Definition and Essential Elements of a Partnership

A partnership is a business arrangement where two or more individuals come together to

operate and manage a business for profit. The partners share the profits and losses of the
business, as well as the risks and rewards.

Essential Elements of a Partnership:

1. Agreement: A partnership must be based on an agreement between the partners. It can be

written, verbal, or implied by conduct. While a written agreement is preferred, it is not a
legal requirement in all jurisdictions.
2. Profit Motive: The primary purpose of a partnership is to carry on business and share
profits.
3. Two or More Persons: A partnership requires at least two individuals. The maximum
number of partners varies by jurisdiction, but typically, a partnership can have up to 20
partners in general businesses.
4. Joint Ownership and Control: Partners share the management responsibilities of the
business, and the control is generally equal unless specified otherwise in the partnership
deed.
5. Legal Status: In many jurisdictions, partnerships are not separate legal entities from the
partners, meaning the business and the individuals are the same entity in terms of legal
responsibilities and liabilities (unless registered as a Limited Liability Partnership - LLP).

Partnership Deed

A partnership deed is a legal document that outlines the terms and conditions under which the
partners will conduct the business. It serves as a contract between the partners.

Key Elements of a Partnership Deed:

 Name of the Business: The official name under which the business will operate.
 Name and Address of Partners: The full names and addresses of all partners.
 Capital Contributions: The amount of capital each partner will contribute to the
business.
 Profit and Loss Sharing: The method by which profits and losses will be divided among
the partners.
 Roles and Responsibilities: Specific duties and responsibilities assigned to each partner.
 Duration: The length of time the partnership is intended to last (can be for a fixed term
or indefinite).
 Decision-Making: Guidelines for decision-making within the business, including how
disagreements will be resolved.
 Dissolution Terms: Conditions under which the partnership can be dissolved.

Rights and Duties of Partners

Partners in a partnership have certain rights and responsibilities:

Rights of Partners:

1. Right to Share Profits and Losses: Each partner is entitled to a share of the profits
based on the terms agreed upon in the partnership deed.
2. Right to Participate in Management: Each partner has the right to take part in the
management and operations of the business unless otherwise specified.
3. Right to Inspect Books and Records: Partners can inspect the business's books of
account and records.
4. Right to Remuneration: In some cases, partners may be entitled to remuneration for
services rendered, though this is typically only if agreed in the partnership deed.
5. Right to Transfer Interests: A partner can transfer their interest to another person, but it
may require approval from the other partners.

Duties of Partners:

1. Duty to Act in Good Faith: Partners must act in the best interest of the partnership and
avoid conflicts of interest.
2. Duty to Share Profits and Losses: Partners are bound to share the profits and losses of
the partnership as agreed upon in the partnership deed.
3. Duty to Contribute Capital: Partners are obliged to contribute the agreed capital to the
business.
4. Duty to Act Prudently: Partners must manage the business carefully and avoid risky or
imprudent decisions.
5. Duty to Not Compete: Partners may not engage in business activities that directly
compete with the partnership unless agreed upon.

Partnership Distinguished from Sole Proprietorship and Companies

1. Partnership vs Sole Proprietorship

 Number of Owners:
o In a sole proprietorship, the business is owned and operated by a single
individual.
o In a partnership, there are at least two partners involved.
 Liability:
o In a sole proprietorship, the owner has unlimited liability, meaning personal
assets are at risk.
o In a partnership, partners also have unlimited liability unless structured as a
Limited Liability Partnership (LLP), meaning they are personally liable for the
debts of the business.
 Control and Decision-Making:
o In a sole proprietorship, the single owner has full control over business
decisions.
o In a partnership, decision-making is shared between the partners.
 Profit Sharing:
o In a sole proprietorship, the owner retains all profits.
 o In a partnership, profits are shared between partners according to the terms of
the partnership agreement.

Example:

 Sole Proprietorship: A freelance graphic designer working alone and earning money
from clients is a sole proprietor.
 Partnership: Two friends starting a bakery together, sharing profits and responsibilities,
is an example of a partnership.

2. Partnership vs Company (Corporation)

 Legal Status:
o A partnership does not have a separate legal entity from the partners (unless it's
an LLP or Limited Partnership).
o A company (corporation) is a separate legal entity from its shareholders, meaning
it can own property, incur liabilities, and continue even if the shareholders
change.
 Liability:
o In a partnership, partners typically have unlimited liability unless structured as
an LLP.
o In a company, shareholders have limited liability, meaning they are only liable up
to the amount they invested in the company.
 Management and Control:
o In a partnership, all partners generally share control unless stated otherwise.
o In a company, control is vested in a board of directors, and shareholders elect the
directors.
 Continuity:
o A partnership may dissolve upon the withdrawal or death of a partner unless
specified in the partnership deed.
o A company continues to exist regardless of changes in ownership or
management, providing continuity.

Example:

 Partnership: A small law firm with three partners practicing together is a partnership.
 Company: Apple Inc., a global technology company, is a corporation with shareholders,
limited liability, and a board of directors.

Conclusion

A partnership is a flexible business arrangement where partners share profits, losses, and
management responsibilities. It differs from a sole proprietorship, which is run by a single
individual, and from a company, which has a distinct legal identity and limited liability. The
partnership deed is crucial in formalizing the terms of the partnership, and understanding the
rights and duties of partners helps ensure smooth business operations.