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Friday, September 21, 2018

Formation of Partnership - A Financial Accounting Guide For Students

A partnership is a business arrangement in which two or more people own a business entity and share in its profits, losses, and risks.

A partnership business may be established without any formality although the partners third parties may be involved. They may make an agreement between themselves in respect of the rights and responsibilities of each partner.

Accordingly it is usual for people entering into partnership to express their intention in a partnership agreement known as deed of partnership. Deed of partnership may be defined as agreements, rules and regulations guiding the members of a partnership.
 The agreement contains the following rules and regulations:

  • The names of the partners.
  • The nature of the firm.
  • The nature of the business formed.
  • The rights and duties of each partner.
  • The proportion in which capital is to be provided and whether interest should be paid on capital.
  • The signatories on the cheques.
  • The sharing of profits and provision for drawings.
  • Duration of the partnership.
  • The circumstances which shall dissolve the partnership.   
  • The payment of partners’ salaries.
  • The method of admission of new partners.
  • The objective of the firm.           

In addition to the deed of partnership agreement, the partners must engage in a number of other formation activities that are common to all businesses.
These should include:

  • Registration of the business name.
  • Obtain any licenses required by governments where the partnership plans to operate
  • Open a current bank account in the name of the partnership
  • Submit information annually about the returns from the business with the Internal Revenue Service.

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