Agency
Mutual Mutual agency means that each partner acts on behalf of the partnership when
engaging in partnership business. The act of any partner is binding on all other
partners. This is true even when partners act beyond the scope of their authority,
so long as the act appears to be appropriate for the partnership. For example, a
partner of a grocery store who purchases a delivery truck creates a binding contract
in the name of the partnership, even if the partnership agreement denies
this authority. On the other hand, if a partner in a law firm purchased a snowmobile
for the partnership, such an act would not be binding on the partnership.
The purchase is clearly outside the scope of partnership business.
Limited Life
A partnership does not have unlimited life. It may be ended voluntarily at any time
through the acceptance of a new partner or the withdrawal of a partner. A partnership
may be ended involuntarily by the death or incapacity of a partner. Thus
the life of a partnership is indefinite. Partnership dissolution occurs whenever
a partner withdraws or a new partner is admitted. Dissolution of a partnership
does not necessarily mean that the business ends. If the continuing partners agree,
operations can continue without interruption by forming a new partnership.
Unlimited Liability
Each partner is personally and individually liable for all partnership liabilities.
Creditors claims attach first to partnership If assets. these are insufficient, the
claims then attach to the personal resources of any partner, irrespective of that
partners equity in the partnership. Because each partner is responsible for all the
debts of the partnership, each partner is said to have unlimited liability.
Co-Ownership of Property
Partnership assets are owned jointly by the partners. If the partnership is dissolved,
the assets do not legally revert to the original contributor. Each partner
Illustration H-1
Partnership characteristics
Helpful Hint Because of mutual
agency, an individual should be
extremely cautious in selecting
partners.
Unlimited Liability Limited Life
Mutual Agency
Association of Individuals
Co-Ownership of Property
Partnership
Form of Business
Organization
TOR Ltd.
has a claim on total assets equal to the balance in his or her respective capital
account. This claim does not attach to specific assets that an individual partner
contributed to the firm. Similarly, if a partner invests a building in the partnership
valued at $100,000 and the building is later sold at a gain of $20,000, that
partner does not personally receive the entire gain.
Partnership net income (or net loss) is also co-owned. If the partnership
contract does not specify to the contrary, all net income or net loss is shared
equally by the partners. As you will see later, though, partners may agree to
unequal sharing of net income or net loss.