Partnership is defined as the relationship which exists between persons carrying on a business in common with a view of profit.
In other words, a partnership is an arrangement between two or more individuals in which they undertake to share the risks and rewards of a joint business operations.
It is usual for a partnership to be established formally by means of a partnership agreement. However, if individuals act as though they are in partnership even if no written agreement exists, they it will be presumed in law that a partnership does exist and that its terms of agreement are the same as those laid down in the partnership act 1890.
The partnership agreement
The partnership agreement is a written agreement in which the terms of the partnership are set out, and in particular the financial arrangements as between partners the items it should cover include the following.
- Profit sharing ration
- Interest on capital
- Partners salaries
- Guaranteed minimum profit shares
In the absence of a formal agreement between the partners, certain rules laid down by the partnership act are presumed to apply instead.
- Residual profits are shared equally between the partners
- There are no partners’ salaries
- Partners receive no interest on the capital they invest in the business
- Partners are entitled to interest of 5% per annul on any loans they advance to the business in excess of their agreed capital