Corporate and Business Law (Global) · Partnerships

Partnership Formation and Partnership Agreement for ACCA LW

Updated 11 October 2026 · Fact-checked

A partnership forms when two or more persons carry on a business together with a view to profit. No registration or writing is needed. A partnership agreement sets the terms between partners. Where it is silent, default rules apply, such as equal profit shares, equal management rights and no salary.

Understand Formation and Partnership Agreement

A partnership is the relationship between persons carrying on a business in common with a view to profit. It is the simplest way for two or more people to trade together. In the Global variant you should know the general common law principles and not the detail of one country's statute. Local statutes differ, so answer from the principles given in the question.

A partnership is usually formed by conduct, not paperwork. If people run a business together and share profits, a court can find a partnership even if they never used the word. Sharing profits is strong evidence, but it is not conclusive. Someone who receives a share of profit as a loan repayment, as wages or as an annuity is not automatically a partner. Courts look at the whole relationship: joint ownership of the business, joint control, shared risk and how the parties describe themselves to outsiders.

A partnership agreement (sometimes called a deed of partnership) is the contract between the partners. It can be oral, written or implied from conduct, but writing avoids disputes. Typical contents are: the firm's name and business, capital each partner contributes, profit and loss sharing ratio, salaries or interest on capital, management and voting rights, drawings, how new partners are admitted, what happens on retirement or death, and how disputes are settled.

The agreement binds only the partners. It does not change what outsiders can rely on. A third party who deals with the firm in good faith may still hold the firm and partners liable under the normal rules of authority.

If there is no agreement, or it is silent on a point, default rules fill the gap. They are fair-minded but blunt. Partners share profits and losses equally, whatever their capital. All may take part in management. No partner is paid a salary. No interest is paid on capital. Partners are indemnified for expenses properly incurred for the firm. A new partner needs everyone's consent. Ordinary matters are decided by majority, but a change to the nature of the business needs all partners to agree.

Key formulas to remember

Test for a partnership: Partnership = persons + carrying on a business in common + with a view to profit; No registration or written document is needed. Sharing profit is evidence, not proof.
Default profit and loss sharing: Each partner's share = total ÷ number of partners; Applies whatever the capital contributed, unless the agreement says otherwise.
Default management: Every partner may take part in management; Ordinary matters: majority decides. Changing the nature of the business: all must agree.
Default pay and capital: No salary; no interest on capital; Interest or salary is due only if the agreement provides for it.
Default indemnity: Firm indemnifies a partner for payments and liabilities properly incurred in the ordinary and proper conduct of the business; Personal expenses are not covered.
Default admission and records: New partner admitted only with consent of all existing partners; books kept at the firm's place of business and open to every partner; Expulsion is allowed only if the agreement gives the power.

How to solve Formation and Partnership Agreement questions

Use this order for any question on how a partnership arises or what terms apply.

1Read the facts and decide whether the question is about existence of a partnership, terms between partners, or default rules.
2Test for a partnership: are there two or more persons, a business, carried on in common, with a view to profit?
3Look at the evidence: profit sharing, joint control, shared risk, how they described themselves. Remember that profit share alone is not conclusive.
4Check for an agreement, oral or written. If one exists, its terms apply between the partners on the points it covers.
5For any point the agreement does not cover, apply the default rule: equal shares, equal management, no salary, no interest on capital.
6Check whether a change needs unanimity, such as admitting a partner or altering the nature of the business.
7State your conclusion in one sentence and give the rule that supports it.

Quickest way: Agreement first, defaults second

When to use it: Use for Section A questions and the short Section B tasks where a scenario asks what the partners are entitled to.

Underline what the agreement says. That wins between partners.
For anything unstated, answer with the default: equal, no salary, no interest.
For admitting a new partner or changing the business, look for unanimity.
For existence of a partnership, look for business, common, profit. Ignore the label the parties use.
Eliminate options that treat profit sharing as automatically creating a partnership or that split profit by capital without an agreement.

Common mistakes in Formation and Partnership Agreement

Dividing profits in proportion to capital when there is no agreement.
It feels fair that the bigger investor gets more, and it is how many companies work.
Fix: Without agreement, profits and losses are shared equally. Capital ratios matter only if the agreement says so.
Saying a partnership needs a written agreement or registration.
Students confuse partnerships with companies, which must be registered.
Fix: A partnership can arise by conduct. Writing is advisable but not required.
Treating any profit share as proof of partnership.
Profit sharing is the best-known sign, so it is over-applied.
Fix: Consider why the share is paid. Wages, loan repayments or an annuity do not by themselves make someone a partner.
Awarding a partner a salary or interest on capital by default.
Students assume working harder or investing more must be paid.
Fix: No salary or interest on capital unless the agreement provides it.
Letting the majority admit a new partner or change the business.
Majority voting is the rule for ordinary matters, and it is wrongly extended.
Fix: Admitting a partner and changing the nature of the business need all partners to agree.
Assuming the agreement limits liability to outsiders.
Students forget the agreement is a contract between partners only.
Fix: Say the restriction binds the partners. A third party unaware of it may still rely on normal authority.

Worked examples

Example 1

Asha contributes ₹8,00,000 and Bilal contributes ₹2,00,000 to a trading business they run together. They have no partnership agreement. The business makes a profit of ₹1,50,000. Asha works full time; Bilal works part time. How is the profit shared?

Show the solution

Confirm a partnership exists: two persons run a business together with a view to profit.
Check for an agreement: none, so default rules apply.
Default rule: profits are shared equally, regardless of capital or time worked.
No salary is due to Asha and no interest on capital is due to either partner.
Each share = ₹1,50,000 ÷ 2 = ₹75,000.

Answer: Each partner receives ₹75,000. Asha's larger capital and fuller work give her no extra entitlement without an agreement.

Example 2

Chen and Dara are partners. Their agreement is silent on new partners. Chen wants to admit his cousin Eli as a third partner, and Dara objects. Eli would invest capital. Can Chen admit Eli? Also, Dara wants to claim interest on her capital. Advise.

Show the solution

The agreement says nothing on admission, so the default rule applies.
Default rule: a new partner can be admitted only with the consent of all existing partners.
Dara has not consented, so Eli cannot become a partner. Chen's wish as one of two partners does not amount to a majority.
On interest: the default is that no interest is paid on capital.
The agreement does not provide for interest, so Dara has no claim.

Answer: Chen cannot admit Eli without Dara's consent, and Dara cannot claim interest on her capital because neither the agreement nor the default rules give it.

Exam tips

In objective questions, look for the words agreement, silent or no agreement. They tell you whether to use the written terms or the defaults.
Learn the defaults as a short list: equal profit, equal management, no salary, no interest, unanimity for new partners.
Watch for options that say registration or writing is essential. These are usually wrong for a general partnership.
In a scenario, a partner's label, such as employee or consultant, does not decide the question. Look at the substance of the relationship.
In written answers, state the rule, apply it to the named partners with figures, then give a clear conclusion.

Practice questions from Partnerships

Formation and Partnership Agreement: frequently asked questions

How is a partnership formed?

It is formed when two or more persons carry on a business together with a view to profit. No registration is needed, and it can arise from conduct alone. A written agreement is advisable but not required.

What should a partnership agreement contain?

Typically the firm name and business, capital, profit and loss ratio, salaries or interest, management rights, drawings, admission and retirement of partners, and dispute resolution. It can cover anything the partners agree, as it is a contract between them.

What are the default rules if there is no agreement?

Partners share profits and losses equally and all may manage the business. No salary or interest on capital is paid. Partners are indemnified for proper expenses, and a new partner needs everyone's consent.

Does sharing profits always make someone a partner?

No. It is strong evidence, but courts look at the whole relationship. A profit share paid as wages, loan repayment or an annuity does not automatically create a partnership.