Final answer:
In a partnership, each partner maintains a separate capital account for invested capital and retained earnings, and profits are withdrawn rather than distributed as dividends.
Step-by-step explanation:
In a partnership, each partner has their own separate capital account, containing their invested capital and share of retained earnings. Distributions are taken from these capital accounts and are referred to as withdrawals, not dividends. This is because a partnership is not a separate taxable entity like a corporation, and thus does not issue dividends. Instead, each partner's share of the profits is passed through to their individual tax returns.
Partnerships can offer flexibility in terms of financial management, including how capital is injected and distributed, but they come with the risk that partners are responsible for each other's actions. Unlike partnerships, a sole proprietorship is owned and run by an individual, and a corporation is owned by shareholders who own shares of stock in the firm and it usually pays out profits in the form of dividends.