Nature, scope and objectives of partnership PDF

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DEFINITION OF A PARTNERSHIP The Partnership Law is the general governing authority for partnerships.  Accountants advising partnerships must be familiar with this law because it describes many of the rights of each partner and of creditors during creation, operation, and liquidation of the partnership.  Article 1767 of the Partnership Law embodies the definition of partnership.  It states that “by the contract of partnership, two or more persons bind themselves to contribute money, property, or industry to a common fund with the intention of dividing the profits among themselves.” This definition encompasses three distinct factors: 1. Association of Two or More Persons – The “persons” are usually individuals. Any natural person who possesses the right to enter into a contract can become a partner. 2. To Carry On as Co-Owners – A partnership is an aggregation of partners’ individual rights. This means that all partners are co-owners of partnership property and are co-owners of the profits or losses of the partnership. 3. Business for Profit – A partnership may be formed to perform any legal business, trade or profession, or other service. However, the partnership must attempt to make a profit; therefore, non-profit organizations may not be partnerships. CHARACTERISTICS OF A PARTNERSHIP Before taking up the accounting problems encountered in partnerships, it is helpful to know the important characteristics of the partnership form of organization. Separate Legal Personality – Article 1768 of the Partnership Law states that the partnership has a juridical personality separate and distinct from that of each of the partners. A partnership may, therefore, acquire property in its own name and may enter into contracts. Ease of Formation – The formation of a partnership does not require as many formalities as a corporation. The partnership may be created by oral or written agreement between two or more persons, or merely by inferences from the implication of their conduct. Capital Limitations – Partnerships are limited in their ability to raise capital. These funds are usually raised through personal resources or borrowing. Co-ownership of Partnership Property and Profits – All assets invested in the partnership may become the property of the partnership. The right of each partner to possess partnership property for partnership purposes is equal to the right of each of the other partners. Each partner has a proprietary interest in the partnership. This interest refers to each partner’s share in the earnings and in the capital.

Limited Life – Any change in the agreement of the partners terminates the partnership contract. A partnership may also expire any time when there is a change in the relationship of the partners due to the death, withdrawal, bankruptcy or incapacity of a partner. No one can be forced against his will to continue as a partner regardless of the agreed terms of operations. Other factors which may bring a partnership to an end are the expiration of the period specified in the partnership contract and the admission of a new partner. Mutual Agency – Each partner has an equal right to act for the partnership and to enter into contracts binding upon it, as long as he acts within the normal scope of business operations. Each partner is a principal as well as an agent of the partnership. Unlimited Liability – Each partner may be held personally liable for all the debts of the partnership. All of his business and personal properties may be used for the settlement of partnership liabilities. There is, however, a special type of partnership, called limited partnership, wherein certain partners are allowed to limit their personal liabilities to the extent of their capital contributions only. ENTITY VERSUS PROPRIETORSHIP THEORIES  The proprietorship theory views the assets of a business as belonging to the proprietor, the liabilities as debts of the proprietor, and the income of the business as an increase in the proprietor’s net worth (capital).  In practice, however, proprietorship assets and liabilities are treated separately from the personal assets, and liabilities of the proprietor.  Thus, in practice, proprietorship are treated as separate entities, even though, in theory, they are not.  On the other hand, small partnerships are usually viewed as a combination of two or more proprietorships, and the “proprietorship” theory would be the pertinent one for firms this size.  The death of one partner would usually cause dissolution especially if there are only two partners.  Despite the many similarities between partnerships and proprietorships (i.e. unlimited liability, dissolution upon death), partnerships are generally viewed as entities separate and apart from the individual partners.  Assets are viewed as belonging to the partnership and not to the individual partners.  Income earned by the partnership is usually viewed as income to the “entity” with each partner entitled to a distributive share of the income....