A form of business that enables two or more individuals to collectively run an organization, and they agree to share the profits and losses of the company. Each member of such a business is called a partner and together they are known as a partnership firm. Partners in a partnership firm share profits and losses in proportion to their respective investments. These firms are regulated by Section 4 of the Indian Parliament Act 1932.
Features of partnership firm
A partnership firm is a separate entity from a sole proprietorship. Following are the major features of partnership firms that make it different from other types of organizations:
- based on agreement– Partnership is an agreement between two or more persons called partners, who decide to start this business, they have to make a formal mutual contract between themselves. This agreement is usually written and is called a partnership deed.
- number of partners– There is a restriction on the number of partners who can be part of a partnership firm. As per Section 11 of the Indian Partnership Act 1932, the maximum number for banking partnership business will be 10 and for partnership businesses other than banking businesses the number is limited to 20. The minimum number of partners required for a firm is two.
- Liabilities– In general partnership, all the partners are subject to liabilities which are not limited and hence they are responsible to cover the entire debts of the firm. But in case of limited liability partnership the liability is limited.
- profit sharing– In a partnership firm, the partners share profits and losses in predetermined proportions as per their partnership deed. If the partnership deed is not signed or there is no clause mentioned about it in the agreement then the income will be distributed equally.
- Non-transferability of interest– A partner cannot transfer his interest from the existing firm to another. There are strict restrictions on the admission and retirement of partners without prior permission. Every change requires the consent of all the partners of the firm.
Types of Partnership
Partnership firms can be classified into different types based on their characteristics. These types are discussed in detail below:
- general partnership– Partnership in which partners participate equally in the regular activities and decision-making possibilities of a firm. Here the partners are equally responsible for all the profits, liabilities and debts of the company. The liability of all the partners in this firm is unlimited.
- limited Partnership- A limited partnership is one in which the liability of one or more partners is limited. A limited partner usually takes his share of the profits without any involvement in daily managerial activities and decision making. Due to limited liabilities they do not have to suffer losses in excess of the limited liability.
- partnership at will– This type of partnership depends on the wishes of the partner. Here the partner can break the bond anytime if needed. This type of partnership is usually formed for legitimate business which usually lasts for an indefinite period of time until the partners are ready to break the bond.
Types of Partners:
In a partnership firm, there can be several types of partners, including:
- general partner: These partners have unlimited liability and are actively involved in the management and decision making of the business.
- limited partner: These partners have limited liability and do not participate in the daily management of the business. They are passive investors and their liability is limited to the extent of their investment.
- sleeping partners: These partners do not participate in the management of the business, but they have unlimited liability for the debts and obligations of the firm.
- nominal partner: These partners lend their name to the business but do not contribute capital or participate in the management of the business.
- active participant: These partners actively participate in the management of the business and share in the profits and losses.
- share in profits only: These partners are entitled to share in the profits but do not share in the losses.
The exact types of partners in a partnership firm may vary depending on the specific partnership agreement and the needs of the business.
Benefits of Partnership:
There are many benefits of partnership. Members becoming part of a partnership firm will get the following benefits:
- Shared Resources: Partnership allows sharing of resources including financial, managerial and operational resources. This can help reduce costs and increase efficiency.
- Complementary Skills and KnowledgePartnership allows pooling of skills, knowledge and expertise from different individuals or companies. This can lead to more innovative solutions and better decision making.
- shared risk: In a partnership, the risk is shared among the partners, which can help reduce personal risk for each partner.
- increased credibility: A partnership can help increase the credibility of the partners in the eyes of customers, suppliers and other stakeholders.
- access to new markets: Partnerships can help open up new markets and customers for partners, leading to increased revenues and growth.
- resilience: Partnerships can be structured flexibly, allowing different levels of involvement and commitment from each partner.
- tax benefits: Depending on the structure of the partnership, there may be tax benefits for the partners.
Overall, partnerships can be a powerful tool for achieving shared goals and objectives, and can provide many advantages compared to operating independently.
Disadvantages of Partnership:
Despite having many advantages, partnership organization also has some disadvantages. These are described as follows:
- unlimited liability:Partners in a partnership firm agree to share all losses and profits among themselves. The liability of all the partners is not limited. The burden usually falls on personal assets and funds held by the partners.
- Capital Blockage:Neither a partner in the firm can withdraw his capital nor transfer his share to anyone without the consent of the other partners. This is an important reason that discourages people from investing in partnership firms.
- Uncertainty:Partnership business is plagued with uncertainty. It arises from events such as insanity, bankruptcy, retirement and death of the partner. This may result in the business ending suddenly.
- Difficulty in taking decisions:In partnership business, the consent of each partner is required before taking decisions. Every decision requires the consent of all partners. Policy-making choices also require everyone’s consent. Therefore, partners are unable to take spontaneous or quick decisions at the right time.
In short, partnership is a form of organization that has the overall features of a sole proprietorship as well as a company organization. Here, the members have unlimited liability and are collectively responsible for each other’s actions. Partnership is suitable for businesses that are not large enough to be managed by a sole proprietor.
Partnership: Meaning, Types, Benefits Download Notes PDF
sharing is Caring!
