Question

Sneha after her course in designing started taking jobs for designing logo, wedding cards, pamphlets, advertisements etc. Her work became quite popular and she had continuous orders. She decided to have a separate office with some staff to help her. She was suggested by her father to have a business organization and run it properly.
(a) Her business was constantly growing and she was facing problems with handling all orders and finishing them on time. Her friend Pooja, who was also a designer, proposed to join her as a business partner. Sneha was confused whether to continue her business as a sole trader or convert it into a partnership firm. As a true friend of Sneha, you are required to suggest the advantages and disadvantages of a partnership business. (two each)
(b) Sneha and Pooja decide to form a partnership firm and do the business together. Suggest them on the following issues with proper reasons.
(i) What kind of liability will they have and how will it affect them?
(ii) How is 'Particular Partnership' different from 'Partnership at Will' ?
(iii) Is it necessary for them to have an agreement and register their firm?

Answer 1

(a). Advantages of a partnership include that: (any two)

• Two heads (or more) are better than one
  
• Your business is easy to establish and start-up costs are low
  
• More capital is available for the business
  
• You’ll have greater borrowing capacity
  
• High-caliber employees can be made partners
  

There is an opportunity for income splitting, an advantage of particular Importance due to resultant tax savings

Disadvantages of a partnership include that: (any two)

• The liability of the partners for the debts of the business is unlimited
  

each partner is ‘jointly and severally’ liable for the partnership’s debts; that is, each partner is liable for their share of the partnership debts as well as being liable for all the debts

• There is a risk of disagreements and friction among partners and management
  

each partner is an agent of the partnership and is liable for actions by other partners

• If partners join or leave, you will probably have to value all the partnership assets and this can be costly.
• (b) 1. Different management styles.
• Different management styles don’t have to be a big problem. Some partnerships take on parental dynamic: one is a disciplinarian who is task-oriented, slightly distant and intent to get things done. The other is laissez-faire, relatable and prioritizes a ''chill'' company culture over a well-oiled machine. In the best case scenario, one lays down the law and keeps the ship on course, while the other keeps employees happy.
• 2. Personal habits.
• In the early stages of a new company, the rules for maintaining a work-life balance don’t really apply for founding members. Those who have offices can expect to stay there well past traditional quitting time. A lot of people can’t take the pressure. There’s a huge range of different vices and vulnerabilities that can jeopardize a business partnership, especially if there are no other employees: substance abuse, alcohol, lapses in ethics, and mental health issues.
• 3. Financial problems and equity.
• Another struggle many partnerships face is the nature of the partnership. After all, not every team is split 50/50. The founder might be willing to put up all the money and just needs tech or business help to get it off the ground. In this case, how is equity divided? How is the secondary partner valued? Are the guidelines absolutely clear to both parties involved? These questions should be addressed at the end of the courting period, but it’s eminently important that there are no lingering tensions going forward.
• 5. Commitment levels.
• Much like issues over equity and financial contribution, it’s necessary to be perfectly clear on what each partner is looking for. One might just be in it for the experience, but not willing to put in the time and dedication required. Maybe they want in but keep their day job, invest little money, or lack needed skills outside of their own specialization.
• (B).i They must have limited liability and this is because they will have an assurance that their risk to the business is limited to an extent. This will have a positive effect on business since their confidence will be boosted up by seeing limited risk.
• (ii) A particular partnership is formed to fulfill a single task or transaction. Whereas partnership at will is that in which the decision is in the hands of the partners to terminate the partnership after completion of an assignment.
• (iii) In any kind of partnership, there must be an agreement between partners as it is easy to solve any riot. But it is not necessary to register the partnership because the legal formalities may cost high to small scale business.