Individuals or entities carrying on business are on the constant look out for means to expand their business and grow their profitability. For this purpose, they may collaborate with different entities who can further their business interests. A manufacturer for example may approach the country’s leading distributor to expands its sales network, like-minded business men may come together to conduct a joint business and achieve economies of scale. Different contractual arrangements are usually entered into to implement these collaborations.
This article looks at meaning of and differences between two types of such arrangements – consignment and partnership.
Definitions and meanings
Consignment:
A consignment is a business arrangement in which one party sends goods to another party for them to be sold on the former’s behalf, in exchange for payment of a commission. A manufacturer or trader, for example, may enter into a consignment arrangement with a distributor or retailer to increase sale of their goods.
A consignment arrangement involves two entities – a consignor and a consignee. Consignor is the entity (an individual or an organization) that manufactures and owns the goods and sends them to the consignee to be sold to customers. Consignee, on the other hand, is the entity that receives possession of the goods from the consignor and sells them to customers in exchange for commission from the consignor.
The typical steps involved in a consignment transaction are:
- The consignor manufactures goods or buys them from a manufacturer and transports to the consignee’s location which could be a warehouse, store or shop.
- Consignee takes possession of the goods and stores them at his location for further sale.
- The consignee will periodically send a statement of consignment inventory to the consignor specifying the goods sold, the goods being returned as well as the goods remaining unsold.
- For all goods sold, the consignor generates a sales invoice.
- At the same time, the consignee will issue an invoice for his commission for sale of the goods.
- The consignee will pay the consignor, the amount received from sale of goods after deducting his due commission and expenses, if any.
The key feature of consignment transactions to note is that ownership of the goods remains with the consignor and it is only the possession that is transferred to the consignee.
Partnership:
A Partnership is a business form whereby two or more parties come together to carry on a business for mutual benefit.
A partnership is evidenced by a legal document known as a partnership deed. A partnership deed lists out the rights and responsibilities of the partners including their capital contributions, profit sharing ratio, roles in the business etc. Apart from drafting a partnership deed, a partnership involves several other compliance formalities such as obtaining separate tax identification number, preparing separate books of accounts for the partnership business and getting them audited etc.
Example
A group of 3 CPAs come together to form a partnership to conduct a joint accounting and consulting business. 2 of the partners contribute 45% capital each whereas the third partner is a consulting partner and contributes the balance 10%. They each have a 1/3rd share in the profits.
Partnerships can either be unlimited in which partners are personally liable for all obligations of the joint business or a ‘limited liability partnership’ in which the liabilities of partners are restricted to their individual capital contributions.
Difference between consignment and partnership
The eleven key points of difference between consignment and partnership have been detailed below:
1. Meaning
- A consignment is business contract in which the consignor sends goods to the consignee, to be sold on his behalf in exchange for payment of a commission on goods sold.
- A partnership is a type of business entity in which two or more entities contract to conduct a business for their mutual benefit.
2. Nature
- A consignment is a business or contractual arrangement to effect sale of goods.
- A partnership is a business entity which is formed to conduct several types of businesses.
3. Parties involved
- There are two parties to a consignment transaction – the consignor and consignee.
- A partnership may have any number of partners in excess of two.
4. Nature of relation between parties
- The consignor and consignee relationship is of principal and agent.
- The relation between parties in a partnership are of profit-sharing partners.
5. Purpose
- The purpose of entering into a consignment arrangement for the consignor is to increase sale of his goods and for the consignee is to earn a commission.
- The purpose of entering into a partnership is to benefit from the joint capabilities of partners to carry out a profitable business together.
6. Profit sharing
- There is no profit sharing between a consignor and consignee. The consignee earns a percentage commission for the sales effected by him.
- Partners share profits of the joint business in a predetermined ratio.
7. Risk absorption
- In a consignment transaction, the consignor remains the legal owner of the goods and he thus bears all associated risks.
- In a partnership, the partners share losses (just as they share profits) in predetermined ratio.
8. Evidenced by
- A consignment transaction is evidenced by an agreement or contract.
- A partnership is evidenced by a partnership deed, which generally must be registered with statutory authorities.
9. Governing statute
- The operation of a consignment transaction is governed by general contract law of the country.
- The operation of a partnership is governed by the separate jurisdictional Partnership Act.
10. Compliances
- A consignment transaction has fewer compliances as it is an individual business contract.
- A partnership on the other hand is a form of business entity and thus requires fulfilment of several legal compliances such as registration of partnership deed, maintenance of separate accounts, audit of accounts, obtaining separate tax documents and registration numbers etc.
11. Accounting
- Consignment accounting is incorporated within the regular books of accounts of the consignor and consignee.
- Partnership accounting requires maintenance of separate books of accounts of the partnership.
Conclusion – consignment vs partnership:
While the basic purpose of both consignment and partnership is furtherance of business, they are suitable in different circumstances. Consignment contracts are opted for amongst parties that have set of different capabilities such as between manufacturer who has production capabilities and distributors who have established supply chains. A partnership is generally formed between parties who have similar capabilities or similar objectives such as doctors, engineers and CPAs etc. However, the partners having different capabilities may also come together to work towards a common goal.
