What is a Partnership Agreement?

What is Partnership?

A partnership agreement is an agreement between two or more individuals who sign a contract to start a profitable business together. In the Partnership agreement, the partners are equally responsible for the debt of an organisation. Even if one person withdraws his/her partnership, they are liable for an already existing debt, and future liability if they do not provide with proper notice of retirement. Sometimes, a partnership can also exist without signing any scripted agreement, in such cases law that regulates partnership would apply.

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Few things that should be highlighted on the partnership agreement are given below:

  • Type of business
  • The contribution of a fund by each partner
  • Each partner’s right and responsibilities
  • Percentage of ownership and profit and loss to be distributed amongst each other

Categories of Agreement

Partnership Agreement is classified into 3 categories, namely:

  • General Partnership
  • Limited Partnership
  • Silent Partnership

Importance of Partnership Agreement:

A partnership agreement is vital to keep away the disagreement, confusion or any changes that might occur in the course of business tenure. Below are a few points that describe why a partnership agreement is essential:

  • To form distinguished roles and responsibilities for each partner.
  • To avoid tax problems, the tax status shows that the partner is dispensing profits to each partner based on accounting practice and acceptable tax.
  • To avoid liability and legal issue, if there is any with any of the partners.
  • It helps to deal with any lifestyle or circumstance changes of any partners. They usually deal with buy-out agreement with individual partners.
  • To surpass non-compete agreements and conflict of interest with partners.
  • To overrule the state law.

Partners Contribution & Percentage Distribution

  • Partner contribution can be in a different amount and type including cash, idea, partner’s time on a job. In this regards, each partner’s contribution need not necessarily be in cash. That means the partners may make uniform inputs to the business, have equal rights, but the inputs may not be in cash but other different forms.
  • Since each partner has distinct responsibilities and strength, partnership share is 100 percent impartial from a financial point of view.
  • The partnership percentage can be estimated by calculating the total cash required to invest in starting a new business and dividing each partner share with that total.
  • The role each partner plays in starting a company and the amount of work and time contributed can also dictate a percentage of proprietorship as much as financial offerings.
  • If partners have a corporate entity, create a total stock that has equal worth as the business, if 1000 stock is 100 percent ownership divide and calculates each partner share.

For example, to get the estimated value of a share in a business, the cost of a company should be divided by the total number of shares. If the business is worth ₹. 35,00,000/- with 1,000 shares, the share value is ₹. 3,500/-.

How does the Partnership Work?

Partnership in Business

In business, there are two types of partnership. Namely:

  • General Partnership: It is formed when two or more individual enters into an agreement to run a business and make profits. Generally, no written agreements are made in this partnership but share all joint and various liabilities of the partner.
  • Limited Partnership: The partner invest money but do not operate or involve themselves in operating a business. This partnership is formed legally and by creating an agreement.

Types of Partners in a Partnership

Listed below are the different type of partners depending upon the type and level of partnership:

  • General and limited partners: General partners manage and participate in the partnership and also had liability for depts. Whereas, limited partners invest in the business but do not interfere in the management.
  • Salaried partners and Equity partners: In partnership, some partners are paid salary, while the equity partners have a share in the business.
  • Different levels of partners: Here, the job role, responsibilities, investment, level of inputs may be different.

The above mentioned is the concept, that is elucidated in detail about all the aspects of partnership and partnership agreement for the Commerce students. To know more, stay tuned to BYJU’S.

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