Partnerships

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.

2.2 Reasons for forming partnerships

o To increase the amount of capital in the business o To eliminate competition o To bring capital and technical expertise together.

2.3 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.

o A partnership is not a legal entity so the partnership does not pay tax, but the .. partners do pay tax.

2.4 Establishment of a partnership

There are two ways of establishing a partnership.

A. 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.

2.5 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
 Capital contributions
 Profit sharing ratios
 Interest on capital, current and drawing account
 Partnership’s salaries and bonuses
 Withdrawals by