What is a partnership?
A partnership is a business owned by two to twenty people who agree to run a business together for profit. In Malaysia it is governed by the Partnership Act 1961 and registered with SSM. Compared with a sole proprietorship, a partnership pools the capital, skills and responsibility of several people, but each partner carries unlimited liability.
Unlimited liability means the partners' personal property can be used to settle business debts if the firm cannot pay. Partners are also jointly responsible for decisions made by any one of them in the course of business, so trust and a clear written agreement matter greatly before people go into partnership together.
The partnership agreement
A partnership agreement is the document that sets out the terms of the business. It usually covers:
- The capital contributed by each partner;
- The profit-and-loss sharing ratio;
- Interest on capital and interest on drawings;
- Partners' salaries or allowances;
- Interest on partners' loans.
Key idea
If there is no agreement, the default rules of the Partnership Act 1961 apply: profits and losses are shared equally, no interest on capital is given, no partner salary is paid, and a partner's loan earns interest at 8% per annum.
Worked example
Example
Aina and Bakri are partners with no written agreement. This year's profit is RM30,000. Because there is no agreement, the profit is shared equally: each receives RM15,000. Aina cannot claim a salary even though she works more.
Types of partners
Not all partners are alike. An active partner takes part in running the business, while a sleeping (dormant) partner contributes capital but does not manage it. A limited partner, allowed under a limited liability partnership, risks only the capital invested. Choosing the right structure and writing a clear agreement help prevent disputes later.
Remember
A loan from a partner is different from capital. With no agreement, the loan earns 8% interest per year, but capital earns no interest at all.