Section 1 of 8
A partnership is a business owned and managed by between 2 and 20 partners who share responsibility for the business.
Most of the financial statements of a partnership are identical to those of a sole trader. The key differences are:
| Feature | Sole trader | Partnership |
|---|---|---|
| Income statement | Ends at profit for the year | Has an appropriation account section showing how profit is divided |
| Statement of financial position | Single capital account | Capital split into capital accounts and current accounts per partner |
Most partnerships have a formal partnership agreement that sets out the terms on which the partners operate. Its purpose is to protect each partner's interests if a dispute arises.
A partnership agreement typically specifies:
If no partnership agreement exists, the following default rules apply under the Partnership Act 1890:
| Rule | Default under the Act |
|---|---|
| Capital contributions | Partners contribute equal capital |
| Profit and loss sharing | Profits and losses shared equally |
| Interest on drawings | No interest charged on drawings |
| Interest on capital | No interest paid on capital |
| Partner salaries | No salaries paid to partners |
| Interest on a loan account | 5% per annum on any partner loan to the business |
A sleeping (dormant) partner has invested capital but takes no active role in the management of the business. They would not normally be entitled to a salary.
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