STUDY UNIT 2: ESTABLISHMENT AND FINANCIAL STATEMENTS OF A PARTNERSHIP PARTNERSHIP
A partnership is a legal relationship which arises when an agreement is entered into by two to twenty people. Each partner contributes something – cash, assets, knowledge etc to the business with the aim of making a profit which is shared according to an agreement.
Reasons for forming partnerships
To increase the amount of capital in the business
To eliminate competition
To bring capital and technical expertise together.
Legal position of a partner
Partners are joint bearers of the rights of the partnership and are jointly and severally liable for the obligations and debts of the partnership. In South Africa there is no specific legislation which pertains to partnerships.
The operations of partnerships are mainly conducted according to common law.
A partnership is not a legal entity so the partnership does not pay tax, but the .. partners do pay tax.
Establishment of a partnership
There are two ways of establishing a partnership.
ACTION – It is possible to establish a partnership by agreement. This implies that if the actions (conduct) of two or more people are such that they give rise to the assumption that the people are in partnership, then a partnership is automatically established between them. B.
AGREEMENT – A partnership is established when people agree in words to form a partnership.
The partnership agreement
There are no formal requirements but it is desirable to draw up a written agreement between/among partners.
Some details should include
Profit sharing ratios
Interest on capital, current and drawing account
Partnership’s salaries and bonuses
Withdrawals by partners
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