Partnership Defined in Accounting Terms - dummies

Partnership Defined in Accounting Terms

By Maire Loughran

A partnership must have at least two owners, with any percentage of ownership interest (as long as the combined total isn’t more than 100!). As with the sole proprietorship, partners aren’t classified as employees.

A partnership doesn’t need to have two partners with a 50 percent share each. It can have many partners with all sorts of different interest percentages in the partnership.

Partners usually share the financial commitment of the business. They can bring different strengths to the table by pooling resources, expertise, and strengths. Most states have limited startup costs, and beyond the partnership agreement, there are few formalities.

As with typical family dynamics, partners can have shifting loyalties and, thus, may have a partnership fraught with disagreement. Partners may have different and conflicting goals for the business. They may show unequal commitment in terms of time and finances, leading to personal disputes.

Partners are personally liable for business debts and liabilities. Depending on the partnership setup, partners may also be liable for debts incurred, decisions made, and actions taken by the other partner or partners.

The following figure shows a typical presentation for the equity section of a balance sheet of a partnership. Partnerships mimic sole proprietorships, in that the equity section has capital and withdrawal accounts. Assume that Thomas Green and John Blue each have a 50 percent ownership in the partnership.