PARTNERSHIP

CHARATERISTICS OF PARTNERSHIP
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1. Partnership is not legal entity and partners can only be sued;
2. The liability of each partner is unlimited;
3. A partnership must comprise of at least two members. The maximum number allowed is twenty;
4. Partnerships are governed by the relevant Partnership Act. If the partners do not make their own agreement, or if their own agreement does not cover any particular matter specified in the Partnership Act, provisions of the Partnership Act dealing with that particular matter will become applicable.

ADVANTAGES OF PARTNERSHIP
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1. Like the sole proprietorship, disclosures of financial statements to the general public are not required;
2. Easy to form compared to a limited company;
3. Higher capital is available compared to a sole proprietorship;
4. Taking advantage of the different expertise and skill of the different partners;
5. Low cost of formation;
6. Tax advantage;
7. Partnerships not subjected to many regulations compared to limited companies.

DISADVANTAGES OF PARTNERSHIP
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1. Lack of flexibility unlike the one-man show of a sole proprietorship;
2. Still cannot avoid the unlimited liability like the sole proprietorship;
3. Limited life when one of the partners withdraws or dies, then the partnership will dissolve by itself;
4. Conflicts amongst the partners might affect the stability of the partnership;
5. Capital though higher than a sole proprietorship but still limited compared to a limited company.

SALIENT POINTS TO NOTE:
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The general practice is to have some form of agreement between the partners setting out their rights, duties and liabilities. This agreement is referred as the Partnership Deed.

The normal clauses in a Partnership Deed includes the following:
• Names of the partners and firm’s name;
• Nature of the business;
• Term of the partnership;
• Capital to be introduced by each partner;
• Profit and loss sharing ratios;
• Arrangements as to partners’ drawings and salaries;
• Arrangements regarding interest on capital, advances and drawings;
• Provisions regarding the retirement or death of a partner;
• Method of valuing goodwill upon retirement or death of a partner and
• Other details to be observed by partners.


MAJOR DIFFERENCES OF THE FINANCIAL STATEMENT OF A SOLE PROPRIETORSHIP AND PARTNERSHIP:
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Capital Account : In Sole Proprietorship (SP) only one capital account is prepared. In Partnership (PS) more than one capital account is prepared. The number of capital account in PS depends on the number of partners in the Partnership concern.

Profit / Loss : In SP all the profit belongs to the owner whereas in PS, profit and loss distributed to the partners’ capital account according to the agreed ratio.

Income Statement : No income statement is prepared in SP. The Income statement of the partnership shows a schedule on how the net profit/loss is distributed to the partners.

Balance Sheet : In SP, balance sheet shows only one capital account which belongs to the single owner. In PS, balance sheet shows the balance of the capital amount of each partner classified under owner’s equity.

Statement of Partner’s Equity : In SP, no such statement is prepared. In PS, besides the income statement and balance sheet, a Statement of partner’s equity is also prepared to show the changes in equity of each partner since the beginning of the year.