What is Partnership?
A partnership is a kind of business where a formal agreement between two or more people is made and agreed to be the co-owners, distribute responsibilities for running an organization and share the income or losses that the business generates.
In India, all the aspects and functions of the partnership are administered under ‘The Indian Partnership Act 1932’. This specific law explains that partnership is an association between two or more individuals or parties who have accepted to share the profits generated from the business under the supervision of all the members or behalf of other members.
Also read: Importance of Partnership Agreement
Features of Partnership:
Following are the few characteristics of a partnership:
- Contract or Formation – A firm having multiple owners must have a legal agreement between all the partners. So, it is compulsory to have a partnership contract to establish a partnership firm.
- Unlimited Liability – All the partners are liable for the payment of the debts, even if they have to liquidate their personal assets.
- Continuity – In the context of death, bankrupt, and retirement of any partners, etc., the partnership will be dissolved and the remaining partners must make a fresh agreement amongst each other. Similarly, a son cannot inherit his father’s partnership, but with the agreement of other partner members, he can be added as a new partner.
- Number of Members – There is no specific number as to the maximum number of members a partnership firm can have. However, according to the Companies Act, 2013, for banking only 10 members are allowed. For companies, the maximum member should not exceed more than twenty.
- Mutual Agency- This means all the partners should take responsibility for a company’s operation. But sometimes one partner on behalf of the rest of the partners can supervise or take actions.
Types of Partnerships
A partnership is divided into different types depending on the state and where the business operates. Here are some general aspects of the three most common types of partnerships.
- General Partnership
A general partnership comprises of two or more owners to run a business. In this partnership, each partner represents the firm with equal right. All partners can participate in management activities, decision making, and have the right to control the business. Similarly, profits, debts, and liabilities are equally shared and divided equally.
In other words, the general partnership definition can be stated as those partnerships where rights and responsibilities are shared equally in terms of management and decision making. Each partner should take full responsibility for the debts and liability incurred by the other partner. If one partner is sued, all the other partners are considered accountable. The creditor or court will hold the partner’s personal assets. Therefore, most of the partners do not opt for this partnership.
- Limited Partnership
In this partnership, includes both the general and limited partners. The general partner has unlimited liability, manages the business, and the other limited partners. Limited partners have limited control over the business (limited to his investment) and are not associated with everyday operations of the firm.
In most of the cases, the limited partners only invest and take a profit share, and they do not have any interest in participating in management or decision making. This noninvolvement means they don’t have the right to compensate the partnership losses from their income tax return.
You might also want to know: Different modes of reconstitution of Partnership Firm
- Limited Liability Partnership
In Limited Liability Partnership (LLP), all the partners have limited liability. Each partner is guarded against other partners legal and financial mistakes. A limited liability partnership is almost similar to a Limited Liability Company (LLC) but different from a limited partnership or a general partnership.
- Partnership at Will
Partnership at will can de be defined as when there is no clause mentioned about the expiration of a partnership firm. Under section 7 of the Indian Partnership Act 1932, the two conditions that have to be fulfilled by a firm to become a Partnership at Will are:
- The partnership agreement should have not any fixed expiration date.
- No particular determination of the partnership should be mentioned.
Therefore, if the duration and determination are mentioned in the agreement, then it is not a partnership at will. Also, initially if the firm had a fixed expiration date, but the operation of the firm continues beyond the mentioned date that it will be considered as a partnership at will.
Quick link: Advantages of Partnership
Indian Partnership Act 1932
Most of the businesses in India adopt a partnership business, so to monitor and govern such partnership The Indian Partnership Act was established on the 1st October 1932. Under this partnership act, an agreement is made between two or more person who agrees to operate the business together and distribute the profits they gain from this business.
The five important elements of The Indian Partnership Act 1932 are:
- Agreement for Partners – It is an association of two or more individuals and a partnership arises from an agreement or a contract. The agreement (accord) becomes the basis of the association between the partners. Such an agreement is in the written form. An oral agreement is evenhandedly legitimate. In order to avoid controversies, it is always good, if the partners have a copy of the written agreement.
- Two or More Persons – In order to manifest a partnership, there should be at least 2 persons possessing a common goal. To put it in other words, the minimal number of partners in an enterprise can be 2. However, there is a constraint on their maximum number of people.
- Sharing of Profit – Another significant component of the partnership is, the accord between partners has to share gains and losses of a trading concern. However, the definition held in the Partnership Act elucidates – partnership as an association between people who have consented to share the gains of a business, the sharing of loss is implicit. Hence, sharing of gains and losses is vital.
- Business Motive – It is important for a firm to carry some kind of business and should have a profit gaining motive.
- Mutual Business – The partners are the owners as well as the agent of their firm. Any act performed by one partner can affect other partners and the firm. It can be concluded that this point act as a test of partnership for all the partners.
Students can also refer to Basic Concepts of Accounting for Partnership
Advantages of Partnership:
- Easy Formation – An agreement can be made oral or printed as an agreement to enter as a partner and establish a firm.
- Large Resources – Unlike sole proprietor where every contribution is made by one person, in partnership firm partners can contribute more capital and other resources as required.
- Flexibility – The partners can initiate any changes if they think it is required to meet the desired result or change circumstances.
- Sharing Risk – All loss incurred by the firm is equally distributed amongst each partner.
- Combination of different skills – The partnership firm has the advantage of knowledge, skill, experience, and talents of different partners.
Few co-branding partnership examples are listed below:
- Red Bull and GoPro
- Spotify and Uber
- Levi’s & Pinterest
- Maruti Suzuki
- Hindustan Petroleum
The above mentioned is the concept, that is elucidated in detail about ‘partnership’ for the Commerce students. To know more, stay tuned to BYJU’S.