Partnership is a long-term commitment to operate in business together. The people who own a partnership are called partners. They maintain one set of accounting records and share the profits and losses.
Nature of Partnership
1. It is formed to make profits
2. It must obey the law as given in the Partnership Act 1890. If there is a limited partner, it must also comply with the Limited Partnership Act of 1907. 3. Normally there can be a minimum of two partners and a maximum of twenty partners. 4. Each partner (except for limited partners) must pay their share of any debts that the partnership could not pay. This can be said to be unlimited liability. 5. Partners who are not limited partners are known as general partners.
Limited partnerships are partnerships containing one or more limited partners. Limited partnership must be registered with the Registrar of Companies. Limited partners are not liable for the debts of the partnership with respect to unlimited liability.
Characteristics and Limitations of Limited Partnership
1. Their liability for the debts of the partnership is limited to the capital they have put in. 2. They are not allowed to take out or receive back any part of their contribution to the partnership during its lifetime. 3. They are not allowed to take part in the management of the partnership or to have the power to make the partnership take a decision. 4. All the partners cannot be limited partners, so there must be at least one general partner with unlimited liability.
Limited Liability Partnership
This form of partnership was first introduced in 2000. They differ from limited partnership in that partners are liable only to the extent of their capital invested. Also, all partners are permitted to take part in the management of the partnership.
Agreements in writing are not necessary. However, it is better if a written agreement is drawn up by a lawyer or an accountant.
Contents of Partnership Agreements
1. The capital to be contributed by each partner;
2. The ratio in which profits (or losses) are to be shared;
3. The rate of interest, if any, to be paid on capital before the profits are shared; 4. The rate of interest, if any, to be charged on partners drawings; 5. Salaries to be paid to partners;
6. Arrangements for the admission of new partners;
7. Procedures to be carried out when a partner retires or dies.
Where no partnership agreement exists
Where no partnership exists, express or implied, Section 24 of the Partnership Act 1890 governs the situation. The accounting content of this section states:
1. Profits and losses are to be shared equally.
2. There is no interest allowed on capital.
3. No interest is to be charged on drawings.
4. Salaries are not allowed.
5. Partners who put a sum of money into a partnership in excess of the capital they have agreed to subscribe are entitled to interest at the rate of 5 per cent per annum on such an advance.
Nature of goodwill
Goodwill is an intangible asset. It can only exist if the business was purchased and the amount paid was greater than the value of the net assets.
Reasons for payment of goodwill
1. The business has a large number of regular customers who will continue to deal with the new owner. 2. The business has a good reputation.
3. It has experienced efficient and reliable employees.
4. The business is situated in a good location.
5. It has good contacts with suppliers.
6. It has well-known brand names that have not been valued and included as assets.
Although goodwill is not normally entered in the financial statements unless it has been purchased, sometimes it is necessary where partnerships are concerned. Unless it has been agreed differently, partners own a share in the goodwill in the same ration in which they share profits. This means that when something happens such as
a) Existing partners...
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