Partnership

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A partnership is an agreement where parties agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, businesses, interest-based organizations, schools, governments or combinations. Organizations may partner to increase the likelihood of each achieving their mission and to amplify their reach. A partnership may result in issuing and holding equity or may be only governed by a contract.

Contents

History

Partnerships have a long history; they were already in use in medieval times in Europe and in the Middle East. According to a 2006 article, the first partnership was implemented in 1383 by Francesco di Marco Datini, a merchant of Prato and Florence. The Covoni company (1336–40) and the Del Buono-Bencivenni company (1336–40) have also been referred to as early partnerships, but they were not formal partnerships. [1]

In Europe, the partnerships contributed to the Commercial Revolution which started in the 13th century. In the 15th century the cities of the Hanseatic League would mutually strengthen each other; a ship from Hamburg to Gdansk would not only carry its own cargo but was also commissioned to transport freight for other members of the league. This practice not only saved time and money, but also constituted a first step toward partnership. This capacity to join forces in reciprocal services became a distinctive feature, and a long lasting success factor, of the Hanseatic team spirit. [2]

A close examination of medieval trade in Europe shows that numerous significant credit based trades were not bearing interest. Hence, pragmatism and common sense called for a fair compensation for the risk of lending money, and a compensation for the opportunity cost of lending money without using it for other fruitful purposes. To circumvent the usury laws edicted by the Church, other forms of reward were created, in particular through the widespread form of partnership called commenda , very popular with Italian merchant bankers. [3] Florentine merchant banks were almost sure to make a positive return on their loans, but this would be before taking into account solvency risks.

In the Middle East, the qirad and mudarabas institutions developed when trade with the Levant, namely the Ottoman Empire and the Muslim Near East, flourished and when early trading companies, contracts, bills of exchange and long-distance international trade were established. [4] After the fall of the Roman Empire, the Levant trade revived from the 10th to 11th century in Byzantine Italy. The eastern and western Mediterranean formed part of a single commercial civilization in the Middle Ages, and the two regions were economically interdependent through trade (in varying degrees). [5]

The Mongols adopted and developed the concepts of liability in relation to investments and loans in Mongol–ortoq partnerships, promoting trade and investment to facilitate the commercial integration of the Mongol Empire. The contractual features of a Mongol-ortoq partnership closely resembled that of qirad and commenda arrangements; however, Mongol investors used metal coins, paper money, gold and silver ingots and tradable goods for partnership investments and primarily financed money-lending and trade activities. [6] Moreover, Mongol elites formed trade partnerships with merchants from Central and Western Asia and Europe, including Marco Polo's family. [7]

Partnership agreements

To come into being, every partnership necessarily involves a partnership agreement, even if it has not been reduced to writing. In common law jurisdictions, a written partnership agreement is not legally required, but partners may benefit from a partnership agreement that articulates the important terms of their relationship. [8]

In business, two or more companies join forces in a joint venture, [9] a buyer–supplier relationship, a strategic alliance or a consortium to i) work on a project (e.g. industrial or research project) which would be too heavy or too risky for a single entity, ii) join forces to have a stronger position on the market, iii) comply with specific regulation (e.g. in some emerging countries, foreigners can only invest in the form of partnerships with local entrepreneurs).
[10] In this case, the alliance may be structured in a process comparable to a Mergers & Acquisitions transaction. A large literature in business and management has paid attention to forming and managing partnership agreements. [11] It has, in particular, shown the role of contracts and relational mechanisms to organize business partnerships. [12]

Partnerships present the involved parties with complex negotiations and special challenges that must be navigated to agreement. Overarching goals, levels of give-and-take, areas of responsibility, lines of authority and succession, how success is evaluated and distributed, and often a variety of other factors must all be negotiated. Once an agreement is reached, the partnership is typically enforceable by civil law, especially if well documented. Partners who wish to make their agreement affirmatively explicit and enforceable typically draw up articles of partnership. Trust and pragmatism are also essential as it cannot be expected that everything can be written in the initial partnership agreement, therefore quality governance [13] and clear communication are critical success factors in the long run. It is common for information about formally partnered entities to be made public, such as through a press release, a newspaper ad, or public records laws.

Partner compensation

Partner compensation will often be defined by the terms of a partnership agreement. Partners who work for the partnership may receive compensation for their labor before any division of profits between partners. [14]

Equity vs. salaried partners

In certain partnerships of individuals, particularly law firms and accountancy firms, equity partners are distinguished from salaried partners (or contract or income partners). The degree of control which each type of partner exerts over the partnership depends on the relevant partnership agreement. [15]

Although individuals in both categories are described as partners, equity partners and salaried partners have little in common other than joint and several liability. In many legal systems, salaried partners are not technically "partners" at all in the eyes of the law. However, if their firm holds them out as partners, they are nonetheless subject to joint and several liabilities.

In their most basic form, equity partners enjoy a fixed share of the partnership (usually, but not always an equal share with the other partners) and, upon distribution of profits, receive a portion of the partnership's profits proportionate to that share. In more sophisticated partnerships, different models exist for determining either ownership interest, profit distribution, or both. Two common alternate approaches to distribution of profit are "lockstep" and "source of origination" compensation (sometimes referred to, more graphically, as "eat what you kill"). [16]

Law firms

The source of origination compensation is rarely seen outside of law firms. The principle is simply that each partner receives a share of the partnership profits up to a certain amount, with any additional profits being distributed to the partner who was responsible for the "origination" of the work that generated the profits. [16]

British law firms tend to use the lockstep principle, whereas American firms are more accustomed to source of origination. When British firm Clifford Chance merged with American firm Rogers & Wells, many of the difficulties associated with that merger were blamed on the difficulties of merging a lockstep culture with a source of origination culture. [17]

Taxation

Partnerships recognized by a government body may enjoy special benefits from taxation policy. Among developed countries, for example, business partnerships are often favored over corporations in taxation policy, since dividend taxes only occur on profit before they are distributed to the partners. However, depending on the partnership structure and the jurisdiction in which it operates, owners of a partnership may be exposed to greater personal liability than they would as shareholders of a corporation. In such countries, partnerships are often regulated via antitrust laws, so as to inhibit monopolistic practices and foster free market competition. Enforcement of the laws, however, varies considerably. Domestic partnerships recognized by governments typically enjoy tax benefits, as well.

Common law

At common law, members of a business partnership are personally liable for the debts and obligations of the partnership. Forms of partnership have evolved that may limit a partner's liability. [18]

Forms of partnership

The general partnership, in which all partners manage the business and are personally liable for its debts, developed under common law. General partners have an obligation of strict liability to third parties injured by the Partnership. General partners may have joint liability or joint and several liability depending upon circumstances.

The limited partnership (LP), is a partnership in which general partners manage the partnership's operations, and limited partners forego the right to manage the business in exchange for limited liability for the partnership debts. The liability of limited partners is limited to their investment in the partnership. This form of partnership was developed in the 19th century, the U.K. where it was imparted by charter, [19] and in the U.S. where it was created by statute. [18] [19]

More recently, additional forms of partnership have been recognized:

Silent partners

A silent partner or sleeping partner is one who still shares in the profits and losses of the business, but who is not involved in its management. [20] Sometimes the silent partner's interest in the business will not be publicly known. A silent partner is often an investor in the partnership, who is entitled to a share of the partnership's profits. Silent partners may prefer to invest in limited partnerships in order to insulate their personal assets from the debts or liabilities of the partnership.

Oceania

Australia

Summarising s. 5 of the Partnership Act 1958 (Vic), for a partnership in Australia to exist, four main criteria must be satisfied. They are:

  • Valid Agreement between the parties;
  • To carry on a business – this is defined in s. 3 as "any trade, occupation or profession";
  • In Common – meaning there must be some mutuality of rights, interests and obligations;
  • View to Profit – thus charitable organizations cannot be partnerships (charities are typically incorporated associations under Associations Incorporations Act 1981 (Vic))

Partners share profits and losses. A partnership is basically a settlement between two or more groups or firms in which profit and loss are equally divided

South Asia

Bangladesh

In Bangladesh, the relevant law for regulating partnership is the Partnership Act 1932. [21] A partnership is defined as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. [22] The law does not require written partnership agreement between the partners to form a partnership. A partnership is not required to be registered, but a partnership is considered as a separate legal identity from its owners only if the partnership is registered. There must be a minimum of 2 partners and maximum of 20 partners. [23]

India

According to section 4 of the Partnership Act of 1932,"Partnership is defined as the relation between two or more persons who have agreed to share the profits of a business carried on by all or any one of them acting for all". This definition superseded the previous definition given in section 239 of Indian Contract Act 1872 as – "Partnership is the relation which subsists between persons who have agreed to combine their property, labor, skill in some business, and to share the profits thereof between them". The 1932 definition added the concept of mutual agency. The Indian Partnerships have the following common characteristics:

1) A partnership firm is not a legal entity apart from the partners constituting it. It has limited identity for the purpose of tax law as per section 4 of the Partnership Act of 1932. [24]

2) Partnership is a concurrent subject. Contracts of partnerships are included in the Entry no.7 of List III of The Constitution of India (the list constitutes the subjects on which both the State government and Central (National) Government can legislate i.e. pass laws on). [24]

3) Unlimited Liability. The major disadvantage of partnership is the unlimited liability of partners for the debts and liabilities of the firm. Any partner can bind the firm and the firm is liable for all liabilities incurred by any firm on behalf of the firm. If property of partnership firm is insufficient to meet liabilities, personal property of any partner can be attached to pay the debts of the firm. [24]

4) Partners are Mutual Agents.The business of firm can be carried on by all or any of them acting for all. Any partner has authority to bind the firm. Act of any one partner is binding on all the partners. Thus, each partner is 'agent' of all the remaining partners. Hence, partners are 'mutual agents'. Section 18 of the Partnership Act, 1932 says "Subject to the provisions of this Act, a partner is the agent of the firm for the purpose of the business of the firm" [24]

5) Oral or Written Agreements. The Partnership Act, 1932 nowhere mentions that the Partnership Agreement is to be in written or oral format. Thus the general rule of the Contract Act applies that the contract can be 'oral' or 'written' as long as it satisfies the basic conditions of being a contract i.e. the agreement between partners is legally enforceable. A written agreement is advisable to establish existence of partnership and to prove rights and liabilities of each partner, as it is difficult to prove an oral agreement. [24]

6) Number of Partners is minimum 2 and maximum 50 in any kind of business activities. Since partnership is 'agreement' there must be minimum two partners. The Partnership Act does not put any restrictions on maximum number of partners. However, section 464 of Companies Act 2013, and Rule 10 of Companies (Miscellaneous) Rules, 2014 prohibits partnership consisting of more than 50 for any businesses, unless it is registered as a company under Companies Act, 2013 or formed in pursuance of some other law. Some other law means companies and corporations formed via some other law passed by Parliament of India.

7) Mutual agency is the real test. The real test of 'partnership firm' is 'mutual agency' set by the Courts of India, i.e. whether a partner can bind the firm by his act, i.e. whether he can act as agent of all other partners. [24]

North America

Canada

Statutory regulation of partnerships in Canada fall under provincial jurisdiction. A partnership is not a separate legal entity and partnership income is taxed at the rate of the partner receiving the income. It can be deemed to exist regardless of the intention of the partners. Common elements considered by courts in determining the existence of a partnership are that two or more legal persons:

  • Are carrying on a business
  • In common
  • With a view to profit. [25]

United States

Under U.S. law a partnership is a business association of two or more individuals, through which partners share the profits and responsibility for the liabilities of their venture. [26] U.S. states recognize forms of limited partnership that may allow a partner who does not participate in the business venture to avoid liability for the partnership's debts and obligations. Partnerships typically pay less taxes than corporations in fields like fund management. [27] [28]

The federal government of the United States does not have specific statutory law governing the establishment of partnerships. Instead, every U.S. state and the District of Columbia has its own statutes and common law that govern partnerships. The National Conference of Commissioners on Uniform State Laws has issued non-binding model laws (called uniform act) in which to encourage the adoption of uniformity of partnership law into the states by their respective legislatures. Model laws include the Uniform Partnership Act and the Uniform Limited Partnership Act. Most U.S. states have adopted a form of the Uniform Partnership Act, which includes provisions regulating general partnerships, limited partnerships and limited liability partnerships.

Although the federal government does not have specific statutory law for establishing partnerships, it has an extensive statutory and regulatory scheme for the taxation of partnerships, set forth in the Internal Revenue Code (IRC) and Code of Federal Regulations. [29] The IRC defines federal tax obligations for partnership operations [30] that effectively serve as federal regulation of some aspects of partnerships.

East Asia

China

A partnership in the People's Republic of China is a business entity governed by the Partnership Enterprise Law [31] passed by the Standing Committee of the National People's Congress to authorize and govern partnership enterprises. A partnership is a type of business entity in which partners share with each other the profits or losses of the business undertaking in which all have invested.

Hong Kong

A partnership in Hong Kong is a business entity formed by the Hong Kong Partnerships Ordinance, [32] which defines a partnership as "the relation between persons carrying on a business in common with a view of profit" and is not a joint stock company or an incorporated company. [33] If the business entity registers with the Registrar of Companies it takes the form of a limited partnership defined in the Limited Partnerships Ordinance. [34] [35] However, if this business entity fails to register with the Registrar of Companies, then it becomes a general partnership as a default. [35]

Europe

United Kingdom limited partnership

A limited partnership in the United Kingdom consists of:

  • One or more people called general partners, who are liable for all debts and obligations of the firm; and
  • One or of the firm beyond the amount contributed.

Limited partners may not:

  • Draw out or receive back any part of their contributions to the partnership during its lifetime; or
  • Take part in the management of the business or have power to bind the firm.

If they do, they become liable for all the debts and obligations of the firm up to the amount drawn out or received back or incurred while taking part in the management, as the case may be.

See also

Related Research Articles

Business is the practice of making one's living or making money by producing or buying and selling products. It is also "any activity or enterprise entered into for profit."

<span class="mw-page-title-main">Equity (finance)</span> Ownership of property reduced by its liabilities

In finance, equity is an ownership interest in property that may be offset by debts or other liabilities. Equity is measured for accounting purposes by subtracting liabilities from the value of the assets owned. For example, if someone owns a car worth $24,000 and owes $10,000 on the loan used to buy the car, the difference of $14,000 is equity. Equity can apply to a single asset, such as a car or house, or to an entire business. A business that needs to start up or expand its operations can sell its equity in order to raise cash that does not have to be repaid on a set schedule.

A joint venture (JV) is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and risks, and shared governance. Companies typically pursue joint ventures for one of four reasons: to access a new market, particularly emerging market; to gain scale efficiencies by combining assets and operations; to share risk for major investments or projects; or to access skills and capabilities.

<span class="mw-page-title-main">Limited liability partnership</span> Partnership in which some or all partners have limited liabilities

A limited liability partnership (LLP) is a partnership in which some or all partners have limited liabilities. It therefore can exhibit aspects of both partnerships and corporations. In an LLP, each partner is not responsible or liable for another partner's misconduct or negligence. This distinguishes an LLP from a traditional partnership under the UK Partnership Act 1890, in which each partner has joint liability. In an LLP, some or all partners have a form of limited similar to that of the shareholders of a corporation. Depending on the jurisdiction, however, the limited liability may extend only to the negligence or misconduct of the other partners, and the partners may be personally liable for other liabilities of the firm or partners.

<span class="mw-page-title-main">Sole proprietorship</span> Business legally synonymous with its owner

A sole proprietorship, also known as a sole tradership, individual entrepreneurship or proprietorship, is a type of enterprise owned and run by only one person and in which there is no legal distinction between the owner and the business entity. A sole trader does not necessarily work alone and may employ other people.

<span class="mw-page-title-main">Private limited company</span> Type of company used in many jurisdictions

A private limited company is any type of business entity in "private" ownership used in many jurisdictions, in contrast to a publicly listed company, with some differences from country to country. Examples include the LLC in the United States, private company limited by shares in the United Kingdom, GmbH in Germany and Austria, Besloten vennootschap in The Netherlands, société à responsabilité limitée in France, and sociedad de responsabilidad limitada in the Spanish-speaking world. The benefit of having a private limited company is that there is limited liability.

<span class="mw-page-title-main">Law firm</span> Business entity formed to practice law

A law firm is a business entity formed by one or more lawyers to engage in the practice of law. The primary service rendered by a law firm is to advise clients about their legal rights and responsibilities, and to represent clients in civil or criminal cases, business transactions, and other matters in which legal advice and other assistance are sought.

<span class="mw-page-title-main">Limited partnership</span> Form of partnership

A limited partnership (LP) is a type of partnership with general partners who have a right to manage the business and limited partners who have no right to manage the business but have only limited liability for its debts. Limited partnerships are distinct from limited liability partnerships, in which all partners have limited liability.

The rules governing partnership taxation, for purposes of the U.S. Federal income tax, are codified according to Subchapter K of Chapter 1 of the U.S. Internal Revenue Code. Partnerships are "flow-through" entities. Flow-through taxation means that the entity does not pay taxes on its income. Instead, the owners of the entity pay tax on their "distributive share" of the entity's taxable income, even if no funds are distributed by the partnership to the owners. Federal tax law permits the owners of the entity to agree how the income of the entity will be allocated among them, but requires that this allocation reflect the economic reality of their business arrangement, as tested under complicated rules.

<span class="mw-page-title-main">General partnership</span> Basic form of partnership under common law

A general partnership, the basic form of partnership under common law, is in most countries an association of persons or an unincorporated company with the following major features:

<span class="mw-page-title-main">Limited liability limited partnership</span> Business entity in U.S. commercial law

The limited liability limited partnership (LLLP) is a relatively new modification of the limited partnership. The LLLP form of business entity is recognized under United States commercial law. An LLLP is a limited partnership, and it consists of one or more general partners who are liable for the obligations of the entity, as well as or more protected-liability limited partners. Typically, general partners manage the LLLP, while the limited partners' interest is purely financial. Thus, the most common use of limited partnership is for purposes of investment.

<span class="mw-page-title-main">Company</span> Association or collection of individuals

A company, abbreviated as co., is a legal entity representing an association of legal people, whether natural, juridical or a mixture of both, with a specific objective. Company members share a common purpose and unite to achieve specific, declared goals.

There are many ways in which a business may be owned under the legal system of England and Wales.

General partner is a person who joins with at least one other person to form a business. A general partner has responsibility for the actions of the business, can legally bind the business and is personally liable for all the partnership's debts and obligations.

A partnership in Hong Kong is a business entity formed by the Partnerships Ordinance, which defines a partnership as "the relation between persons carrying on a business in common with a view of profit" and is not a joint stock company or an incorporated company. If the business entity registers with the Registrar of Companies it takes the form of a limited partnership defined in the Limited Partnerships Ordinance. However, if this business entity fails to register with the Registrar of Companies, then it becomes a general partnership as a default.

A partner in a law firm, accounting firm, consulting firm, or financial firm is a highly ranked position, traditionally indicating co-ownership of a partnership in which the partners were entitled to a share of the profits as "equity partners". The title can also be used in corporate entities where equity is held by shareholders.

United Kingdom partnership law concerns the way that partnerships are formed or governed within the United Kingdom. Depending upon where the partnership was formed, English law, Scots law or Northern Irish law may apply in addition to statutes that create a framework across the UK. Under Scots law a partnership is a distinct legal entity and can borrow money from a bank in the name of the partnership, while English law only allows borrowing in the names of individual partners. Partnerships are a form of business association, which arises automatically when people carry on business with a view to a profit. Partners are jointly and severally liable, just as they own the property in common.

An international joint venture (IJV) occurs when two businesses based in two or more countries form a partnership. A company that wants to explore international trade without taking on the full responsibilities of cross-border business transactions has the option of forming a joint venture with a foreign partner. International investors entering into a joint venture minimize the risk that comes with an outright acquisition of a business. In international business development, performing due diligence on the foreign country and the partner limits the risks involved in such a business transaction.

<span class="mw-page-title-main">Partnership Act 1890</span> United Kingdom legislation

The Partnership Act 1890 is an Act of the Parliament of the United Kingdom which governs the rights and duties of people or corporate entities conducting business in partnership. A partnership is defined in the act as 'the relation which subsists between persons carrying on a business in common with a view of profit.'

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