| LO3 - Describe the characteristics of a partnership. |
A partnership is an unincorporated business owned by more than one person. Partners should have a partnership agreement that stipulates such things as each partner’s rights and duties, the sharing of net income, limits on withdrawals, and means to terminate the partnership. Like a proprietorship, a partnership is not a separate legal entity. For example, each partner’s share of the partnership profits is included as income on the partner’s personal income tax return. Also like a proprietorship, partnerships have unlimited liability. 1 Each partner is personally liable for debts that the partnership cannot pay. In the event that a partner is unable to pay a proportionate share of partnership debts, the other partners can required by creditors to pay these.
Also like a proprietorship, a partnership has a limited life. For example, an existing partnership is dissolved when a new partner is admitted, or an existing partner withdraws or dies. Partner dissolution does not necessarily mean that normal operations cease. Usually the same business continues under a new partnership agreement. Accounting for partnership capital therefore involves issues related to the formation and dissolution of partnerships and to the allocation of the profits and losses to the individual partners.
Partnerships also have a number of unique characteristics. These include mutual agency, co-ownership of assets, and sharing of profit and losses. As a result, accounting for partners’ capital differs from accounting for shareholders’ equity and proprietor’s capital. These characteristics are described below.
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