PARTNERSHIP

A partnership is a form of business organization in which owners have unlimited personal liability for the actions of the business, though this problem can be mitigated through the use of a limited liability partnership. The owners of a partnership have invested their own funds and time in the business, and share proportionally in any profits earned by it. There may also be limited partners in the business, who contribute funds but do not take part in day-to-day operations. A limited partner is only liable for the amount of funds he or she invested in the business; once those funds are paid out, the limited partner has no additional liability in relation to the activities of the partnership.

DEFINITION:

 A legal form of business operation between two or more individuals who share management and profits. The federal government recognizes several types of partnerships. The two most common are general and limited partnerships. 

A partnership is a form of business where two or more people share ownership, as well as the responsibility for managing the company and the income or losses the business generates.

A business owned by two or more people who agree on the method of distribution of profits and/or losses and on the extent to which each will be liable for the debts of one another.

FEATURES OF PARTNERSHIP

1.      Existence of business:

The objective of partnership must be to do some type of business. Business here means any activity leading to earn profit persons joining together and agreed to do charitable work or for formation of any club for entertainment would not be treated as partnership due to absence of the business. Even agreement of taking up any business activity in future shall not be treated as partnership fill the formation of business.

2.      Numbers of persons:

There must be at least two or more persons to form a partnership firm. As per Indian partnership Act, the minimum number of person required is to buy it does not prescribe the maximum limit for the purpose.

3.      Contractual relationship:

There should be a contractual relationship between the persons forming partnership. Persons competent to contract can be partners. They have to mutually agree and jointly decide to go for any business activity as per agreed terms and conditions. This may be either written or oral form among the partners.

4.      Sharing of Profits:

Business is carried on to share profit and not to incur losses. The profits generated by the firm are to share among the partners on an agreeable proportion. Loss it any has also to be borne by them on that ratio.

5.      Agency:

Partnership contract is based on principle of agency. Each partner is an agent of other partners. The business is carried on by all or any one of them acting on behalf of all other partners.

6.      Utmost good faith:

The partners should have utmost good faith in each other. They should be just and honest. They should present true accounts and must disclose true information to one another.

7.      Unlimited liability:

Like sole proprietorship, every partner has an unlimited liability in respect of debts of the firm. If the property or the assets of the firm are insufficient to meet the claims of the creditors, the private property of the partners can be attached to meet the claims of the creditors.

8.      Restriction on transfer of ownership:

A partner cannot transfer his share in business to an outsider without the consent of all other partners. This is because the partnership agreement is based on contract among individuals.

9.      Capital contribution:

Each partner contributes his share in the capital of the partnership firm. The capital contribution need not be equal or in any particular proportion. It must be as per the agreement each partner is behind to contribute that amount. A partner may be admitted to partnership without any capital contribution.

10.  Duration of the partnership:

The existence of the partnership firm continues at the pleasure of the partners. Legally of partnership comes to an end, if any partner dies or becomes insolvent or retries. The remaining partners may agree to continue the business under the original firm’s name after settling the claims of the outgoing partner.

TYPES OF PARTNERSHIP

There are three relatively common types of partnership which are general partnership (GP), limited partnership (LP) and limited liability partnership (LLP). 

GENERAL PARTNERSHIP

A general partnership is a partnership with only general partners. Each general partner takes part in the management of the business and also takes responsibility for the liabilities of the business. If one partner is sued, all partners are held liable. General partnerships are the least desirable for this reason.

LIMITED PARTNERSHIPS (LP)

In a limited partnership, a general partner may collaborate with a limited partner. A limited partner has no managerial authority, nor in most situations would they earn equal returns. However, the limited partner is protected by limited liability in legal situations regarding debt or other costs that may impact the general partner's personal assets. Along similar lines, limited partners are not considered agents of the organization from a legal perspective. It is also important to understand that this is not the same as a limited liability partnership (LLP), in which all partners have limited liability.

LIMITED LIABILITY PARTNERSHIP (LLP)

The limited liability company has supplanted the general partnership and the limited partnership, because of the limits of liability. But there are still cases in professional practices in which some partners want to be limited in scope of duties and they just want to invest, having the liability protection.

ADVANTAGES OF PARTNERSHIP

Partnership form of business organisation has certain advantages, which are as follows –

1.      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.

2.    Availability of large resources - Since two or more partners join hand to start partnership business it may be possible to pool more resources as compared to sole proprietorship. The partners can contribute more capital, more effort and also more time for the business.

3.    Better decisions - The partners are the owners of the business. Each of them has 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.

4.     Flexibility in operations - The partnership firm is a flexible organisation. 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.

5.   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.

DISADVANTAGES OF PARTNERSHIP

Inspite of all these advantages, the following are certain limitations.  

1.      Unlimited Liability:

All 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 any one can be asked to pay all the debts even from his personal properties.

2.     Uncertain Life: 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 dissolution of partnership.

3.  Lack of Harmony: You know that in 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 partners. Difference of opinion may lead to closure of the business on many occasions.

4.      Limited Capital: 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.

5.    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.