A partnership is when two or more individuals have an arrangement to carry on an activity or trade together for the collective benefit of those persons.
The gains and interest in the entity which will be derived by each individual partner is commonly depicted in a written agreement.
Partnership agreements will typically set out the rules which govern the arrangement and might cover some of the following areas:
Profit Share
On the basis that the partnership will be used as a trading vehicle or business entity, the documents will set out the profit shares and losses applicable to each partner.
In the simplest cases, this will merely be an equal split where the amounts earned are divided by the number of partners.
In other cases, there might be clauses which guarantee certain individuals a minimum or maximum amount of profit.
Capital Requirements
Partnerships, like any other business need financing. Some or all of this requirement might be satisfied by the partners collectively.
In order to ensure the survival of the business, a partnership agreement might stipulate minimum capital account balances which must be maintained by each partner.
At whichever level the balance is set at, each person would have to ensure that drawings or capital repayments did not result the agreed level being breached.
Departure and Arrival of a Partner
The general rule when one or more people leave or join a partnership is that the existing business entity is dissolved.
Due to the lack of practicalities involved in such an arrangement (particularly when there are a large number of partners), agreements can be out in place so that the original entity continues.
This is conditional on at least one person being common to both the old and new partnerships.
Risk and Exposure
Partnerships are similar to sole traders, in that they are seen as an extension of the persons who own them.
Thus, a partner’s personal wealth can be become intrinsically linked to the fortunes of the business.
Partnerships Acts
Subject to amendments written in to the partnerships agreement, the acts of one partner bind the others whether or not they had prior knowledge or had provided consent for that specific act.
This results in each partner implicitly being joint and severally liable for the act of the others.
In essence, there are simply partnerships where a few individuals agree to work together and there are more complex arrangements which are distinct by their levels of formal requirements and procedures.
Whether or not this type of business entity is viable for a particular circumstance, is as always, a matter of personal assessment and conclusion.
