PARTNERSHIP

A type of business organization in which two or more individuals pool money, skills, and other resources, and
share profit and loss in accordance with terms of the partnership agreement. In absence of such agreement, a
partnership is assumed to exit where the participants in an enterprise agree to share the associated risks and
rewards proportionately.

CHARACTERISTICS OF 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 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 partners' equity accounts. Each partner has a capital account and a
withdrawal account that serves similar functions as the related accounts for sole proprietorships.

TYPES OF PARTNERSHIPS
A partnership arises whenever two or more people co-own a business, and share in the profits and losses of
the business. Each person contributes something to the business -- such as ideas, money, or property -though management rights and personal liability will vary depending on which of three modern partnership
forms the business takes: general partnership, limited partnership, or limited liability partnership (LLP).
General Partnerships
A general partnership involves two or more owners carrying out a business purpose. General partners share
equal rights and responsibilities in connection with management of the business, and any individual partner
can bind the entire group to a legal obligation. Each individual partner assumes full responsibility for all of the
business's debts and obligations. Although such personal liability is daunting, it comes with a tax advantage:
partnership profits are not taxed to the business, but pass through to the partners, who include the gains on
their individual tax returns at a lower rate.
Limited Partnerships
A limited partnership allows each partner to restrict his or her personal liability to the amount of his or her
business investment. Not every partner can benefit from this limitation -- at least one participant must accept
general partnership status, exposing himself or herself to full personal liability for the business's debts and
obligations. The general partner retains the right to control the business, while the limited partner(s) do(es) not
participate in management decisions. Both general and limited partners benefit from business profits.
Limited Liability Partnerships (LLP)
Limited liability partnerships (LLP) retain the tax advantages of the general partnership form, but offer some
personal liability protection to the participants. Individual partners in a limited liability partnership are not
personally responsible for the wrongful acts of other partners, or for the debts or obligations of the business.
Because the LLP form changes some of the fundamental aspects of the traditional partnership, some state tax
authorities may subject a limited liability partnership to non-partnership tax rules. The Internal Revenue
Service views these businesses as partnerships, however, and allows partners to use the pass through
technique.
Existing partnerships that wish to take advantage of LLP status do not need to modify their existing partnership
agreement, though they may choose to do so. In order to change status, a partnership simply files an
application for registration as a limited liability partnership with the appropriate state agency. All states require
disclosure of the partnership's name and principle place of business. Some states also require, among other
things, identification of the number of partners, a brief description of the business, a statement that the
partnership will maintain insurance, and written acknowledgment that the limited liability status may expire.

KINDS OF PARTNERS
The following are the major classification of the partners:
1.

Active Partner (Managing or Working Partner)

A person who takes active part, in the affairs and management of the business is called active partner. He
contributes his shares in the capital and is also liable to pay the obligations of firm.
2.

Nominal Partner

He is not in reality a partner of firm but his name is used as if he is a member of the firm. He is not entitled in
the profit or loss of the business but he is liable to all the acts of the firm. The person who has good prestige
and status is given, the position of nominal partner.
3.

Sub-Partner

The person who receives a share of profit from one of the regular partners is called the Sub-Partner. He is not
liable to pay the debt is of the firm. He has no rights and privileges against the firm.
4.

Silent Partner (Silent form managing point of view)

He is that kind of partner who does not participate in the affairs of the business but is known to outsiders as a
partner of the firm. He is liable to pay the debts of the firm like other partner.
5.

Secret Partner (Secret from public point of view)

He is active in the running life of the firm but public does not know him as partner of the firm. He pays his share
in the capital and is liable to settle the creditors of the firm.
6. Sleeping Partner or Dormant Partner (Sleeping From Both Points of View i.e. public and
managing)
A person who (a) does not conduct the management of the firm personally (b) is not known to the outsiders as
a partner of the firm, is called sleeping partner. But he invests his amount in the business and is liable to clear
the debts of the firm. He is also called dormant partner.
7.

Minor Partner

There is no restriction to join the minor in the partnership by law. Although he may become partner but with the
consent of all existing partners. In this case, he can be admitted to the profits of the firm only but not losses. He
is not personally liable for the obligations of the firm. But minor has the right to inspect and copy .the accounts
of the firm. Within six months of his attaining maturity, he has to give public notice whether he wants to remain
partner or not. After his decision, he will deemed as full fledged partner.
8.

Quasi Partner

A person who has retired from the running management life of the firm but he does not withdraw his capital
from the business is know as quasi-partner. So his capital is considered as a loan and he receives interest at
the rate varying with the profit. Really he is not a partner but he is a Deferred Creditor.
9.

Senior Partner

A person who brings large portion of capital in the business is called senior partner. He has prominent position
in the firm due to his experience, skill, energy, age and other abilities.
10. Junior Partner

He invests minor portion of capital in the business and so he has small share in the profits. He is junior to an
other partner in the firm due to his age, experience and other factors.
11. Holding Out Partner (Estoppels partner)
A person who declares by word of mouth as partner of the firm is called holding out partner. In reality he is not
a regular partner so he is not entitled to receive share of profit. Such persons are liable to those parties who
have given credit on the faith of such representation.
12. Salaried Partner
An individual who does not bring anything i.e. amount or goods in the firm but has right to receive salary or
share in the profit or both is named as salaried partner. He is known to the outside world as a partner and is
liable for all the acts of the firm like other partners.
13. Incoming Partner
A person who is newly admitted to the firm with the consent of all the parties is called incoming partner. He is
not liable for any act of the firm done before he became a partner unless he agrees;
14. Retired Partner (Outgoing Partner)
A person who goes out of a firm due to certain event or reason is known as retired or out going partner. In this
situation the remaining partners continue to carry on the business. Retiring partner is liable for all the
obligations and debts incurred before the retirement. But he will also be liable to third parties even for future
transaction, if he does not give public notice of his retirement.
15. Partners in Profit Only
He is an individual who gets a share of the profits only without being liable for the losses. He does not
participate in the management of the business. He will be liable to outsiders for all acts of the firm.
16. Limited Partner
A person who has not to pay any obligation more than the share he holds in the firm is called limited partner.
He can not take part in the management of the firm. This kind of partner exists in limited partnership. But this
organization is rare in our country.

ARTICLES OF PARTNERSHIP
Articles of partnership is a voluntary contract between two or among more than two persons to place their
capital, labor, and skills, and corporation in business with the understanding that there will be a sharing of the
profits and losses between/among partners. Outside of North America, it is normally referred to simply as a
partnership agreement.
A partnership agreement is the written and legal agreement between business partners. It is always
recommended but not essential for partners to have such an agreement.