Formation of a partnership

Formation of a Partnership

• A partnership is an arrangement where two or more individuals share the profits and losses of a business venture. Various terms and conditions of a partnership are outlined in the partnership agreement.

• Partnership agreement should ideally feature:
  • The amount of capital each partner will contribute.
  • The ratio in which profits and losses will be shared.
  • Any special rights or responsibilities each partner may have.
  • The procedures for admitting or expelling partners.
  • How the partnership will be dissolved, if necessary.

• A partnership forms when each partner contributes something to the business. This capital could take the form of money, physical resources, or even intellectual capital. This is specified in the Deed of Partnership.

• Integration of these elements initiates the formation of a partnership. This process is often guided by a solicitor to ensure all legal aspects are covered and protected.

Capital Contributions

• Each partner contributes a certain amount of capital to start the business. This capital is recorded in separate capital account for each partner.

• Fixed capital accounts are used when the partners’ capital contributions do not change throughout the life of the partnership.

• Fluctuating capital accounts are used when partners’ capital contributions can change over time – such as when a partner contributes extra capital or withdraws some of their capital.

Profit and Loss Sharing

• Profits and losses are shared among partners as per the agreed ratio in the partnership agreement.

• If the agreement does not specify a ratio, profits and losses are shared equally by default regardless of the amount of capital contributed.

Partnership Accounts

• Records of the partnership’s financial activities are recorded in the Partnership Accounts. It includes income earned, expenses incurred, assets acquired, liabilities, capitals, withdrawals etc.

• Accurate accounting records are kept and used to draw up the Partnership Financial Statements - these detail the financial position of the business, and the profits or losses that it has made.

• Each partner has access to the partnership’s accounts and can inspect them at any time.

Dissolution of Partnership

• When a partnership is to be dissolved, the assets of the business are sold, and the revenue obtained is used to first pay off any existing liabilities.

• The remaining amounts are then distributed to the partners, based on their capital and profit sharing ratios as mentioned in the partnership agreement.