Partnerships (Cambridge International IGCSE Accounting)

Partnerships

What is a partnership?

• **A partnership **is a business in which two or more people operate as owners with the main purpose of making profits
• Normally a partnership consists of** two to twenty partners **
• Sometimes a partnership is formed when a** sole trader** wishes to expand or grow their business
• Two or more sole traders may decide to combine their resources such as money and assets to form a new business

What are the advantages of operating as a partnership?

• Forming a partnership is relatively easy as formal permission is not required to set it up

• Partners have access to additional finance because all partners contribute to raising the capital of the business

• Partners have access to each other's skills and expertise

  • For example, a makeup artist might partner up with a hairstylist

• Partners share the risks of operating the business

• Partners can cover each other for sickness and holidays

What are the disadvantages of operating as a partnership?

• Profits are shared among all partners

  • Unlike a sole trader who keeps all the profits, partners will share it

• Partners may find that they have **disagreements **

• Partners may take** longer to come to decisions** about the operating activities of the business due to them having different opinions

• All partners are responsible for the debts of the business

  • Even if the debt was only created by one of the partners

Exam Hint In the exam on the structured written paper, you may be asked to advise a sole trader whether or not they should form a partnership with another sole trader. You should state two advantages of operating a partnership and two disadvantages of operating as a partnership and then make a recommendation.

Partnership agreement

What is a partnership agreement?

• A partnership agreement is a document that sets out the terms of how the partnership should operate
• Its purpose is to help partners avoid disagreements in the future

What is contained in the partnership agreement?

• The agreement contains information about:

  • The amount of capital each partner is to invest

  • Whether or not the partners are entitled to interest on their capital

    • And if so, the percentage to be paid
    • Interest on capital is given to reward partners for investing their money into the business

  • Whether or not salaries are paid to each partner

    • And the amount to be paid

  • Whether or not partners are entitled to drawings and the limit each partner can take out of the business

  • Whether or not interest is charged on partners' drawings

    • And if so, the percentage to be charged
    • Interest on drawings is charged to discourage partners from withdrawing money from the business

  • Whether or not the partners are entitled to interest when they loan their own money to the business

    • And if so, the percentage to be paid
    • Interest on loans is given to reward partners for loaning their money to the business

  • The distribution of profits and losses to be shared between partners