Monday, December 21, 2009

partnership

a partnership is an agreement of sole proprietors to pool their assets and talents in a business. like the sole proprietorship, partners are exposed to unlimited liability, limited life of the business, business income is combined with personal income for tax purposes; unlike a sole proprietorship, more than one person is involved, and thus, more capital may be raised in financial markets. modern partnerships have a parallel in classical musharaka and mudaraba.

a partnership is similar to a proprietorship except that is owned by two or more individuals.
- in Indonesia we know firma and CV as two types of partnership
- combines the skills and resources of more than one person

a partnership is an association of two or more persons who own and manage a business for profit. partnerships have several characteristics with accounting implications. in Indonesia, there are three types of partnership recognized by Civil Code : Civil Partnership (Persekutuan Perdata), Firm (Firma) and Limited Partnership (CV).

a partnership has 'limited life'. a partnership dissolves whenever a partner ceases to be a member of the firm. for example, a partnership is dissolved if a partner withdraws due to bankruptcy, incapacity, or death. likewise, admitting a new partner dissolves the old partnership. when a partnership is dissolved, the remaininng partners must form a new partnership if operations of business are to continue.

in most partnerships, the partners have 'unlimited liability'. that is, each partner is individually liable to creditors for debts incurred by the partnership. thus, if a partnership becomes insolvent, the partners must contribute sufficient personal assets to settle the debts of the partnership.

partners have co-ownership of partnership property. the property invested in a partnership by a partner becomes the joint property of all the partners. when a the partnership is dissolved, the partner's claims against the assets are measured by the amount of the balances in their capital accounts.

another characteristic of partnership is mutual agency. this means that each partner is an agent of the partnership. the acts of each partner commit the entire partnership and become the obligations of all partners. for example, any partner can enter into a contract on behalf of all the members of the partnership. this is why partnerships should be formed only with people you trust.

an important right of partners is participation in income of the partnership. net income and net loss are ditributed among the partners according to their agreement.

a partnership, like a proprietorship, is a nontaxable entity and thus does not pay federal income taxes. however, revenue and expense and other results of partnership must be reported anually to the Tax Office. the partners must, in turn, report their share of partnership income on their personal tax returns.

a partnership is created by a contract, known as the partnership agreement or articles of partnership. it should include statements regarding such matters as amounts to be invested, limits on withdrawals, distributions of income and loses, and admission and withdrawal of partners.

the partnership form is less widely used than the proprietorship and corporate forms. however, a partnership has the advantage of bringing together more capital, managerial skills, and experience than does a proprietorship. a partnership is relatively easy and inexpensive to organize, requiring only an agreement between two or more persons. in addition, like a proprietorship, a partnership is a nontaxable entity.

a major disadvantage of the partnership is the unlimited liability feature for partners. other disadvantages of a partnership are that its life is limited, and one partner can bind the partnership to contracts. also, raising large amounts of capital is more difficult for a partnership than for a corporation.

partnership agreements often have limitations on 'related party transactions'. a related party transaction can give rise to a conflict of interest. for example, most agreements would want to limit or disclose partnership transactions with other entities owned by a partner.

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