Characteristics of a Business Partnership
In a partnership contract, two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profit among themselves. Two or more persons may also form a partnership for the exercise of a profession.
An association of two or more persons to carry on, as co-owners, a business for profit. (Uniform Partnership Act, Section 6).
Partnerships resemble sole proprietorships, except that there are two or more owners of the business. Each owner is called a partner.
Partnerships are often formed to bring together various talents and knowledge or to bring needed capital into a business. They are generally associated with the practice of law, public accounting, medicine and other professions. Partnerships of this nature are called general professional partnerships. On the other hand, service industries, retail trade, wholesale and manufacturing enterprises may also be organized as partnerships.
The characteristics of partnerships are different from the sole proprietorships already studied in basic accounting. Some of the more important characteristics are as follows:
Mutual Contribution. There cannot be a partnership without contribution of money, property or industry (i.e. work or services which may either be personal manual efforts or intellectual) to a common fund.
Division of Profits or Losses. The essence of a partnership is that each partner must share in the profits or losses of the venture.
Co-Ownership of Contributed Assets. All assets contributed into the partnership are owned by the partnership by virtue of its separate and distinct juridical personality. If one partner contributes an asset to the business, all partners jointly own it in a special sense.
Mutual Agency. Any partner can bind the other partners to a contract if he is acting within his express or implied authority.
Limited Life. A partnership has a limited life. It may be dissolved by the admission, death, insolvency, incapacity, withdrawal of a partner or expiration of the term specified in the partnership agreement.
Unlimited Liability. All partners (except limited partners), including industrial partners, are personally liable for all debts incurred by the partnership. If the partnership can not settle its obligations, creditors' claims will be satisfied from the personal assets of the partners without prejudice to the rights of the separate creditors of the partners.
Income Taxes. Partnerships, except general professional partnerships, are subject to tax at the rate of 34% (in 1998), 33% (in 1999) and 32% (in 2000 and thereafter) of taxable income.
Partners' Equity Accounts. Accounting for partnerships are much like accounting for sole proprietorships. The difference lies in the number of the partners' equity accounts. Each partner has a capital account and a withdrawal account that serves similar functions as the related accounts for sole proprietorships.
Advantages and Disadvantages
A partnership offers certain advantages over a sole proprietorship and a corporation. It also has a number of disadvantages. They are as follows:
Advantages over Proprietorships
- Brings greater financial capability to the business.
- Combines special skills, expertise and experience of the partners.
- Offers relative freedom and flexibility of action in decision-making.
Advantages over Corporations
- Easier and less expensive to organize.
- More personal and informal.
- Easily dissolvable, and thus unstable compared to a corporation.
- Mutual agency and unlimited liability may create personal obligations to partners.
- Less effective than a corporation in raising large amounts of capital.
Partnerships vs. Corporations
Manner of Creation. A partnership is created by mere agreement of the partners while a corporation is created by operation of law.
Number of Persons. Two or more persons may form a partnership; in a corporation, at least five (5) persons, not exceeding fifteen (15).
Commencement of Juridical Personality. In a partnership, juridical personality commences from the execution of the articles of partnership; in a corporation, from the issuance of certificate of incorporation by the Securities and Exchange Commission.
Management. In a partnership, every partner is an agent of the partnership if the partners did not appoint a managing partner; in a corporation, management is vested on the Board of Directors.
Extent of Liability. In a partnership, each of the partners except a limited partner is liable to the extent of his personal assets; in a corporation, stockholders are liable only to the extent of their interest or investment in the corporation.
Right of Succession. In a partnership, there is no right of succession; in a corporation, there is right of succession. A corporation has the capacity of continued existence regardless of the death, withdrawal, insolvency or incapacity of its directors or stockholders.
Terms of Existence. In a partnership, for any period of time stipulated by the partners; in a corporation, not to exceed fifty (50) years but subject to extension.
1. According to object:
- Universal partnership of all present property. All contributions become part of the partnership fund.
- Universal partnership of profits. All that the partners may acquire by their industry or work during the existence of the partnership and the use of whatever the partners contributed at the time of the institution of the contract belong to the partnership.
- Particular partnership. The object of the partnership is determinate—its use or fruit, specific undertaking, or the exercise of a profession or vocation.
2. According to liability:
- General. All partners are liable to the extent of their separate properties.
- Limited. The limited partners are liable only to the extent of their personal contributions. In a limited partnership, the law states that there shall be at least one general partner.
3. According to duration:
- Partnership with a fixed term or for a particular undertaking.
- Partnership at will. One in which no term is specified and is not formed for any particular undertaking.
4. According to purpose:
- Commercial or trading partnership. One formed for the transaction of business.
- Professional or non-trading partnership. One formed for the exercise of profession.
5. According to legality of existence:
- De jure partnership. One which has complied with all the legal requirements for its establishment.
- De facto partnership. One which has failed to comply with all the legal requirements for its establishment.
Kinds of Partners
- General partner. One who is liable to the extent of his separate property after all the assets of the partnership are exhausted.
- Limited partner. One who is liable only to the extent of his capital contribution.
- Capitalist partner. One who contributes money or property to the common fund of the partnership.
- Industrial partner. One who contributes his knowledge or personal service to the partnership.
- Managing partner. One whom the partners has appointed as manager of the partnership.
- Liquidating partner. One who is designated to wind up or settle the affairs of the partnership after dissolution.
- Dormant partner. One who does not take active part in the business of the partnership and is not known as a partner.
- Silent partner. One who does not take active part in the business of the partnership though may be known as a partner.
- Secret partner. One who takes active part in the business but is not known to be a partner by outside parties.
- Nominal partner or partner by estoppel. One who is actually not a partner but who represents himself as one.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.