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Partnership Accounting |
Definition: Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.
Characteristics of Partnership :
1. Two or more persons = There must be at least two persons to form a partnership and all such persons must be competent to contract.
2. Agreement = Partnership comes into existence by an agreement, either written or oral.
3. Lawful Business = A partnership is established for a lawful business.
4. Profit-sharing = The agreement between/among the partners must be to share profits and losses of the business. It is not essential that all the partners must share losses also.
5. Business can be carried on by all or any of the partners acting for all = Business of the partnership can be carried on by all or any of them acting for all the partners. In other words, partners are agents as well as the principals.
Rights of Partners :
1. Every partner has the right to participate in the management of the business.
2. Every partner has the right to be consulted about the affairs of the business.
3. Every partner has the right to inspect the books of account and have a copy of it.
4. Every partner has the right to share profits or losses with others in the agreed ratio.
5. Every partner has the right not to allow the admission of a new partner.
6. After giving proper notice, a partner has the right to retire from the firm.
Partnership Deed :
1. Description of the partners = Names, description and addresses of the partners.
2. Description of the firm = Name and address of the firm.
3. Principal place of business = Address of the principal place of business.
4. Nature of Business = Nature of business that the firm shall carry on.
5. Commencement of partnership = Date of commencement of partnership.
6. Capital contribution = The amount of capital to be contributed by each partner, whether the Capital Accounts shall be fixed or fluctuating.
7. The interest of Capital = Rate of interest, if allowed on capital.
8. Interest on Drawings = Rate of interest if to be charged on drawings.
9. Profit-sharing ratio = Ratio in which profits or losses are to be shared by the partners.
10. Interest on loan = Rate of interest on the loan by a partner to a firm.
11. Remuneration to partners = Amount of salary, commission, etc., if agreed to be paid.
12. Valuation of goodwill = Method by which goodwill of the firm will be valued at the time of admission or retirement of a partner or at the time of death of a partner.
13. Settlement of account = The manner in which accounts of partners shall be settled in case of his (their) retirement or death or at the time of dissolution of the firm.
14. Valuation of assets = The manner in which assets of the firm shall be valued in the case of its reconstitution.
15. Rights and duties of partners = The rights and duties of partners are defined.
16. Duration of partnership = The period of the partnership,i.e., whether it is for a specified period or for a venture or at will.
17. Bank account operation = How shall the Bank Account be operated? Whether it shall be operated by any of the partners or jointly.
18. Death of a Partner = Whether the firm will continue or dissolve.
19. Settlement of Disputes = Disputes, if any, among the partners-how they shall be settled.
Limited Liability Partnership (LLP) :
It is a business vehicle like the partnership with the additional feature of partners' liability being limited.
Characteristic of an LLP
1. Separate Legal Entity
2. Minimum capital of an LLP is not specified
3. An LLP can be established with at least two members who shall also be the Designated Partners and shall have Director Identification Number (DIN).
4. The audit is not mandatory.
Benefits of an LLP
1. It is more flexible as compared to a company to organize internal structure.
2. There is no maximum limit for the number of partners in LLP. In a private limited company, the number of shareholders is limited to 200 shareholders excluding past and present employee-shareholders.
3. Raising and utilization of funds depends on the partners' will as against norms prescribed in the companies act, 2013 as applicable to companies.
4. The liability of partners is limited to their contribution as against liability of partners being unlimited in the case of a normal partnership. However, the LLP Agreement is prepared in the same manner as the partnership deed is prepared.
Disadvantages of LLP
1. Any act of the partner without the knowledge of other partners may bind the LLP.
2. LLP cannot raise money from the public.
3. Venture capital firms generally prefer not to invest in LLPs. Private Limited is preferred over LLP.
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