Partnership Agreement (Articles of Partnership)
Definition
A Partnership Agreement or Articles of Partnership is a formal document specifying the rights, responsibilities, and obligations of partners in a partnership. When express or implied agreements are absent, the Partnership Act 1890 provisions apply, which entail guidelines on profit sharing, payment processes, and partner introduction or retirement conditions.
Key Provisions of the Partnership Act 1890
- Profit and Loss Sharing: Partners share equally in the profits or losses of the partnership.
- Salaries: Partners are not entitled to receive salaries.
- Interest on Capital: Partners are not entitled to interest on their capital contributions initially; however, they may receive interest at 5% per annum on any advances beyond their agreed capital.
- Introduction of New Partners: New partners may not be introduced without the consent of all existing partners.
- Retirement of Partners: A retiring partner is entitled to receive interest at 5% per annum on his or her share of partnership assets retained post-retirement.
- Dissolution of the Partnership: Upon dissolution:
- Assets are used first to repay outside creditors.
- Secondly, to repay partners’ advances.
- Thirdly, to repay partners’ capital.
- Any remaining residue is distributed to partners according to the profit-sharing ratio.
Examples
- Equal Profit Sharing: In a scenario where a partnership made a profit of $100,000, each of the four partners, in the absence of any specific agreement, would receive $25,000.
- No Salaries: Partners contributing their efforts to the business won’t receive a salary for their work unless explicitly stated in the agreement.
- Interest on Advances: If a partner makes a personal advance of $10,000 beyond their capital, they may receive 5% per annum interest on this amount.
Frequently Asked Questions (FAQs)
Q1: What happens if one partner wants to leave the partnership? A1: The retiring partner is entitled to interest at 5% per annum on their retained share of partnership assets post-retirement.
Q2: Can we change the provisions of the Partnership Act 1890 in our agreement? A2: Yes, partners can create their own articles of partnership agreement to override default provisions, provided all partners consent to the terms.
Q3: What if our agreement is silent on a particular matter? A3: If silent, the provisions of the Partnership Act 1890 will automatically apply to that specific issue.
Related Terms
- Limited Liability Partnership (LLP): A partnership where some or all partners have limited liabilities, protecting personal assets from business debts.
- Profit-Sharing Ratio: The ratio in which partners agree to distribute profits or losses among themselves.
- Dissolution: The process of terminating a partnership, involving settling debts and distributing remaining assets.
Online Resources
Suggested Books for Further Studies
- “Partnership Law” by Geoffrey Morse: An in-depth analysis of partnership laws including the Partnership Act 1890.
- “The Law of Partnerships and LLPs: A Practical Guide” by Roderick I’Anson Banks: A comprehensive guide on both general partnership and limited liability partnership laws.
Accounting Basics: “Partnership Agreement” Fundamentals Quiz
### What is another term commonly used for a Partnership Agreement?
- [ ] Contract of Partnership
- [x] Articles of Partnership
- [ ] Business Agreement
- [ ] Corporate Contract
> **Explanation:** Articles of Partnership is another term commonly used for a Partnership Agreement, outlining the terms under which the partnership operates.
### Under the Partnership Act 1890, how are the profits or losses shared if there is no specific agreement?
- [ ] Based on seniority
- [ ] Proportionate to capital contribution
- [x] Equally
- [ ] Randomly
> **Explanation:** In the absence of a specific agreement, partners share equally in the profits or losses according to the Partnership Act 1890.
### Can partners receive salaries under the Partnership Act 1890 provisions?
- [ ] Yes, they can receive fixed salaries.
- [x] No, partners are not entitled to receive salaries.
- [ ] Yes, but only if there is a written consent.
- [ ] No, only in profit-sharing.
> **Explanation:** The Partnership Act 1890 states that partners are not entitled to receive salaries unless expressly agreed otherwise.
### What is the interest rate a partner may receive on any advances over and above their agreed capital?
- [ ] 3% per annum
- [ ] 10% per annum
- [x] 5% per annum
- [ ] 7% per annum
> **Explanation:** Partners may receive interest at 5% per annum on any advances over and above their agreed capital as per the Partnership Act 1890.
### Who must consent for a new partner to be introduced into the partnership?
- [ ] Majority of the partners
- [ ] Senior-most partner
- [x] All existing partners
- [ ] Business advisors
> **Explanation:** A new partner cannot be introduced unless all existing partners consent according to the Partnership Act 1890.
### What entitlement does a retiring partner have under the Partnership Act 1890?
- [ ] Right to a fixed salary until death
- [ ] Option to sell shares on the open market
- [ ] No entitlements
- [x] Interest at 5% per annum on their asset share retained in the partnership
> **Explanation:** A retiring partner is entitled to receive interest at 5% per annum on the share of their partnership assets retained in the partnership after their retirement.
### What is the priority for asset distribution upon the dissolution of the partnership?
- [ ] Assets are distributed to partners first.
- [x] Repay outside creditors first.
- [ ] Repay the government first.
- [ ] Distribute assets according to original capital contributions.
> **Explanation:** Upon dissolution, assets are first used to repay outside creditors, then partners' advances, and then partners' capital as per the Partnership Act 1890.
### Can interest on capital be claimed automatically by partners?
- [ ] Yes, for all capital contributions.
- [ ] Only if the partnership makes profits.
- [x] No, partners are not entitled to interest on their capital.
- [ ] Yes, if there is a contract specifying it.
> **Explanation:** Partners are not entitled to interest on their capital contributions unless otherwise specified in the agreement.
### What must be specified in the partnership agreement regarding profit-sharing ratios?
- [x] How profits and losses will be shared among partners.
- [ ] Only profits distribution among partners.
- [ ] How to reinvest profits only.
- [ ] How to handle losses only.
> **Explanation:** The partnership agreement must outline how profits and losses will be shared among the partners.
### Under what condition can the provisions of the Partnership Act 1890 be overridden in a partnership?
- [ ] No conditions; they cannot be overridden.
- [ ] With government intervention.
- [x] Through an express partnership agreement agreed by all partners.
- [ ] By majority vote.
> **Explanation:** The provisions of the Partnership Act 1890 can be overridden through an express partnership agreement agreed upon by all partners.
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