Each business requires a form of investment and enough customers to whom their production can be sold consistently for profit, if a person not able to invest more then his choice will be going for partnership to reduce his risk and get support for business.
Table of Content
- 1 Meaning of Partnership / Partnership firm
- 2 Definition of Partnership
- 3 Partnership Deed
Meaning of Partnership / Partnership firm
When any business is carried on jointly by a group of persons for mutual benefit, it is known as Partnership or Partnership firm. In other words, A Partnership is an association of two or more persons to carry on, as co-owners of a business and to share equal or agreed profits and losses.
Definition of Partnership
According to L.H.Haney “ the relationship between persons who agree to carry on a business in common with a view to private gain.”
Section 4 of the Indian Partnership Act , 1932 defines Partnership as “ the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.”
Essentials/ features/ characteristics of Partnership
* Mutual agreement :
Partnership is formed by an agreement between two or more individuals. However , the agreement by which Partnership is created may be oral or in writing , but the usual practice is in writing to make a prof for future reference.
* Sharing of profits :
The agreement between the partners to carry on business must be profit sharing among all the partners. The partners may share the profits in any ratio as per the agreement .
In the absence of any agreement to the agreed ratio of profits sharing , the profits must be shared equally as per the Indian Partnership Act , 1932 . It is open to one or more partners to bear all the losses of the business of the firm , if nothing is specified in the partnership agreement regarding loss sharing , the partners should share the losses equally .
* Lawful business :
The business to be carried on by the partners must be lawful , and not illegal , immoral or opposed to public policy . The term business generally conveys the idea of running a business involving numerous transactions .
* Mutual agency :
The partnership business may be carried on by all the partners or any of them acting for all. This means that a partner binds all other partners by his acts and omissions provided that these acts are done for the firm and in the ordinary course of the business.
In other words , partnership represents extension of agency/company principle.
* An association of two or more persons :
There must be two or more persons to constitute a partnership , as a single person cannot enter partnership with himself, if so it is called Sole Trader. The maximum number of persons who can be partners in a firm is ten in the case of a firm carrying on banking business , and twenty in case of other business .
* Unlimited liability of the partners :
The liability of the partners are unlimited . That means , even the private assets of the partners are liable for the debts of the firm to an unlimited extent .
In case an obligation arises, not only the assets of the company can be taken, but also the private property of the partners for the payment of the debts of the company to the third parties . The creditors can claim their contributions from one of the partners or from all the partners. The partners are individually and collectively responsible.
* No separate entity :
A partnership firm and its partners are regarded as one and the same person . A partnership firm has no separate legal entity apart from the partners composing it .
Partnership firm does not enjoy a separate existence of its own which is different from those of its members . Legally, the firm is a collective name for all the partners taken together .
* Utmost good faith :
The very basis of the association is good faith and mutual trust. Each partner must act honestly and give appropriate accounts to other partners. The partnership can not work if there are suspicions among the partners.
* Restriction on transfer of shares :
No member can sell or transfer their shares to anyone without the consent of the other partners. If a partner does not wish to continue in the company, he can give a notice of dissolution of the company.
Types / kinds of partnership
On the basis of liability, partnership may be divided into two classes . They are
- General Partnership or Unlimited Partnership
- Limited Partnership
General partnership : A partnership which has only general partners is called “General partnership” . The partners whose liability is unlimited are called “General partners” .
Limited partnership : A partnership which has one or more limited partners in addition to one or more general partners is called “limited partnership” . The partners whose liability is limited to the extent of capital contributed by them are called “limited partners” or “special partners” .
Features of limited partnership
- In a limited partnership, it is a condition that there should be at least one general partner and one limited partner. The maximum number of partners permitted in a limited partnership is the same as in case of a general partnership .
- The liability of the general partners is unlimited , while the liability of the limited partners is limited to the amount of capital contributed by them .
- A limited partner cannot bind the firm by his own acts .
- A limited partner cannot withdraw any part of his capital during the continuance of the firm .
- A limited partner cannot transfer his share in the partnership to others without the consent of the general partners .
- A limited partner enjoy certain rights . He is entitled to receive a share of the profits of the firm . He can inspect the books of the firm .
- The death , bankruptcy or lunacy of a limited partner will not dissolve the firm .
- A limited partnership must be registered .If it is not registered , it will be regarded as a general partnership with unlimited liability .
- In addition to the usual advantages of the general partnership , a limited partnership enjoys certain additional advantages . The additional advantages of a limited partnership are :
- This form of partnership helps in obtaining capital from persons who are not willing to assume unlimited liability .
- It is more stable than a general partnership , because its continuity is not affected by the death , bankruptcy or lunacy of the limited partners.
Drawbacks of limited partnership are :
- It is subject to legal formalities . Registration of limited partnership is compulsory .
- Secrecy of business matters cannot be maintained in a limited partnership because of compulsory registration and consequent publicity of its affairs .
- The limited liability of the limited partners reduces the credit-worthiness of the firm .
- In a limited partnership , the general partners , who take part in the management of the business , may exploit the limited partners who have no voice in the management of the partnership business .
- The limited partners cannot withdraw their capital during the continuance of the firm .
From the point of view of duration , partnerships may be classified into three kinds . They are :
- Partnership for affixed term
- Particular partnership
- Partnership at will
Partnership for a fixed term :
When a partnership is formed for a fixed term (i.e., for a particular period) , it is called partnership for a fixed term .
A partnership formed for a fixed period may be continued even after the expiry of the fixed period , if the partners decide to continue their partnership after the expiry of the fixed period , the rights obligation of the partners will remain the same as before , and the partnership will become partnership at will .
Particular partnership :
When a partnership is formed for a particular venture (i.e., undertaking or business) , it is called particular partnership . A partnership formed for a specified or particular venture comes to an end on the completion of the specified venture .
A particular partnership can be continued even after the completion of the particular venture , the rights and obligations of the partners will remain the same as before , and the partnership will become partnership at will .
Partnership at will :
Where no provision is made in the contract between the partners for the duration of their partnership or for the termination of their partnership , the partnership is called “partnership at will”.
As the duration is not fixed in the case of partnership at will , the partnership at will is uncertain and indefinite . Such a partnership can be dissolved at any time at the will and pleasure of any partner . It can be dissolved by any partner by giving a notice , in writing , to the other partners , of his intention to dissolve the firm.
Types / kinds of partners
a) Active , Actual , Working or Ostensible partner :
A partner who takes an active part in the conduct and management of the business of the firm is called an active , actual , working or ostensible partner . An active partner is a full fledged firm .
He is an agent of the other partners in the normal course of business . He must give a public notice of his retirement from the firm , of course , after his retirement , so as to free himself from liability for the acts of the company carried out after his retirement.
b) Sleeping , dormant or financing partner :
A partner who merely contributes capital and shares the profits or losses of the firm , but does not take active part in the conduct and management of the partnership business is called a sleeping , dormant or financing partner .
He is not known to the outside world as a partner , he is liable along with the other partners for all the acts of the firm like an undisclosed principle . He need not give public notice of his retirement after retirement so as to free himself from liability for the acts of the company carried out after his retirement.
c) Secret partner :
If a person is a partner of the firm , but the fact of his being a partner is not disclosed to outsiders , he is called as secret partner . A secret partner is liable for all the debts of the firm to an unlimited extent .
d) Nominal partner , Fictitious partner or partner in name only :
A partner who neither contributes capital nor shares the profits or losses of the firm nor takes any active part in the conduct of the business of the firm , but merely lends his name to the firm is called a nominal , fictitious partner , or a partner in name only .
But he is known to the outside world as a partner , as he allows his name to be used as a partner . He is liable to outsiders along with the other partners for all the acts of the firm to an unlimited extent .
e) Partner in profits only :
A partner who , as per the partnership agreement , is entitled to a share in the profits of the firm , but is not liable to contribute towards the losses of the firm is called a partners in profits only .
However he is liable to third parties , along with the other partners , for all the acts of the firm to an unlimited extent .
f) Partner by Estoppel :
Where a partner , by words of mouth or by his conduct , gives an impression to the outside world that he is a partner in a certain partnership firm , though he is not really a partner , he is estoppel or precluded from denying the role which he has assumed , and he is held liable as a partner of the firm to any outsider who has granted credit or loan to that firm on the faith of his representation . Such a partner is called partner by estoppel .
g) Partner by holding out :
A person is held out as a partner though he is not a partner . He comes to know that his name is getting circulated as a partner of the firm but he intentionally keeps quite/silent over the matter . Then he is called a partner by holding out . A partner by holding out is liable to third parties who grant credit to the firm with a belief that he is a partner .
h) Minor Partner or minor admitted to the benefits of the partnership :
It is true that a minor cannot become a full-fledged partner of a firm . But , as per section 30(1) of the partnership Act , he may be admitted to the benefits of a partnership with the consent of all the partners by an agreement executed by his guardian on his behalf with the other partners .
The following points has to be noted in admitting a minor into a partnership :
- A minor cannot be full-fledged partner of a firm , because he is incompetent to contract .
- He may , however , be admitted to the benefits of a partnership .
- He can be admitted to the benefits of a partnership with the consent of all the partners .
- If the minor is admitted to the benefits of a partnership , the guardian of the minor has to enter into an agreement with the other partners on behalf of the minor .
- There must be a partnership before a minor can be admitted to their benefit.
- There cannot be a partnership consisting of only one adult partner and one or more minors .
The status of a minor , admitted to the benefits of partnership , after attaining majority , is as follows :
- After attaining the age of 18 years , a minor becomes a major .
- According to the Indian Partnership Act , 1932 , a minor admitted to the benefits of partnership , within a six months of attaining majority , must give a public notice intimating whether he will continue to a partner or not .
- If he does not give a public notice of his intention , he will be presumed to have decided to continue as the partner of the firm .
If a minor decides to continue as a partner of the firm , as a major partner :
- He will have to bear unlimited liability for all the debts incurred by the firm right from the date of his being admitted to the benefits of partnership .
- He will continue to share the profits of the firm as before .
- He will also have to share the losses of the firm .
- If a minor chooses not to become a partner ( i.e., major partner )
- His rights and liabilities will continue to be those of a minor partner up to the date of the notice given by him.
- He will not be liable for any debts of the firm after the date of notice .
- He has the right to file a suit in a court for his share in the profits and assets of the firm.
A partnership is formed by an agreement between the persons . The partnership agreement between the partners may be oral or written . When a partnership agreement is put in writing , duly stamped and signed by all the partners , the document containing the partnership agreement is called the partnership deed or the articles of partnership .
The partnership deed contains all the terms and conditions of the partnership , and every partner is bound by the terms and conditions laid down in the partnership deed .
The terms and conditions usually found in a partnership deed are as follows :
- The name of the firm .
- The names and addresses of the partners .
- The nature of the business which the firm proposes to undertake .
- The principal place of business and the branches of the firm .
- The date of commencement of partnership .
- The duration of the partnership .
- The amount of capital to be contributed by each partner and the manner of contribution .
- The manner in which additional capital is to be introduced by the partners in future .
- The amount of withdrawal (drawings ) that can be made by each partner and the manner of withdrawal .
- If any interest is to be allowed on partners capitals , the rate of interest chargeable on partners drawings .
- The rate of interest payable on partners loans , if any .
- The amount of salary , commission or any other remuneration payable to any partner for any extra work done for the firm .
- The ratio in which the profits or losses of the firm are to be shared among the partners .
- The manner in which the work of the management is divided among the partners .
- The rights , duties and liabilities of the partners .
- How the accounts of the partners should be kept and audited .
- Expulsion of a partner in case of gross breach of duty or fraud .
- The methods and circumstances of dissolution of the firm .
- The method of settlement of accounts on retirement or death of a partner .
- The mode of settlement of accounts on the dissolution of a firm.
Also read: Marketing Mix of 7Ps
Formation of partnership
A partnership may be formed directly or may be developed by converting an existing sole trading concern into a partnership by taking one or more persons as partners .
A partnership firm may be formed easily , as no legal formalities are required for its formation . Even the registration of a partnership firm is not compulsory.
Registration of a partnership firm :
The Indian Partnership Act of 1932 provides for the registration of a firm . But the registration of a partnership firm is not made compulsory .It is left to the discretion or option of the partnership firm .
The registration of a partnership firm can be effected at any time . For the registration of a firm , a statement in the prescribed form must be submitted to the registrar of firms along with the necessary registration fee . The statement should be signed by all the partners or by their duly authorized agents .
The statement should contain the following particulars .
- Name of the firm .
- Establishment place of business of the firm .
- Names the other places where the firm operates .
- Date on which each partner joined the firm .
- Names and addresses of all the partners .
- Duration of the firm .
Any change in the above particulars after the registration must be brought to the notice of the registrar of firms within 14 days of such change .
Advantages of registration :
- Advantages to the firm :
The firm gets a right to the third parties in civil suits for getting its rights enforced . In the absence of registration, the company can not sue external partners.
- Advantages to creditors :
A creditor can sue any partner for recovering his money due from the firm . All partners whose names appear on the registry are personally responsible for outsiders. Therefore, creditors can recover their money from any partner of the company.
- Advantages to partners :
The partners can approach a court of law against each other in case of dispute among partners . The partners can also sue external parties to recover their amounts, etc.
- Advantages to incoming partners :
A new partner can fight for their rights in the company if the company is registered. If the company is not registered, it will have to depend on the honesty of the other partners.
- Advantages of outgoing partners :
The registration of a firm benefits the outgoing partners in a number of ways . The outgoing partners may be divided into two categories : On the death of a partner , on the retirement of a partner. On the death of a partner his successors are not responsible for the liabilities incurred by the firm after the date of his death .
In case of a retiring partner , he continues to be responsible up to the time he does not give public notice. The public notice is not registered with the registrar and he ceases his liabilities from the date of this notice. So, it is essential to get a firm registered for getting these advantages.
Effects of Non-Registration of firms :
The Indian Partnership Act of 1932 neither makes the registration of a firm compulsory nor imposes any penalty for non-registration .However , an unregistered firm suffers from certain disabilities . They are :
- An unregistered firm cannot file a suit in a court of law against the third parties for the recovery of its debts exceeding Rs.100 .
- An unregistered firm cannot file a suit against any of its partners for the recovery of its debts .
- A partner of an unregistered firm cannot file a suit in a court of law against the third parties or against the firm or against his co-partners for the recovery of the claims .
- Rights and Duties of partners :
- Rights of partners :
- Right to have access to accounts and books .
- Right to interest on capital .
- Right to take part in the conduct of the business of the firm .
- Right to be consulted .
- Right of indemnity .
- Right to the partnership property .
- Right to share profits of the firm .
- Right to interest on advances .
- Power or authority in an emergency .
- Right to have the partnership property used exclusively for the firm .
- Right to act as agent of the firm .
- Right to prevent the introduction of a new partner .
- Right to retire .
- Right to carry on competing business .
- Not liable for acts done before his joining the firm .
- Right to share the profits after retirement .
- Right to continue in the business of the firm .
- Duties of partners :
- Duties to render true accounts to his partners .
- Duty to carry on the business of the firm to the greatest common advantage .
- Duty to be faithful to his co-partners .
- Duty to indemnify for fraud .
- Duty to give full information .
- Not to claim remuneration .
- Not to assign his rights and interest in the firm .
- Duty to attend diligently to his duties .
- To use the firm’s property exclusively for the firm .
- To share losses equally .
- To indemnify for wilful neglect .
- To account for any personal and secret profits derived by him from the firm .
- To act within his authority .
- Not to compete with the business of the firm .
Dissolution of partnership :
In the case of dissolution of partnership , only one or some of the partners terminate their connections with the firm. It may or may not bring the business of the firm to an end .
In the case of dissolution of partnership , as the business of the firm is not brought to an end , it can be continued by the remaining partners . Dissolution of partnership need not necessarily result in dissolution of firm . The scope of dissolution of firm is wide .
Circumstances leading to dissolution of partnership :
- On the expiry of the fixed term , if the partnership is formed for a fixed term .
- On the completion of particular venture or ventures , if the partnership is formed for a particular venture or ventures .
- On the death of any partner or partners .
- On the insolvency of any partner or partners .
- On the retirement of any partner or partners .
Dissolution of firm :
In case of dissolution of a firm , all the partners terminate their connections with the firm . It does bring the business of the firm to an end .
As the business of the firm is brought to an end , there is no question of continuance of the businesses of the firm . It necessarily results in dissolution of partnership . The scope of dissolution of partnership is not wide .
Circumstances leading to dissolution of a firm :
- A firm formed for a fixed period is automatically dissolved on the expiry of the fixed period , if there is no agreement among the partners to continue the firm.
- A firm formed for a particular venture or ventures is automatically dissolved on the completion of the particular venture or ventures , if there is no agreement among the partners to continue the firm.
- A firm is automatically dissolved on the death of one or more partners , if there is no agreement among the remaining partners to continue the firm .
- A firm is automatically dissolved on the insolvency of one or more partners , if there is no agreement among the remaining partners to continue the firm .
- A firm is automatically dissolved on the retirement of one or more partners , if there is no agreement among the partners to continue the firm .
- A firm is compulsorily dissolved on the death of all the partners or all the partners except one .
- A firm is compulsorily dissolved on the insolvency of all the partners or all the partners except one .
- A firm is compulsorily dissolved on the retirement of all the partners or all the partners except one .
- A firm is compulsorily dissolved when its business becomes illegal on the happening of any subsequent event .
- A firm is compulsorily dissolved with the consent of all the partners or in accordance with an agreement among all the partners .
- A partnership-at-will is dissolved by any partner giving 14 days notice to all the other partners of his intension to dissolve the firm .
A firm is dissolved by an order of the court . The court issues an order for dissolution , when a suit is brought by a partner for dissolution . A partner can bring a suit for dissolution on any one of the following grounds :
- When a partner became insane .
- When a partner has become permanently incapable of performing his duties as a partner .
- When a partner is guilty of misconduct affecting the business of the firm .
- When a partner persistently disregards the partnership agreement .
- When a partner has transferred his share in the firm to a third party without the consent of all the partners .
- When the business of the company cannot be carried on except at a loss .
- When the court is satisfied to dissolve the firm in the interest with the partners .
Settlement of accounts on dissolution :
The assets of the firm , including the income and expenditure from capital , should be used in the following order :
- First , for paying the liabilities of the firm ;
- Secondly , for paying off the loans from the partners ;
- Thirdly , for paying off the partners capitals ;
- Lastly , if there is any surplus after paying off the partners capitals , it is distributed among all the partners in their profit sharing ratio.
Advantages of partnership :
i) Easy to form :
This type of business requires very few legal formalities. No mandatory document should be prepared as if it were a corporation. A single act between partners is enough to start a business in society. An act of association is not necessary and the registration of the company is also optional.
ii) Large resources :
Resources can be acquired by more than one person, which is beneficial for companies. Partners can help expand large companies. If capital is needed, there will be the option to involve more partners. The partners can also organize outsider funds.
iii) Greater managerial talent :
The roles and responsibilities of the partners can be assigned based on their talent and nature. Different partners can manage and control different services.
The skills, experience and knowledge of the partners are different and can be used depending on the situation. This will help increase the efficiency of the company, achieve the objectives and make profits.
iv) More credit-standing :
Partners can have more contacts in the market. They can offer more securities to financial institutions.
The liability of the partners is unlimited, they may raise more funds compared to an individual company, the partner society has more solvency and business facility.
v) Promptness in decision making :
Partners meet frequently and make mutual decisions to solve problems, deal with the situation and manage business opportunities.
vi) Share risks :
The business risk is shared between the partners. The burden of each partner will be much lower compared to the burden of the single trade. In addition, commercial expansion will not be hampered by fear of risk.
vii) Relationship between reward and work :
Partners try to put more work to get more and more profits. There is a direct relationship between reward and work. The more they work, the more they benefit.
viii) More possibility of growth and expansion :
Compared to sole-trading companies, association concerns offer more opportunities for the expansion and growth of companies. The partner can contribute more and expand the business.
ix) Close monitoring :
The partners they themselves look over business ; hence wastage can be avoided. They have direct access to the business to minimize the cost and do whatever they want to grow the business.
x) Flexibility of operations :
There is no legal requirement to request government approval before making major changes to the business configuration. There may be a change in the management structure, the capital and the scale of operations. These changes can easily be made based on business opportunities.
xi) Secrecy :
A company should not publish its statement of results and balance sheet as it should be for a corporation. Partners can keep trade secrets by themselves. Competitors do not know the exact position of the company. Trade secrets are very important for a small concern.
xii) Protection of minority interest :
Each member has the right to participate in the management of the company. All important decisions are made with the consent of all partners. If a majority decision is imposed on a minority, the interested partners can dissolve the company.
xiii) Easy dissolution :
The association can be dissolved in case of insolvency, madness or death of a partner. If the association is at will, any partner can dissolve the company by notifying other partners. No legal formality is required at the time of dissolution. Therefore, it is easy to start and dissolve an association problem.
xv) Democratic administration :
All partners can have an active interest in the operation of the company. All partners are consulted about important decisions. In general, strategic decisions are made only by consensus.
xvi) Saving in managerial expenses :
There is a saving in the expenses of an Partnership company. The partners share all the important functions and care for them. In other ways, such as corporations, management expenses are huge because they must depend on employment.
Disadvantages of partnership :
i) Unlimited liability:
The partners’ liability is unlimited. Not only are they responsible for their commercial investments, but their private properties can also be taken for commercial responsibilities. The partners try to avoid the risks and restrict the expansion and growth of the company.
ii) Limited resources:
The collection of additional resources for expansion purposes is limited. The resources of the company are limited to the personal funds of the partners. The debt capacity of the partners is also limited.
The number of partners to add to a company is also limited. A bank company can not have more than ten partners and in other cases, the number of partners can not exceed twenty. Therefore, there is a limit beyond which partners can not be added.
The Company suffers from uncertainty, as it may dissolve following the death, insanity or insolvency of a member. Mistrust or lack of trust among partners can also lead to dissolution. The discontinuity of the business is a economic, social and brand loss and causes inconveniences to consumers and workers.
(iv) Mutual Distrust:
Mutual distrust among partners is the main cause of the dissolution of association problems. It is difficult to maintain harmony between partners as they may have different opinions and disagree on some issues. The lack of mutual trust can be the cause of disputes and lead to the dissolution of the company.
v) Limitations on the transfer of shares:
No member can transfer his part to a third party without the consent of the other partners. If a partner wishes to recover his action, this will not be possible without the approval of the other partners or without the dissolution of the company.
In the case of a company, any shareholder may transfer their shares without affecting the operation of the company. In partnership, a partner is permanently involved.
vi) Implicit authority burden:
A partner can bind the business by his acts. He can act as an agent of the company. A dishonest partner can lead the company to problems. The other partners must comply with the obligations contracted by the partner. The provision of implicit authority can create problems for the company.
vii) Lack of public faith:
Accounts of association problems are not published. Therefore, the public is not aware of the exact position of the company. Public opinion suspects that these concerns generate huge profits to the detriment of consumers. There is no legal link for the publication of the accounts. Association problems lack confidence.
viii) Lack of timely decisions:
All important decisions are made with the consent of the partners, so the decision-making process takes time. There may be the possibility of losing business opportunities due to slow decision making. Decisions are usually made by summaries, it can be difficult to convince all partners to accept a particular decision.
ix) Prudent approach:
The unlimited responsibility of the partners leads to a prudent approach on the part of the partners. They try to avoid decisions that involve some kind of risk. Several business opportunities can be lost due to this type of trend. In addition, the partners’ ability to take risks may also be limited.
Suitability of partnership business for:
- It is suitable for small or medium size business.
- It is suitable for more skills required to continue the business.
- It is suitable for professional services like accounting professional , medical profession , legal profession , etc .
- It is suitable for service Industries like transport , finance , etc .
- It is suitable for stock broking firms.
- It is suitable for distribution agencies or collecting agencies.