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What is Partnership?

Where two or more persons are associated with running a business with a view to earning a profit is called a partnership form of organization. Persons from similar backgrounds or persons of different aptitudes and skills may join together to carry on a business known as a partnership firm.

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

These firms are governed by the Indian Partnership Act, of 1932. In India there is the Limited Liability Partnership Act of 2008 in which the liability of partners is limited but, to date, it does not have widespread use in the form of business organization.

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Characteristics of Partnership

The following are the characteristics of partnership:

1. Restriction on Number of Partners
2. Contractual Relationship between Partners
3. Competence of Partners
4. Sharing of Profit and Loss
5. Unlimited Liability
6. Relationship of Principal-Agent among Partners
7. Transfer of Interest
8. Legal Status
9. Voluntary Registration
10. Dissolution/Closure of Partnership Firm

Restriction on Number of Partners

There is a restriction to the minimum and maximum number of members in partnership firms. To start a partnership business minimum of two persons are required and the maximum membership limit is 10 in the case of banking business and 20 in the case of all other types of business.

Contractual Relationship between Partners

The relationship between the partners of a partnership firm is created by contract. When the partners enter into a partnership firm through an agreement which may be verbal, written, or implied the firm comes into existence.

If the partners enter into a written agreement it is known as a ‘Partnership Deed’ which governs the operation of all the business activities.

Competence of Partners

In a partnership form of business organization, the individuals have to enter into a contract to become partners, and therefore, they must be competent enough to do so. Thus, minors, insolvent persons, and lunatics 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 with consensuses of all the partners.

Sharing of Profit and Loss

The partners can share the profit of the partnership firm in any ratio as per the agreement i.e. as agreed in their ‘Partnership Deed’. But, in the absence of an agreement, partners can share the profits equally.

Unlimited Liability

The partners of the partnership firms have unlimited liability. Partners are liable jointly and severally for the debts and obligations of the partnership firm. The creditors of the partnership firm can put down their claim on the personal properties of any individual partner or all the partners jointly.

In many cases, 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. In case of dissolution of a firm, the liability of a minor is, however, limited to the extent of his share in the profits.

Relationship of Principal-Agent among Partners

The business activities of a partnership firm may be carried on by all the partners together or any one of them acting for all the partners. It means there is a dual relationship between partners i.e. 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, therefore, essential that there should be mutual trust and faith among the partners in the interest of the firm.

Transfer of Interest

Without the consent of other partners, no partner can sell or transfer his interest in the firm to anyone or any other partner. The partner can give his interest to others with the consent of all the partners.

Legal Status

The partnership firm means partners and the partners mean the partnership firm. A partnership firm is just a name for the business as a whole. In the eyes of Law partnership firm does not enjoy separate recognition i.e. the firm does not enjoy a separate entity distinct from the partners.

Voluntary Registration

Registration of partnership firms is voluntary and not compulsory. However registration of the partnership firm gives the right to enjoy several benefits, and hence, it is considerably desirable to register the partnership firm.

For example, if it is registered, any partner can file a case against other partners, or an outside firm and outsiders can file a suit against the partnership firm in case of any disputes, disagreements claims, etc.

Dissolution/Closure of Partnership Firm

Dissolution/Closure of partnership implies two aspects. First, it shows complete closure or termination of the partnership business, and second, it also shows any change in the existing agreement among the partners due to a change in the number of partners or changes in the conditions of the agreement.

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Advantages of Partnership Firm

The advantages of partnership firm are as follows:

1. Easy Formation
2. Larger Financial Resources
3. Flexibility in Operation
4. Better Management
5. Sharing of Risk
6. Protection of Minority Interest
7. Better Public Relations
8. Diversification of Management

Easy Formation

As there is no need for every partnership firm to register it can be formed without many legal formalities and with less expenditure. Even if partners would like to register their firm the expenditure is restricted to only developing an agreement. Even the registration of a partnership is not compulsory.

All that is required is an agreement among the partners, stating the terms and conditions of the business. It is not even compulsory to have this agreement in writing. It is, however, advantageous to get the partnership registered and have a written agreement.

Larger Financial Resources

A partnership firm can pool larger financial resources as compared to a sole proprietorship because it has more partners to contribute to meet the financial requirements of the partnership firm further these partners may raise more funds from outside through loans from banks or other financial institutions and through borrowings from close relatives or friends. Thus it can enter into bigger operations and can have more credit facilities.

Flexibility in Operation

Due to a limited number of partners changes in operations of the firm and amendment objectives if necessary can be easily done by mutual consent of all the partners. So there is flexibility to make changes in operation in partnership business.

Better Management

Partners often meet to discuss the affairs of business and can make prompt decisions by their mutual consent. As there is a direct relationship between ownership, control, and profit partners take more interest in the affairs of business and operate the business smoothly.

Sharing of Risk

In partnership, in case of probability of risk of loss or actual loss in business partners can easily share it and one individual is not accountable for such loss like the sole proprietor bears the entire loss.

Protection of Minority Interest

In a partnership firm, every partner has an equal right to contribute or say in decision making which affects the firm’s operation. If any decision adversely affects the interests of a partner he can prevent a decision from being taken and in extreme cases a dissenting partner may withdraw from the partnership and dissolve the partnership firm.

Better Public Relations

In a partnership firm, the group consists of a small number of partners who manage the affairs of the firm which facilitates cordial relationships with the public. Compared to a company form of business better cordial relation with the public is possible.

Diversification of Management

A partnership firm permits diversification of management through division of labor and specialization on the part of the owner. In big partnership firms, one often finds one partner handling production problems, another in charge of sales and finance, and so on.

The distribution of duties and responsibilities promotes specialization and each partner performs those functions for which he/she is best qualified.

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Disadvantages of Partnership Firm

The disadvantages of partnership firm are:

1. Instability of Firm
2. Unlimited Liability of Partners
3. Lack of Harmony
4. Limited Capital
5. Lack of Public Confidence
6. Difficulty in Withdrawing Investment

Instability of Firm

Like Sole Proprietorship the death, insolvency, or lunacy of a partner may bring about an unexpected end to the partnership. It means a partnership firm does not continue to exist indefinitely but its existence depends upon the existence of all the partners.

Further, the partnership business can be brought to a close if any partner demands its termination for any reason.

Unlimited Liability of Partners

In a partnership firm, there is joint and several liability of partners to an unlimited extent, and therefore, any one of the partners can be called upon to pay all the debts even from his personal properties.

Every partner has a right to take part in the management of the partnership firm and any wrong decision by a single partner commits the resources of the firm which may lead to heavy liabilities for others. This discourages many persons, with money and ability, to accept membership of a partnership firm.

Lack of Harmony

There are greater possibilities of resistance and quarrel among the partners as every partner has equal rights and voice in the firm’s operation leads to differences of opinion.

Differences of opinion may lead to mistrust and disharmony which may ultimately result in disruption and closure of the firm. Lack of centralized authority and conflicts in policy can disrupt the organization.

Limited Capital

The capital that can be raised for a partnership firm is limited as there is a restriction on the maximum number of partners i.e., 10 in the case of banking business and 20 in the case of all other types of business. A partnership is good insofar as it can be started with limited capital.

However, it becomes a handicap in the growth and expansion phases of the business. There is a limit beyond which it is almost impossible for partners to collect capital. This limit is generally up to the personal properties of partners.

Lack of Public Confidence

As there is no legal mechanism to enforce the registration of a partnership firm and the disclosure of its affairs it may suffer from lack of public confidence. In case of mismanagement in a company form of business, the Central Government has the absolute power to order an investigation of company affairs.

This is almost totally lacking in the case of a partnership and hence general public is reluctant to deal with a partnership firm, both in financial and other matters.

Difficulty in Withdrawing Investment

Investing in a partnership firm is simple but its withdrawal may be a difficult or costly aspect when this aspect is considered from the point of view of individual partners. This is because no partner can withdraw his interest from the firm without the consent of all partners.

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