DEFINITION
In a contract of partnership, 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.
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. Partnerships 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.
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 30% 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.
ADVANTAGES AND DISADVANTAGES OF A PARTNERSHIP
A partnership offers certain advantages over a sole
proprietorship and a corporation. It also has a number of disadvantages. They
are as follows:
Advantages versus Proprietorships
1. Brings greater financial capability to the
business.
2. Combines special skills, expertise and experience
of the partners.
3. Offers relative freedom and flexibility of action
in decision-making.
Advantages versus Corporations
1. Easier and less expensive to organize.
2. More personal and informal.
Disadvantages
1. Easily dissolved and thus unstable compared to a
corporation.
2. Mutual agency and unlimited liability may create
personal obligations to partners.
3. Less effective than a corporation in raising
large amounts of capital.
PARTNERSHIP DISTINGUISHED FROM CORPORATION
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.
KINDS OF PARTNERSHIP
1. According to object:
A.
Universal partnership of all present property. All contributions become part of the
partnership fund.
B.
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.
C. 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:
A. General. All partners are liable to the extent of
their separate properties.
B.
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:
A. Partnership with a fixed term or for a particular
undertaking.
B. Partnership at will. One in which no term is
specified and is not formed for any particular undertaking.
4.
According to purpose:
A. Commercial or trading partnership. One formed for
the transaction of business.
B. Professional or non-trading
partnership. One formed for the exercise of profession.
5.
According to legality of existence:
A. De jure partnership. One which has complied
with all the legal requirements for its establishment.
B. De facto partnership. One which
has failed to comply with all the legal requirements for its establishment.
KINDS OF PARTNERS
1. General partner. One who is liable to the extent of his
separate property after all the assets of the partnership are exhausted.
2. Limited
partner. One who is liable only to the extent of his capital contribution.
3. Capitalist partner. One who contributes
money or property to the common fund
of the partnership.
4. Industrial
partner. One who contributes
his knowledge or personal service to the
partnership.
5. Managing
partner. One whom the partners has appointed as manager of the
partnership.
6. Liquidating
partner. One who is designated
to wind up or settle the affairs of the partnership after dissolution.
7. Dormant
partner. One who does not take active part in the business of the
partnership and is not known as a partner.
8. Silent
partner. One who does not take active part in the business of the
partnership though may be known as a partner.
9. Secret
partner. One who takes active
part in the business but is not known to be a partner by outside parties.
10. Nominal
partner or partner by estoppel. One who is actually not a partner
but who represents
himself as one.