A partnership is a relation between two or more persons who join hands to form a business organization to earn a profit.
The persons who join hands are individually known as ‘Partner’ and collectively a ‘Firm’.
The partners provide the necessary capital, run the business jointly and share the responsibility.
- You must be thinking about how much capital each partner contributes?
- Do all the partners jointly manage the business or can any of them manage the business on behalf of others?
- Who will take the profits?
- If there is any loss then who will suffer the loss?
Yes, these are the few questions that might be coming to your mind.
When you invite your friends to start such a business, it should be the duty of all of you to decide;
- The amount of capital to be contributed by each one of you.
- Who will manage?
- How will the profits and losses be shared?
Thus, there must be some agreement between the partners before they start the business.
This agreement is termed as ‘Partnership Deed’, which lays down certain terms and conditions for starting and running the partnership firm. This agreement may be oral or written.
It is always better to insist on a written agreement among partners to avoid future controversies.
Definition of Partnership Form of Business Organization
A partnership firm is governed by the provisions of the Partnership Act, 1932. Section 4 of the Partnership Act, 1932, defines partnership as “a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”.
The Partnership Act-1932 says; “Partnership is the relation between persons who have agreed to share profits of a business carried on by any of them acting for all.”
The Partnership Act of America says; “The partnership is an association of two or more persons to carry on as co-owners a business for profit.”
“The partnership is the relation which subsists between persons carrying on business in common to profit”; British Partnership Act, 1890 (Sec-1).
Features of Partnership Form of Business Organization
After having a brief idea about the partnership, let us identify the various features of the partnership form of business organization.
Two or more Members
You know that the members of the partnership firm are called partners.
But do you know how many persons are required to form a partnership firm? At least two members are required to start a partnership business.
But the number of members should not exceed 10 in the case of banking business and 20 in case of other business.
If the number of members exceeds this maximum limit then that business cannot be termed as partnership business.
Whenever you think of joining hands with others to start a partnership business, first of all, there must be an agreement between all of you.
This agreement contains
- The amount of capital contributed by each partner;
- Profit or loss sharing ratio;
- Salary or commission payable to the partner, if any;
- Duration of business, if any ;
- Name and address of the partners and the firm;
- Duties and powers of each partner;
- Nature and place of business; and
- Any other terms and conditions to run the business.
The partners should always join hands to carry on any kind of lawful business.
To indulge in smuggling, black marketing, etc., cannot be called partnership business in the eye of the law.
Again, doing social or philanthropic work is not termed as a partnership business.
Competence of Partners
Since individuals join hands to become partners, they must be competent to enter into a partnership contract.
Thus, minors, lunatics and insolvent persons are not eligible to become partners.
However, a minor can be admitted to the benefits of partnership i.e., he can have a share in the profits only.
Sharing of Profit
The main objective of every partnership firm is sharing of profits of the business amongst the partners in the agreed proportion.
In the absence of any agreement for profit sharing, it should be shared equally among the partners.
Suppose, there are two partners in the business and they earn a profit of $20,000.
They may share the profits equally i.e., $10,000 each or in any other proportion, say one fourth and three fourth i.e. $5,000/- and $2500/-.
That means if the assets of the firm are insufficient to meet the liabilities, the personal properties of the partners, if any, can also be utilized to meet the business liabilities.
Suppose, the firm has to make payment of $25,000/- to the suppliers of goods. The partners can arrange only $19,000/- from the business.
The balance amount of $6,000/- will have to be arranged from the personal properties of the partners.
You don’t need to register your partnership firm.
However, if you don’t get your firm registered, you will be deprived of certain benefits, therefore it is desirable. The effects of non-registration are:-
- The firm cannot take any action in a court of law against any other parties for the settlement of claims.
- in case there is any dispute among partners, it is not possible to settle the disputes through a court of law
- The firm cannot claim adjustments for the amount payable to or receivable from any other parties.
No Separate Legal Existence
Just like a sole proprietorship, a partnership firm also has no separate legal existence from that of its owners.
A partnership firm is just a name for the business as a whole. The firm means the partners and the partners collectively mean the firm.
All the partners of the firm are the joint owners of the business. They all have an equal right to actively participate in its management.
Every partner has a right to act on behalf of the firm.
When a partner deals with other parties in business transactions, he/she acts as an agent of the others and at the same time, the others become the principal.
So there always exists a principal-agent relationship in every partnership firm.
Restriction on Transfer of Interest
No partner can sell transfer his interest to anyone without the consent of other partners.
Example- A, B, and C are three partners. A wants to sell his share to D as his health does not permit him, also can not do so until B and C both agree.
Continuity of Business
A partnership firm comes to an end in the event of death, lunacy or bankruptcy of any partner.
Even otherwise, it can discontinue its business at the will of the partners. At any time, they may decide to end their relationship.
Advantages of Partnership Form of Business Organization
Partnership form of business organization has certain advantages, which are as follows:
Easy to form
Like sole proprietorship, the partnership business can be formed easily without any legal formalities. It is not necessary to get the firm registered.
A simple agreement, either oral or in writing, is sufficient to create a partnership firm.
Availability of large resources
Since two or more partners join hands to start partnership business it may be possible to pool more resources as compared to a sole proprietorship.
The partners can contribute more capital, more effort and also more time for the business.
The partners are the owners of the business. Each of them has an equal right to participate in the management of the business.
In case of any conflict, they can sit together to solve the problems.
Since all partners participate in decision-making, there is less scope for reckless and hasty decisions.
Flexibility in operations
The partnership firm is a flexible organization. At any time the partners can decide to change the size or nature of business or area of its operation.
There is no need to follow any legal procedure. Only the consent of all the partners is required.
In a partnership firm, all the partners share the business risks.
For example, if there are three partners and the firm suffers a loss of $12,000 in a particular period, then all partners may share it and the individual burden will be $4,000 only.
Protection of interest of each partner
In a partnership firm, every partner has an equal say in decision making.
If any decision goes against the interest of any partner he can prevent the decision from being taken.
In extreme cases, a dissenting partner may withdraw himself from the business and can dissolve it.
Benefits of specialization
Since all the partners are owners of the business they can actively participate in every aspect of business as per their specialization and knowledge.
If you want to start a firm to provide legal consultancy to people, then one partner may deal with civil cases, one in criminal cases, another in labor cases and so on as per their specialization.
Similarly, two or more doctors of different specializations may start a clinic in partnership.
Limitations of Partnership Form of Business Organization
In spite of all these advantages as discussed above, a partnership firm also suffers from certain limitations.
Let us discuss all these limitations:
The partners are jointly as well as separately liable for the debt of the firm to an unlimited extent.
Thus, they can share the liability among themselves or anyone can be asked to pay all the debts even from his personal properties.
The partnership firm has no legal entity separate from its partners. It comes to an end with the death, insolvency, incapacity or the retirement of any partner.
Further, any dissenting member can also give notice at any time for the dissolution of a partnership.
Lack of Harmony
You know that in a partnership firm every partner has an equal right to participate in the management.
Also, every partner can place his or her opinion or viewpoint before the management regarding any matter at any time.
Because of this sometimes there is a possibility of friction and quarrel among the difference of opinion may lead to the closure of the business on many occasions.
Since the total number of partners cannot exceed 20, the capital to be raised is always limited. It may not be possible to start a very large business in partnership form.
No Transferability of Share
If you are a partner in any firm you cannot transfer your share of interest to outsiders without the consent of other partners.
This creates inconvenience for the partner who wants to leave the firm or sell part of his share to others.
Final Words:- Partnership is gathering of people who have agreed via a deed, to do business, share the profit and responsibilities
Sole proprietorship form of business organization has certain limitations. Its financial and managerial resources are limited.
It is also not possible to expand business activities beyond a certain limit. To overcome these drawbacks, another form, i.e., partnership form of business has come into existence.