Friday, February 8, 2013

What are Characteristics of Partnerships?

Characteristics of Partnerships

Partnerships are an important type of organization because they offer certain advantages with their unique characteristics. We describe these characteristics in this section.

Voluntary Association
A partnership is a voluntary association between partners. Joining a partnership increases the risk to one’s personal financial position. Some courts have ruled that partnerships are created by the actions of individuals even when there is no express agreement to form one.

Partnership Agreement
Forming a partnership requires that two or more legally competent people (who are of age and of sound mental capacity) agree to be partners. Their agreement becomes a partnership contract Agreement among partners that sets terms under which the affairs of the partnership are conducted; also called articles of partnership., also called articles of copartnership. Although it should be in writing, the contract is binding even if it is only expressed verbally. Partnership agreements normally include details of the partners’ (1) names and contributions, (2) rights and duties, (3) sharing of income and losses, (4) withdrawal arrangement, (5) dispute procedures, (6) admission and withdrawal of partners, and (7) rights and duties in the event a partner dies.

Point: When a new partner is admitted, all parties usually must agree to the admission.

Limited Life The life of a partnership is limited. Death, bankruptcy, or any event taking away the ability of a partner to enter into or fulfill a contract ends a partnership. Any one of the partners can also terminate a partnership at will.

Point: The end of a partnership is referred to as its dissolution.

Taxation A partnership is not subject to taxes on its income. The income or loss of a partnership is allocated to the partners according to the partnership agreement, and it is included in determining the taxable income for each partner’s tax return. Partnership income or loss is allocated each year whether or not cash is distributed to partners.

Point: Partners are taxed on their share of partnership income, not on their withdrawals.

Mutual Agency Mutual Agency  
Legal relationship among partners whereby each partner is an agent of the partnership and is able to bind the partnership to contracts within the scope of the partnership’s business. implies that each partner is a fully authorized agent of the partnership. As its agent, a partner can commit or bind the partnership to any contract within the scope of the partnership business. For instance, a partner in a merchandising business can sign contracts binding the partnership to buy merchandise, lease a store building, borrow money, or hire employees. These activities are all within the scope of a merchandising firm. A partner in a law firm, acting alone, however, cannot bind the other partners to a contract to buy snowboards for resale or rent an apartment for parties. These actions are outside the normal scope of a law firm’s business. Partners also can agree to limit the power of any one or more of the partners to negotiate contracts for the partnership. This agreement is binding on the partners and on outsiders who know it exists. It is not binding on outsiders who do not know it exists. Outsiders unaware of the agreement have the right to assume each partner has normal agency powers for the partnership. Mutual agency exposes partners to the risk of unwise actions by any one partner.
 


Point: The majority of states adhere to the Uniform Partnership Act for the basic rules of partnership formation, operation, and dissolution.

Unlimited Liability Unlimited Liability
Legal relationship among general partners that makes each of them responsible for partnership debts if the other partners are unable to pay their shares. implies that each partner can be called on to pay a partnership’s debts. When a partnership cannot pay its debts, creditors usually can apply their claims to partners’ personal assets. If a partner does not have enough assets to meet his or her share of the partnership debt, the creditors can apply their claims to the assets of the other partners. A partnership in which all partners have mutual agency and unlimited liability is called a general partnership. Mutual agency and unlimited liability are two main reasons that most general partnerships have only a few members.

Point: Limited life, mutual agency, and unlimited liability are disadvantages of a partnership.

Co-Ownership of Property Partnership assets are owned jointly by all partners. Any investment by a partner becomes the joint property of all partners. Partners have a claim on partnership assets based on their capital account and the partnership contract.

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