Partnership

Partnership

A partnership is an unincorporated business owned by two or more partners. A partnership often is referred to as firm.

Partners are the least common form of business organization – probably because they often wind up with “to many bosses”. However they are widely used for professional practices, such as medicine, law, and public counting. Partnerships also used for many small businesses, especially those that are family owned. Most partnerships are small businesses – but certainly not all.

For accounting purposes, we view a partnership as entity separate from the other activities of its owners. But under the law, the partnership is not “separate” from its owner. Rather, the law regards the partners as personally – and jointly - responsible for the activities of the business.

The assets of a partnership do not belong to the business – they belong jointly to all of the partners. Unless special provisions are made, each partner has the unlimited personal liability fro the debts of the business. The partnership itself pays no income taxes, but the partners include their respective shares of the firm’s income in their personal income tax returns.

From a legal standpoint, partnerships have limited lives. A partnership ends upon the withdrawal or death of an existing partner. Admission of a new partner terminates the previous partnership and creates a new legal entity. However, this is only a distinction. Most partnership has continuity of existence extending beyond the participation of individuals partners. Partnership agreements often have provisions that make the retirement of partners and the admission new partners routine events that do not effect the operations of the business.

The term “partnership” actually includes three distinct types of organizations: general partnerships, limited partnerships, and limited liability partnerships

General Partnerships:

In a general partnership, each partner has rights and responsibilities similar to those of a sole proprietor. For example, each partner can withdraw cash and many other assets from the business at will. Also, each partner has the full authority of an owner to negotiate contracts binding upon the business. This concept is called mutual agency. Every partner has also has unlimited personal liability for the debts of the firm.

Combining the characteristics of unlimited personal liability and mutual agency makes a general partnership a potentially dangerous form of business organization. Assume, for example, that you enter into a general partnership with tom Jones. You agree to split profits and losses “50-50”. While you are on vocation. Jones commits the partnership to a contract that is simply does not have the resources to complete. Your firm’s failure to complete the contract causes large financial losses to the customer. The customer sues your firm and is awarded the judgment of 55 million by the court.

Limited Partners:

A limited partnership has one or more general partners and one or more limited partners. The general partners are partners in the traditional sense, with unlimited personal liability for the debts of the business and the right to make managerial decisions.

The limited partners are basically passive investors. They share in the profits and losses of the business, but they do not participate actively in management and are not personally liable for the debts of the business.


Limited liability partner:

A limited liability partnership is a relatively new form of business organization. States traditionally have required professionals, such as doctors, lawyers and accountants to organize their practices either as sole proprietor ships or as partnerships. The purpose of this requirement was to ensure that these professionals had unlimited liability of their professional activities.
Over the years, many professionals’ partnerships have grown in size. Several public accounting firms, for example, now have thousands of partners and operate in countries all over the world. Also, lawsuits against professionals firms have increased greatly in number and in dollar amount. To prevent these lawsuits from bankrupting innocent partners, the concept of the limited liability partnership has emerged. In this type of partnership, each partner has unlimited personal liability for his her own professionals activities, but not for the actions of other partners. Unlike a limited partnership, all of the partners in a limited liability partnership may participate in management of the firm.

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