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Partnership Firm is an important component of the Private Sector Organization. 'Partnership' form of the organization evolved because of limitations on capital raising capacity and managerial inability proprietary concern. The partnership helps in expanding the business based on capital and management.
A partnership is an outcome of an agreement between two or more persons who are conducting partnership business for earning profit. The agreement between partners may be oral or written. It is always advisable to have written agreement between all partners.
2. Joint Ownership
The partnership firm is jointly owned by partners. The partners have to use the partnership property only for business purposes and not for personal use.
3. Joint Management
Every partner has the right to take active participation in the management of the business. However, one or more partners may agree to manage the business on behalf of other partners in the firm.
4. Lawful Business
Every partnership firm must undertake lawful business only. The partnership should not engage in any business which is forbidden by law of land. The partnership firm cannot be formed to carry out any unlawful business.
The liability of each partner is unlimited, joint and several. Unlimited liability arises when the assets of the firm are not sufficient to pay off claims of the creditors. The private properties of the partners are attached to satisfy such claims. Several liabilities indicate that each partner is individually and separately liable for the debts of the firm, whether incurred by himself or other partners as agents of the firm.
6. Number of Partners
A partnership firm must have a minimum of two persons at any time during the entire life of the partnership firm. Maximum partners permitted in a partnership firm is 50.
7. Principal-Agent Relationship
Every partner is the joint owner of the business and partners take part in the management of the firm.
8. Restriction on Transfer of Interest
No partner of a firm can transfer or sell their interest or share in the firm to an outsider without the prior consent of all other partners in the firm.
Registration of partnership is not mandatory as per the provisions of the Indian Partnership Act, 1932. If Partners desire, they can register their firm with the ‘Registrar of Firms’ of their respective States. The firm, as well as partners, enjoy several benefits after registration of the firm.
10. Sharing of Profits and Losses
The partners agree to share profits and losses among themselves in certain proportions. Such profit and loss sharing depend upon the amount of capital introduced, services offered, goodwill of the partner and other terms of the agreement. If the agreement is silent on profit and loss sharing then all partners are assumed as equal partners.
11. Termination of Partner
A partner may resign on his own by giving notice to other partners in writing. The partners may also be removed from the firm for fraudulent activities.
The firm can be dissolved at any time if the partners agree to do so. The partnership firm gets automatically dissolved in case of death, insolvency or insanity of any one of the partners unless provided in the partnership agreement about the continued existence of the firm in such situations. The partnership firm automatically gets dissolved when the total number of partners in the firm is reduced to one partner.
1. Easy Formation
It is very easy to form a partnership business. Only two persons are required to form a partnership business. There requires only one step which is the signing of an agreement.
A partnership firm can gather more capital than a Sole Trading Concern. As partnership firm has a number of partners ultimately leading to more capital collections.
3. Business Secrecy
The partnership firms enjoy secrecy as firms are not subject to publish books of accounts annually. Due to this, competitors cannot easily know about the secrets and confidential information of the partnership firm.
4. Continued Existence
The Partnership can have continued existence. Even after the death, insolvency or insanity of one of its partner, the partnership can be carried on by existing partners provided that there should be a provision in a partnership agreement. However, partnerships deed needs to be redrafted.
5. Flexibility of Operation
There exist more flexibility in a partnership firm. Partners may expand or diversify business activities as and when required. Partners can change the line of business as per changing business situations.
6. Decision Making
There is quick decision making in partnership as few partners are involved in the decision-making process. The decisions are taken after detailed discussion among partners.
7. Effort – Reward Relationship
There is a direct relationship between efforts and rewards in the case of a partnership firm. Each partner puts in best efforts and thus rewards are shared among them. If the partnership agreement provides, active partners may get a higher share in the profit as compared to other partners in the organization.
Goodwill means the valuation of the partnership firm in terms of money. The partnership enjoys a good amount of goodwill in the market. This goodwill in the market is due to quality service, better services to customers, ethical working or partnership firm.
In a partnership firm, some partners may be good at diverse skills such as finance, technology, marketing which brings in specialization in a partnership firm.
1. Problem of Continuity
The partnership firm may face the problem of continuity unless provided for the continuation of business in the event of death, insolvency, and insanity to any partner in the partnership firm.
2. Absence of Legal Status
In a partnership firm, there is no separate legal existence. In the eyes of law, both are the same. Law does not make any distinction between partners and the firm. So there is an absence of separate legal status for partnership firm.
Disputes are common in partnership business because of a difference of ideas. Sometimes disputes may lead to the dissolution of the firm.
4. Non-Transferability of Interest
No partner of business can transfer his share in the business to the outsider without the consent of all the partners in the firm.
5. Limitations on the number of Partners
The Indian Partnership Act limits a maximum number of partners which is 50 members. This restricts a maximum number of partners admitted to business. Such restrictions may affect partnership firms while capital contribution and even in case of management of partnership firm.
6. Difficulty in Admission of Partner
In a partnership firm, there is often difficulty in the admission of a new partner. Admission of new partners may affect the profit-sharing ratio of existing partners. Therefore existing partners may object admission of new partners in business. Existing partners may not have full faith in incoming partners and which leads to difficulty in the admission of a new partner.
7. Unlimited Liability
Unlimited liability arises when the assets of the firm are not sufficient to pay off claims of the creditor. The private property of the partners is attached to satisfy such claims.
8. Risk of Implied Authority
There is often a risk of implied authority in the partnership firm. Partners may take undue advantage of managing the business on behalf of others which leads to risk implied authority.
9. Limited Capital
In a partnership firm, there is less capital as compared to JSC. There are restrictions on a number of members which leads to limited capital raising capacity of the business. Limited capital restricts the expansion of the business.
10. Problem of Secrecy
Though books of accounts and financial matters relating to business are not required to be published, a partnership firm lacks business secrecy. Some partners may share confidential information of a business to competitors or third parties for getting financial benefits from them.
In a partnership business, according to the nature of work or the role of partners, there are 9 manifold types of partners. Although it is not compulsory to have one partner of all types in the business.
An active partner is one who takes active participation in the day-to-day working of the business. The active partner may act in different capacities such as manage the organizer, adviser, and controller of all the affairs of the firm. An active partner is also known as a working partner, ordinary partner, etc.
A dormant partner is one who contributes capital, shares profits and contributes to the losses of the business but does not take part in the working of the concern. A dormant partner is also known as a sleeping partner.
A nominal partner is one who lends his name to the firm. He neither contributes to capital nor shares profits of the business. Due to his presence in the firm, the business may get more credit in the market or may promote its sales. A nominal partner is liable to those third parties who give credit to the firm on the assumption of that person being a partner in the firm.
The partner who is not known to third parties is termed as a Secret partner. His membership in the firm is kept secret from outsiders. Secret partner contributes to capital, shares profits of the firm, assume unlimited liability and he is liable for the losses of the business. He can take part in the working of the business.
Minor as Partner
A minor is a person who has not attained 18 years or as it is said maturity as per the provision of the Indian Contract Act, 1872. A minor cannot enter into a contract according to the Indian Contract Act because a contract by a minor is void. However, a minor may be admitted for the benefits of an existing partnership with the consent of all partners.
Partner in Profits only
When a partner agrees to share only profits of the firm and would not be liable for its losses, he is known as a partner in profits only. However, such partners are liable for all the debts of the firm.
When a partner agrees to share their own profit derived from the firm with a third person is known as sub-partner. A Sub-partner cannot represent himself as a partner in the original firm.
Partner with Limited Liability
This type of partner exists in a limited partnership. The liability of the partner is limited to the extent of capital contributed by him in the firm. He is a special partner and generally does not take an active part in the working of the firm.
Quasi Partner is a partner in a partnership firm who retired from firm but left his capital with the firm. Quasi Partner does not take active participation in the firm but shares the profit of the firm. Such a partner is liable for the debts of the firm. Many times such partners receive a certain rate of interest on his capital as decided.
1. Partnership at Will
When there is no provision in partnership agreement regarding the time period for partnership then I am known as ‘Partnership at will’. Such a partnership can be easily dissolved. Any partner can give notice of his intention to leave partnership at any time.
2. Partnership for Particular period
When a partnership is formed for a specific time such partnership is known as ‘Partnership for Particular Period’.
3. Partnership for Particular Venture
When a partnership firm is formed for a particular venture or business, such a partnership is known as ‘Partnership for particular Venture’.
Limited Liability Partnership
Every Limited Liability Partnership should have at least two Designated Partners. Among two partners one partner must be the resident of India.
In Limited Liability Partnership, all partners are General Partners. Limited Liability Partners offers some personal liability protection to the participants. Individual partners in limited liability partnerships are not personally responsible for the wrongful acts of other partners, or for the debts or obligations of the business.