A partnership is an arrangement where parties, known as
business partner
A business partner is a commercial entity with which another commercial entity has some form of alliance. This relationship may be a contract
A contract is a legally enforceable agreement between two or more parties that creates, defines, an ...
s, agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals,
businesses
Business is the practice of making one's living or making money by producing or buying and selling products (such as goods and services). It is also "any activity or enterprise entered into for profit."
Having a business name does not separ ...
,
interest
In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distin ...
-based
organization
An organization or organisation (English in the Commonwealth of Nations, Commonwealth English; American and British English spelling differences#-ise, -ize (-isation, -ization), see spelling differences), is an legal entity, entity—such as ...
s,
school
A school is an educational institution designed to provide learning spaces and learning environments for the teaching of students under the direction of teachers. Most countries have systems of formal education, which is sometimes comp ...
s,
government
A government is the system or group of people governing an organized community, generally a state.
In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government is ...
s or combinations.
Organization
An organization or organisation (English in the Commonwealth of Nations, Commonwealth English; American and British English spelling differences#-ise, -ize (-isation, -ization), see spelling differences), is an legal entity, entity—such as ...
s 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.
History
Partnerships
A partnership is an arrangement where parties, known as business partners, agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, business entity, businesses, interest-based organizations, schoo ...
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
Francesco di Marco Datini (c. 1335 – 16 August 1410) was an Italian merchant born in Prato. Datini is notable for having implemented the first partnership system in business in 1383.
Biography
Datini was one of four children of Marco di Datin ...
, 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.
In Europe, the partnerships contributed to the
Commercial Revolution
The Commercial Revolution consisted of the creation of a European economy based on trade, which began in the 11th century and lasted until it was succeeded by the Industrial Revolution in the mid-18th century. Beginning with the Crusades, Europea ...
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.
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. In order 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 The commenda was a medieval contract which developed in Italy around the 10th century, and was an early form of limited partnership. The commenda was an agreement between an investing partner and a traveling partner to conduct a commercial enterpris ...
, very popular with Italian merchant bankers. 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
Trade involves the transfer of goods and services from one person or entity to another, often in exchange for money. Economists refer to a system or network that allows trade as a market.
An early form of trade, barter, saw the direct excha ...
,
contract
A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tr ...
s,
bills of exchange
A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time, whose payer is usually named on the document. More specifically, it is a document contemplated by or consisting of a ...
and long-distance
international trade
International trade is the exchange of capital, goods, and services across international borders or territories because there is a need or want of goods or services. (see: World economy)
In most countries, such trade represents a significant ...
were established.
[Jairus Banaji (2007), "Islam, the Mediterranean and the rise of capitalism", '']Historical Materialism
Historical materialism is the term used to describe Karl Marx's theory of history. Marx locates historical change in the rise of class societies and the way humans labor together to make their livelihoods. For Marx and his lifetime collaborat ...
'' 15 (1): 47–74, Brill Publishers. After the fall of the Roman Empire, the Levant trade revived in the 10th to 11th centuries 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).
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. Moreover, Mongol elites formed trade partnerships with merchants from Central and Western Asia and Europe, including
Marco Polo’s family.
Partnership agreements
In order 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 the relationship between them.
In business, two or more companies join forces in a joint venture, a buyer-supplier relationship, a
strategic alliance A strategic alliance (also see strategic partnership) is an agreement between two or more parties to pursue a set of agreed upon objectives needed while remaining independent organizations.
The alliance is a cooperation or collaboration which aims ...
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. In this case, the alliance may be structured in a process comparable to a
Mergers & Acquisitions
Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspec ...
transaction. A large literature in business and management has paid attention to the formation and management of partnership agreements. It has, in particular, shown the role of contracts and relational mechanisms to organize business partnerships.
Partnerships present the involved parties with complex negotiation and special challenges that must be navigated unto 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 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.
Equity vs. salaried partners
In certain partnerships of individuals, particularly
law firms and
accountancy
Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "langua ...
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.
*An equity partner is a part-owner of the
business, and is entitled to a proportion of the distributable
profits of the partnership.
* A salaried partner who is paid a
salary
A salary is a form of periodic payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece wages, where each job, hour or other unit is paid separately, rather than on a periodic basis.
F ...
but does not have any underlying ownership interest in the business and will not share in the
distributions of the partnership (although it is quite common for salaried partners to receive a bonus based on the firm's profitability).
Although individuals in both categories are described as partners, equity partners and salaried partners have little in common other than
joint and several liability
Where two or more persons are liable in respect of the same liability, in most common law legal systems they may either be:
* jointly liable, or
* severally liable, or
* jointly and severally liable.
Joint liability
If parties have joint liabili ...
. 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").
*Lockstep involves new partners joining the partnership with a certain number of "points". As time passes, they accrue additional points, until they reach a set maximum sometimes referred to as a plateau. The length of time it takes to reach the maximum is often used to describe the firm (so, for example, one could say that one firm has a "seven-year lockstep" and another has a "ten-year lockstep" depending on the length of time it takes to reach maximum equity).
*Source of origination involves the compensation of profits according to a formula that takes into consideration the amount of revenue and profit generated by each partner, such that partners who generate more revenue receive a greater share of the partnership's distributed profit.
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.
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.
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
corporation
A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and ...
s in taxation policy, since
dividend tax
A dividend tax is a tax imposed by a jurisdiction on dividends paid by a corporation to its shareholders (stockholders). The primary tax liability is that of the shareholder, though a tax obligation may also be imposed on the corporation in the ...
es only occur on profit before they are distributed to the partners. However, depending on the partnership structure and the
jurisdiction
Jurisdiction (from Latin 'law' + 'declaration') is the legal term for the legal authority granted to a legal entity to enact justice. In federations like the United States, areas of jurisdiction apply to local, state, and federal levels.
J ...
in which it operates, owners of a partnership may be exposed to greater
personal liability
In law, liable means "responsible or answerable in law; legally obligated". Legal liability concerns both civil law and criminal law and can arise from various areas of law, such as contracts, torts, taxes, or fines given by government agencie ...
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
In law, common law (also known as judicial precedent, judge-made law, or case law) is the body of law created by judges and similar quasi-judicial tribunals by virtue of being stated in written opinions."The common law is not a brooding omnipres ...
, 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.
Forms of partnership
The general partnership, in which all partners manage the business and are personally liable for its debts, developed under
common law
In law, common law (also known as judicial precedent, judge-made law, or case law) is the body of law created by judges and similar quasi-judicial tribunals by virtue of being stated in written opinions."The common law is not a brooding omnipres ...
. 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
Where two or more persons are liable in respect of the same liability, in most common law legal systems they may either be:
* jointly liable, or
* severally liable, or
* jointly and severally liable.
Joint liability
If parties have joint liabili ...
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
Limited liability is a legal status in which a person's financial liability is limited to a fixed sum, most commonly the value of a person's investment in a corporation, company or partnership. If a company that provides limited liability to it ...
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,
and in the U.S. where it was created by statute.
More recently, additional forms of partnership have been recognized:
*
limited liability partnership
A limited liability partnership (LLP) is a partnership in which some or all partners (depending on the jurisdiction) have limited liabilities. It therefore can exhibit elements of partnerships and corporations. In an LLP, each partner is not ...
(LLP): a form of partnership in which all partners may have some degree of limited liability.
*
limited liability limited partnership
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 ...
(LLLP): a form of limited partnership in which general partners have limited liability for the debts and obligations of the limited partnership.
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. 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. 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. 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.
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.
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).
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.
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"
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.
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
The Companies Act 2013 is an Act of the Parliament of India on Indian company law which regulates incorporation of a company, responsibilities of a company, directors, dissolution of a company. The 2013 Act is divided into 29 chapters containin ...
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
The Parliament of India ( IAST: ) is the supreme legislative body of the Republic of India. It is a bicameral legislature composed of the president of India and two houses: the Rajya Sabha (Council of States) and the Lok Sabha (House of the ...
.
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.
North America
Canada
Statutory regulation of partnerships in Canada fall under
provincial jurisdiction
Canadian federalism () involves the current nature and historical development of the federal system in Canada.
Canada is a federation with eleven components: the national Government of Canada and ten provincial governments. All eleven go ...
. 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.
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. 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.
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
The Uniform Law Commission (ULC), also called the National Conference of Commissioners on Uniform State Laws, is a non-profit, American unincorporated association. Established in 1892, the ULC aims to provide U.S. states (plus the District of C ...
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 The Uniform Partnership Act (UPA), which includes revisions that are sometimes called the Revised Uniform Partnership Act (RUPA), is a uniform act (similar to a model statute), proposed by the National Conference of Commissioners on Uniform State La ...
and the
Uniform Limited Partnership Act. Most U.S. states have adopted a form of the
Uniform Partnership Act The Uniform Partnership Act (UPA), which includes revisions that are sometimes called the Revised Uniform Partnership Act (RUPA), is a uniform act (similar to a model statute), proposed by the National Conference of Commissioners on Uniform State La ...
, which includes provisions regulating
general partnerships,
limited partnerships and
limited liability partnership
A limited liability partnership (LLP) is a partnership in which some or all partners (depending on the jurisdiction) have limited liabilities. It therefore can exhibit elements of partnerships and corporations. In an LLP, each partner is not ...
s.
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. The IRC defines federal tax obligations for partnership operations that effectively serve as federal regulation of some aspects of partnerships.
East Asia
Hong Kong
A partnership in Hong Kong is a business entity formed by the Hong Kong 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.
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
*
Alliance
An alliance is a relationship among people, groups, or states that have joined together for mutual benefit or to achieve some common purpose, whether or not explicit agreement has been worked out among them. Members of an alliance are called ...
*
Consortium
*
Business partnering
Business partnering is the development of successful, long term, strategic relationships between customers and suppliers, based on achieving best practice and sustainable competitive advantage. In the business partner model, HR professionals work c ...
*
Corporation
A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and ...
*
General partnership
*
Joint venture
A joint venture (JV) is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and economic risk, risks, and shared governance. Companies typically pursue joint ventures for one of four rea ...
*
Keiretsu
*
Limited liability partnership
A limited liability partnership (LLP) is a partnership in which some or all partners (depending on the jurisdiction) have limited liabilities. It therefore can exhibit elements of partnerships and corporations. In an LLP, each partner is not ...
(LLP)
*
Limited partnership (LP)
*
Partnership accounting
When two or more individuals engage in enterprise as co-owners, the organization is known as a partnership. This form of organization is popular among personal service enterprises, as well as in the legal and public accounting professions. The impo ...
*
Partnership taxation Partnership taxation is the concept of taxing a partnership business entity. Many jurisdictions regulate partnerships and the taxation thereof differently.
Common law
Many common law jurisdictions apply a concept called "flow through taxation" to ...
*
Strategic Alliance A strategic alliance (also see strategic partnership) is an agreement between two or more parties to pursue a set of agreed upon objectives needed while remaining independent organizations.
The alliance is a cooperation or collaboration which aims ...
*
Types of business entity
A business entity is an entity that is formed and administered as per corporate law in order to engage in business activities, charitable work, or other activities allowable. Most often, business entities are formed to sell a product or a servi ...
*
Up or out
Up or out, also known as a tenure or partnership system, is the requirement for members of a hierarchical organization to achieve a certain rank within a certain period of time. If they fail to do so, they must leave the organization.
Examples ...
(aka partnership system)
References
External links
*
{{Authority control
Business law
Types of business entity