Definition

A partnership is a relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

Characteristics

The following are the main characteristics of partnerships:

  • There must be two or more persons to form a partnership
  • There must be a written or verbal agreement between all the concerned persons
  • The agreement must have the aim of conducting business
  • The business may be carried on by all or any of the partners acting for all
  • The gain or loss must be shared by all

Discussion

The persons who form a partnership are individually called “partners.” The collective name given to them is a “firm.” The maximum number of partners is limited to 10 in banking businesses and 20 in trading concerns.

Sharing the gain is an important element of a partnership. However, it is not conclusive proof of being a partner. There are examples of entities that share in a firm’s gain without being considered partners. For example:

  • Employees paid on the basis of profit
  • Lenders who receive a rate of interest that varies with the amount of profit

Partnerships are based on an agreement that may be written or oral. Even oral agreements may not be necessary; partnerships can be implied from the acts of the persons engaged in the enterprise.

It is, however, always better to make a partnership agreement in writing.

True is a Certified Educator in Personal Finance (CEPF®), contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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