Introduction to Partnership

Introduction to Partnership

♣ Partnership is an association of two or more individuals who agree to share the profits of a lawful business.

♣ It is managed and carried on either by all or by any, or some of them acting for all.

♣ The formation of partnership is easy and simple.

♣ Each member of such a group is individually known as ‘partner’ and collectively the members are known as a ‘partnership firm’.

Governed by: The Indian Partnership Act, 1932.

Characteristics/ Features of Partnership

• Number of Partners: A minimum of two persons
• Contractual Relationship: The relation between the partners is created by contract. They enter into partnership through an agreement (verbal, written or implied). If the agreement is in writing, it is called ‘Partnership Deed’.
• Competence of Partners: Individuals must be competent enough to do so. That means minors, lunatics and insolvent persons are not eligible to become partners.
• Minors can only be admitted to the benefits of partnership i.e. he can have a share in the profit, but cannot become a partner.
• Sharing of Profit and Loss: They share profit in any ratio as mutually agreed between them. In the absence of any such agreement, they share it equally.
• Unlimited Liability: The partners have joint and unlimited liability. Creditors can lay claim on the personal properties of any individual partner or all the partners jointly. Even a single partner may be called upon to pay the debts of the firm. Of course, he can get back the money due from other partners.
• Principal-Agent Relationship: Every partner is an agent when he is acting on behalf of others and he is a principal when others act on his behalf. It is essential that there should be mutual trust and faith among the partners in the interest of the firm.
• Transfer of Interest: No partner can sell or transfer his interest in the firm to anyone without the consent of other partners.
• Legal Status: A partnership firm is just a name for the business as a whole. The firm means partners and the partners mean the firm. Law does not recognize the firm as a separate entity distinct from the partners.
• Voluntary Registration: Registration of partnership is not compulsory. But since registration entitles the firm to several benefits, it is considered desirable. For example, if it is registered, any partner can file a case against other partners, or a firm can file a suit against outsiders in case of disputes, claims, disagreements, etc.
• Dissolution of Partnership: Dissolution of partnership a complete closure or termination of partnership business. It also includes any change in the existing agreement among the partners due to a change in the number of partners.

Advantages of Partnership Firm

• Easy to Form: The partnership can be easily organized. No complicated legal formalities are involved in the establishment. The partners enter into a partnership agreement and start business.
• Favorable Credit Standing: The partnership enjoys a better credit rating in the eyes of creditors. As the liability of each partner in the organization is unlimited the financial institution can safely advance loans to the firms.
• Greater Management Ability: As there are many partners involved in the operation of a business, the firm can distribute the duties and responsibilities to each partner for which one is best qualified and suited. It can promote efficiency of the firm.
• Profit Incentive: The profits are shared by the partners as per agreement. They are encouraged to do more work to earn more profit. Higher the profits, higher will be the partners share.
• Advantages of Secrecy: The partners can keep the business secrets to themselves. The firm is not required by law to publish its profit and loss account and balance sheet.
• Brake on Hasty/speedy Decisions: As liability of partners is unlimited, the partners, therefore, tend to be careful in taking business decisions. They adopt sound practices in the conduct of business. There is a brake on hasty/speedy decisions.
• Special Protection to Minor: A death or lunacy of a partner may not cause dissolution of the partnership. His minor can be admitted only to the benefits of partners with the consent of other partners.
• Sharing of Risk: In partnership every partner bears the risks individually as it is easier compared to sole proprietorship.

Disadvantages of Partnership Firm

• Unlimited Liability of Partners: One of the basic defects of partnership is that the partners are personally and jointly responsible for all the debts of the firm. In case the business suffers losses and the business assets are not sufficient to satisfy the claimants on liquidation, the personal property of one or more than one partners can be sold under the Court order for the clearance of the debts of the business. The rich and wealthy persons, therefore, avoid to be enlisted in partnership because each individual partner in liable for the firm’s debt.
• Limited Life of Firm: The duration of the partnership is always uncertain. If partner dies, injured, withdraws, sells his interest, or a new partner is admitted into the business, or their arises difference, the partnership may come to an end. There are possibilities of the dissolution of the firm due to internal differences.
• Disputes among the Partners: The partners should be like minded, have a common objective, be large hearted, have a cool temperament, should not unnecessarily cause friction and confusion among the partners. The choosing of partner is in fact like choosing a wife. Marry in haste and repent in leisure. In case of dispute among the partners, quick action should be taken by all the partners for the remedial measures.
• Possibility of Misuse of Resources: It is known to each and every partner that the resources of the firm are owned jointly. There can and does arise the misuse of resources by a partner/partners.
• Loss of Business Opportunities: In case of differences among the “partners, a delay may take place in decision-making. This can cause loss to the firm.
• Lack of Public Confidence: Partnership form of organization may not enjoy public confidence due to lack of transparency, publicity and absence of regulations.

Conclusion- Suitability of Partnership Firm

In a partnership firm, persons from different walk of life having ability, managerial talent and skill join together to carry on a business. This increases the administrative strength of the organization, the financial resources, the skill and expertise, and reduces risk. Such firms are most suitable for comparatively small business such as retail and wholesale trade, professional services, medium sized mercantile houses and small manufacturing units. Generally it is seen that many organizations are initially started as partnership firms and later, when it is economically viable and financially attractive for the investors, it is converted into a company.