PARTNERSHIP

An Overview
 HOW PARTNERSHIP OPERATES?
• Basically, the manner a partnership business
operates is the same with that of sole
proprietorship; be it on rendering services;
sale of merchandise and manufacturing of a
product.
• Assets = Liabilities + Partners’ Equity
 DIFFERENCE BETWEEN SOLE
PROPRIETORSHIP AND PARTNERSHIP
• 1. Capital Structure - In a sole proprietorship,
capital is owned and provided by one person
called proprietor and the ownership in capital
is known as Owner’s Equity. While in
partnership, capital is owned and provided by
at least two or more persons called partners
and their ownership in capital is known as
Partners’ Equity.
 DIFFERENCE BETWEEN SOLE
PROPRIETORSHIP AND PARTNERSHIP
• 2. Plurality of capital and drawing accounts –
There is only one capital and one drawing
account in a sole proprietorship because there
is only one owner. In the case of the
partnership, there are as many capital and
drawing accounts as each partner is provided
with one capital and drawing account.
 DIFFERENCE BETWEEN SOLE
PROPRIETORSHIP AND PARTNERSHIP
• 3. Division of Profits – There is only one owner
in a sole proprietorship, once it makes profit
from operations, the owner wholly receives it.
If he suffered loss, he will shoulder it by
himself. In the case of the partnership profit
and loss will be shared by the partners
according to agreed ratio.
 DIFFERENCE BETWEEN SOLE
PROPRIETORSHIP AND PARTNERSHIP
• 4. Profit is Closed to “Drawing Accounts” –
Under sole proprietorship, profit and loss is
closed to Capital Account while under
partnership, profit and loss is closed to
Drawing Account. This is done in order not to
impair the original capital contribution of the
partners.
 DIFFERENCE BETWEEN SOLE
PROPRIETORSHIP AND PARTNERSHIP
• 5. Admission – When a new partner is
admitted in an existing partnership, the
contract that was executed by the old partners
will be dissolved in favor of a new contract
drawn between by both new and old partners.
 DIFFERENCE BETWEEN SOLE
PROPRIETORSHIP AND PARTNERSHIP
• 6. Closure of the Partnership’s Operation – A
partnership will stop to operate and liquidated
when partners ceased to be partners. Series of
steps is done to end the contract, to wit:
Realization of Assets, Payment of Liabilities
and Distribution of Capital and Profits to
partners which is termed as liquidation.
 PARTNERSHIP
• “a contract whereby 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’’
-Article 1767 of the New Civil Code of the
Philippines
 CHARACTERISTICS OF PARTNERSHIP
• 1. Mutual Agency – every partner has the
authority to act for the partnership and
become binding if such act is within his
express or implied authority.
• 2. Limited Life – partnership exist on contract
drawn by the partners and can be terminated
anytime the partners so desire causing the
partnership to be dissolved. (retirement,
withdrawal, death, bankruptcy, incapacity of a
partner and admission of a new partner)
 CHARACTERISTICS OF PARTNERSHIP
• 3. Unlimited Liability – partnership creditors
can run after the personal assets of the
partners (except limited partners) after all the
partnership assets have been exhausted.
• 4. Co-ownership – when a property is invested
by a partner in the partnership, such property
is no longer owned by him but by the
partnership and because partners are co-
owners, each and every one of them acquires
equity over such investment.
 CHARACTERISTICS OF PARTNERSHIP
• 5. Plurality of Capital and Drawing Accounts –
a unique characteristics wherein each partner
is provided with a capital and drawing
accounts.
• 6. Profit and Loss Distribution – a partner has
to share for every amount of profit that the
business makes or loss that the business
incurs.
 ADVANTAGES OF A PARTNERSHIP
1. It can easily be formed because it exists on
agreement.
2. Better management can be attained considering
the combined expertise of the partners.
3. A bigger amount of capital can be raised as
compared to sole proprietorship.
4. Partnership for the exercise of profession is
exempted from payment of income tax.
5. The interest of one partner cannot be
transferred to a new partner without the
consent of other partners.
 DISADVANTAGES OF A PARTNERSHIP
1. A partner’s personal assets can be ran after
by the partnership creditor in case the
partnership could not pay all it obligation
(except limited partner)
2. Misunderstanding and disputes may arise
among partners.
3. Limited source of capital as compared to
corporation.
4. Possible divisiveness in reaching a decision.
5. Limited life of existence.
 KINDS OF PARTNERSHIP
1. According to its activities
– a. Trading Partnership – its main activity is to
manufacture or purchase and sale of goods.
– b. Non-Trading Partnership – its main activity is to
engage in service activities, professional or non-
professional activities.
 KINDS OF PARTNERSHIP
2. According to its liability of the partners
– a. General Partnership – all partners are general
partners, that is all partners are personally liable
for the unpaid partnership debts to the extent of
their personal assets.
– b. Limited Partnership – not all partners can be
limited partners. There should be at least one (1)
general partner who acts as the “shock absorber”
of the partnership unpaid obligation.
 KINDS OF PARTNERSHIP
3. According to its duration
– a. Partnership at will – the life of the business
depends upon the will of the partners.
– b. Partnership for a fixed term – the life of the
business depends on the stated fixed year of
operation.
– c. Partnership for a particular undertaking – the
life of the business depends on the completion of
the undertaking/purpose of the partnership.
 CLASSIFICATION OF PARTNERS
1. As to Contribution
– a. Capitalist Partner – contributes money or
property.
– b. Industrial Partner – contributes only his
personal services.
– c. Capitalist-Industrial Partner – contributes not
only money, or property but also personal services
as well.
 CLASSIFICATION OF PARTNERS
2. As to Liability
– a. General Partner – is one who is liable for
partnership debts up to the extent of his personal
assets.
– b. Limited Partner – is one who is liable for
partnership debts up to the extent of his
interest/contribution/capital in the partnership
only.
 CLASSIFICATION OF PARTNERS
3. Other Classification
– a. Nominal Partner – a partner who makes no
investment, does not participate in running the
business but permits his name to be used either for
accommodation or consideration.
– b. Secret Partner - a partner who is not known as a
partner but actively participate in running the
partnership affair.
– c. Silent Partner – a partner who does not take active
part in running the partnership affairs and is known as
being a partner.
– d. Dormant Partner - a partner who has a financial
interest in the partnership but does not take active
part in running the partnership affair and is not known
as a partner.