accounts.

Partners Capital Account

The capital accounts represent permanent interest of a partner. The following transactions affect this account: 1. Investments contributions made a credited to each partners capital account to increase the partners equity and 2. Permanent Withdrawals withdrawals of capital are debited to each partner's capital account to decrease the partners equity.

Partners Drawing Account

This is the account title used to reflect temporary interest of a partner. Ordinarily, there are also two transactions affecting this account: 1. Share in the net profit ( the agreement as to the manner of distribution is provided in the Articles of Co-Partnership) is credited to the drawing by the partner; or share in net loss is debited to the drawing account to decrease the partners equity and his source of regulatory drawings.

Partners Drawing Account

2. Personal drawings may be formal as provided in the Articles of Co-Partnership. These are oftentimes called salaries but are in fact withdrawals of profit and are debited to the drawing account to decrease the partners equity. Informal withdrawals may also be made by the partners when the need arises ( made with the consent of all partners and are also debited to the drawing account and viewed as decreases in the overall capital of the individual partner.

Opening the Books of the Partnership

The first entries in the partnership books pertain to the contribution made by the partners. The contribution is in the form of cash or property, the pro-forma entry is: Cash ( or merchandise or building) xx Partner, Capital xx

If the investment is in the form of service, a memorandum entry should be prepared.

Opening the Books of the Partnership

A contribution in the form of property should be recorded , as of investment date, at the current fair value or appraised value. Fair value is the amount for which an asset could be exchanged between two knowledgeable and willing parties in an arms length transactions. Liabilities attached to invested properties may be assumed by the partnership, in which case the capital of the partner will be credited only at the net amount of the asset contribution.