Where there is no partnership agreement, a partner who advances loan to the partnership is entitled to …………………… interest
Where there is no partnership agreement, a partner who advances loan to the partnership is entitled to …………………… interest
Explanation
Where there is no partnership agreement, a partner who advances a loan to the partnership is entitled to 5% interest per annum. This is the default rate specified in the Partnership Act.
A partner’s loan to the firm is different from their capital contribution. Loans are temporary advances that earn fixed interest, while capital earns a share of profits. The 5% rate applies when partners have not agreed on a different rate.
This interest is charged before profits are divided among partners, making it an expense of the partnership. It is paid regardless of whether the partnership makes a profit or loss.
The Partnership Act provides default rules that apply when partners have not made their own agreement. Other default provisions include: no interest on capital, no salary for partners, and equal profit sharing. Partners can agree to different terms in a partnership deed.