Question

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Imagine that one of your colleagues has offered you the opportunity to become a partner in a new business venture. The colleague stipulates that due to your past relationship, there is no reason to draw up a partnership agreement. From the information you’ve gathered from Form 1065, identify the different partnership roles and select the one with the least potential liability if the business fails. Discuss the pros and cons of drawing up a partnership agreement. Defend your position.

Answer 1

In a partnership firm, a partner works as an owner. There is unlimited liability of a partner in partnership firm. If firm fails to pay his liability, partner's personal assets get utilize to pay outside liabilities of business. He also works as an agent for the firm. A partner works for the firm to earn profit. He also gets remuneration, bonus, salary, commission for his working, but he has no right to get remuneration. He requires bringing capital and goodwill to get share in assets and profit. All partner of firm distribute profit and loss as per partnership agreement if there is no partnership agreement than profit/loss should be share equally between the partners. If there is difference arise in any business matter, then that matter should be solved by majority. Partner can access firm books and accounts.

In case of business failure, First of all firms assets use to pay firm’s liabilities, if these any assets shortfall to pay these liabilities then partners personal liable to pay this liabilities .Every partner is bound to attend diligently to his duties in the conduct of business.

Roles and duties of partner will be implied in firm unless the partnership agreement provides to the contrary.

Pros and cones of partnership deed- A partnership deed is a document that outlines in detail, the powers, duties and rights and responsibilities of all the partners. A partnership provides a legal responsibility between partners of the firm. It also states the profit sharing ratio, nature of business, name- address of the partners as well firm.

Following are the major benefits of having a well- drafted partnership deed;-

• It regulates the rights, duties and liabilities of each partner.
• It helps to avoid any misunderstanding amongst the partners because all terms and conditions of the partnership have been laid down before hand in the deed.
• Any dispute amongst the partners may be settled easily as the partnership deed may be readily referred to.

Hence, it is always the best practice to have a written partnership deed instead of oral agreements. There are no cones and disadvantage of a written partnership deed.