It enables two or more parties to operate, own and control an organization, where the parties agree to share the profits and the losses incurred by the company in a pre-decided format

Author: Kevin Henderson
Kevin Henderson
Kevin Henderson
Private Equity | Corporate Finance

Kevin is currently the Head of Execution and a Vice President at Ion Pacific, a merchant bank and asset manager based Hong Kong that invests in the technology sector globally. Prior to joining Ion Pacific, Kevin was a Vice President at Accordion Partners, a consulting firm that works with management teams at portfolio companies of leading private equity firms.

Previously, he was an Associate in the Power, Energy, and Infrastructure Investment Banking group at Lazard in New York where he completed numerous M&A transactions and advised corporate clients on a range of financial and strategic issues. Kevin began his career in corporate finance roles at Enbridge Inc. in Canada. During his time at Enbridge Kevin worked across the finance function gaining experience in treasury, corporate planning, and investor relations.

Kevin holds an MBA from Harvard Business School, a Bachelor of Commerce Degree from Queen's University and is a CFA Charterholder.

Reviewed By: Manu Lakshmanan
Manu Lakshmanan
Manu Lakshmanan
Management Consulting | Strategy & Operations

Prior to accepting a position as the Director of Operations Strategy at DJO Global, Manu was a management consultant with McKinsey & Company in Houston. He served clients, including presenting directly to C-level executives, in digital, strategy, M&A, and operations projects.

Manu holds a PHD in Biomedical Engineering from Duke University and a BA in Physics from Cornell University.

Last Updated:October 26, 2023

What Is a Partnership?

A partnership is an arrangement that enables two or more parties to operate, own and control an organization, where the parties agree to share the profits and the losses incurred by the company in a pre-decided format. 

According to Kimball and Kimball, it is a group of men who come together to share capital and services for achieving organizational goals.

According to Dr. William R. Spriegal, two or more people form a partnership, and each is responsible for the obligations. Each of the partners may support each other, and the partners have unlimited liability where personal assets may be taken for debts of the firm. 

The parties or people who form a partnership are separately called ‘partners’ and together called a ‘firm.’ It is also believed that it came into existence to overcome the limitations of the sole proprietorship

Kashish G defined it as the relation between two or more parties who agreed to share profits and losses carried on by all or anyone acting for all. 

According to Sindhuja S, it is an association of two or more persons who came together to run the business to share profits and losses. The firm’s partners are responsible for operating the business, capital, and profits. 

Partnership Features

The features are as follows: 

  1. Agreement between partners: There is an agreement between two or more persons or parties, which can be verbal or written. Partners agreed on the agreement when they commenced the partnership firm.
  2. Two or more parties to be involved: There should be a minimum of 2 persons to get involved, with no restriction on a maximum number of partners. 
  3. Sharing of profits and losses: One of the significant features includes sharing profits earned and losses incurred by the partners in a pre-decided ratio. 
  4. Business motive: It must obey and follow the profit-oriented motive of the business. 
  5. Mutual business: The partners are considered the agents of the business, and the partners should consider that any action performed by one would affect the other partners and the firm. 
  6. Unlimited liability: The partners have unlimited liability, where the creditors can recover the debts from the private properties of the partners when the firm assets are not enough. 
  7. Restriction on transfer of shares: The partners cannot sell or transfer the shares to someone else or make anyone else the partner. 
  8. Good faith and trust: The partners must have faith and trust, enabling the smooth flow of business. 
  9. Dissolution can be dissolved on any partner’s death, illness, or insolvency

Importance of Partnership

According to Sindhuja S, the need for partnership arose from the limitations of the sole proprietorship. There is a huge need for this kind of organizational structure as it enhances some of the drawbacks of the other structure and provides several advantages to the partners. 

During expansion, sole proprietorship finds it difficult to fulfill the company’s requirement of funds which further limits business management leading to borrowing debt from creditors. This helps in arranging funds for expansion and managing work effectively and efficiently.

So, to enhance this situation and resolve this issue of limited funds, this form of the organization came into existence. It is considered beneficial when it requires a high amount of funds and managerial expert talent. 

In other words, this type of organization enhances the knowledge, expertise of work, and available resources to prepare better products and reach a greater customer base or audience. This also helps in intensifying the atmosphere of the business firm.

The importance includes:

  1. Easy formation: It is easy to form with the help of an agreement, which is a written contract between the partners with all the necessary details of the business and the partners. 
  2. Easy to get additional capital: The partners provide additional capital that can be used to expand the business. 
  3. Specialization in work: The work is allotted to the management experts, enabling effective and efficient work output. 
  4. Better decisions: The partners can discuss and then take decisions accordingly with a collective opinion. 
  5. Reduced risk: As all the incomes and losses are divided among the company’s partners, the risk of incurring losses is divided and reduced.

Types of Partnerships

It is classified into three types, as mentioned below: 

1. General

It comprises two or more partners, where each partner has an equal right in the business. 

The profits, losses, and debts are shared equally among the partners. The rights of decision-making and management are also equally divided among the partners. The partners possess unlimited liability. 

2. Limited

It comprises both general and limited partners, where the general partners have unlimited liability and manage the business’s operations. In contrast, the limited partners have limited liability and have no involvement in the management or operations of the business. 

3. Limited Liability

According to this, all partners have limited liability, where the partners are guarded against other partners’ legal and financial mistakes. This is considered similar to a Limited Liability Company

Types of Partners

The classification of partners is as follows: 

  1. Active partner: A partner who participates in day-to-day operations and activities in the business. 
  2. Dormant partner or sleeping partner: Partners who only contribute towards the capital and take their share of profit but do not involve themselves in day-to-day operations and activities. 
  3. Nominal partner: A partner with no interest in the partnership but just lending their name to the company. The nominal partner will not contribute any capital and not share any profits of the company.
  4. Partner by Estoppel: If a person identifies someone else as a firm partner, whether by his words, actions, or conduct, then such a partner is a partner by estoppel. 
  5. Partner in profits only: a partner who will only share profits in the firm but not be liable for liabilities or sharing the firm’s losses. 
  6. Secret partner: The partner who does not reveal themself but has all the rights that other partners possess. 

Partnership Deed

It is a written agreement between 2 or more partners of the firm who agreed to share the losses and profits of the firm. It is a legal document between the partners, written or oral. It is also called an agreement with the partners. 

It includes basic details about the business and the partners and outlines of the terms and conditions. It also states the role of all the partners and the proportion of their share in the profits and losses of the business. 

Contents: The deed contains several essential characteristics of the agreement, which are agreed upon by all the partners and bound by those terms and conditions mentioned in the agreement. 

The following are the contents that are included in the deed: 

  1. Name and details of the firm 
  2. Name and details of the partners
  3. Date when the business commenced
  4. Duration of business existence
  5. The profit-sharing ratio among the partners
  6. Duties, responsibilities, and power of each partner
  7. Rights of each partner
  8. Process of admission or retirement of a partner
  9. Procedure for dissolution of a firm or when a partner becomes insolvent
  10. Capital contributed by each partner
  11. Salary or remuneration paid to the partner
  12. Goodwill calculation
  13. Drawings made by the partners

Importance: The agreement is important when there is conflict among the partners regarding the business and their share. The agreement controls and observes the partners’ duties, responsibilities, and rights. 

This agreement avoids any misunderstanding or confusion based on the profit-sharing ratio or roles of the partners, or any terms and conditions, as everything is mentioned in the agreement. Furthermore, it also mentions the remuneration paid to the partners according to their work. 

Partnership FAQs

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Researched and Authored by Vanshika Nakul | LinkedIn 

Reviewed and Edited by Abhijeet Avhale | LinkedIn

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