Partnership Firm
KAPG & Associates

A Partnership Firm is a business structure where two or more individuals share ownership, resources, and responsibilities. Partnerships are common among small and medium-sized businesses, especially professional services. Partnerships are ideal for businesses where trust, direct involvement, and shared expertise are important, such as law firms, accounting firms, and consultancies. The structure allows for flexibility and ease of formation, but unlimited liability can be a drawback in certain types of partnerships. Here are the main features:

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Shared Ownership: In a partnership, two or more individuals (partners) come together to form a business, contributing capital, skills, and resources. Each partner shares ownership, profits, and responsibilities according to an agreed-upon ratio.


Unlimited Liability (in general partnerships): In a general partnership, partners have unlimited liability, meaning they are personally liable for the business’s debts and liabilities. Each partner's personal assets could be at risk to cover business obligations, although liability can vary in limited partnerships.


Agreement-Based Structure: Partnerships are typically governed by a partnership agreement, which outlines the roles, profit-sharing ratios, and responsibilities of each partner. The agreement also covers aspects like dispute resolution, decision-making processes, and what happens if a partner exits the firm.


No Separate Legal Entity: In a traditional partnership, the business does not have a separate legal identity, so the partners and the firm are legally the same entity. This differs from LLPs, which are distinct legal entities.


Flexibility and Control: Partners have the flexibility to manage the business directly. This allows for efficient decision-making and direct control over the business, although disagreements may arise.


Limited Life Span: A partnership generally dissolves if a partner leaves, retires, or dies, unless specified otherwise in the agreement. However, the remaining partners can agree to continue the business with modifications.


Taxation: Partnerships are typically taxed as pass-through entities, meaning the firm itself isn’t taxed. Instead, profits and losses pass through to the partners, who report them on their personal tax returns. This avoids double taxation.


Limited Access to Capital: Partnerships may have limited options for raising capital compared to corporations, as they cannot issue shares. Funding is generally limited to personal contributions, loans, or investments from new partners.


Types of Partnerships:

  1. General Partnership: All partners share unlimited liability and manage the business actively.
  2. Limited Partnership (LP): Includes both general partners (with unlimited liability) and limited partners (with liability limited to their investment, and typically no management role).
  3. Limited Liability Partnership (LLP): All partners have limited liability and a separate legal identity, offering more protection and often used by professional firms.