A ‘partnership’ is a group of people who collect the financial and administrative resources of two or more individuals, share their profits or losses, and agree to continue a business. The individuals who form a partnership are called “partners” and collectively called “partnership firm”. Partnerships are an ideal form of small and medium enterprises with limited capital and other resources, limited production and marketing, and limited specialization in maintenance.
Section 4 of the Partnership Act, 1932 defines partnership as “The relationship between individuals who agree to share the profits of a business that works for all or for all”.
L.H. Honey said, “It is the relationship between persons who are eligible for the contract that generally allows one to run a legitimate business for personal gain.”
John Shubin said, “Two or more individuals can enter into a partnership, either in writing or orally.
Features of a Partnership Firm
The features of a business structure partnership can be identified as follows:
1. Formation: The corporate form of the business organization is governed by the provisions of the Indian Partnership Act, 1932. It will come into force through a legal agreement. The way a business is run must be legal and work for profit. However, bringing two people together for charitable purposes is not a partnership.
2. Association of two or more persons: partnership, at least two persons. The maximum number of members in a banking business is 10 and for other businesses it should not exceed 20. Individuals participating must be eligible to enter into a contract. A partnership firm cannot be formed because the minor is not eligible to enter into a contract.
3. Unlimited Liability: The shareholders of a company have unlimited liability. Personal assets can be used to repay debts if business assets are insufficient. In addition, the partners are obligated to repay the debts collectively and individually. Collectively, all partners are responsible for the debts they contribute to their share of the business, as long as they are responsible. Even personally, each partner is responsible for repaying the debts of the business.
4. Indirect power: An indirect power exercised by any partner on behalf of the firm. The business is governed by the activities of the shareholders.
5. Presence of a legitimate business: A business in which individuals agree to share profits must be legal. Any contract to engage in smuggling, black market, etc. cannot be called a partnership business in the eyes of the law.
6. Good faith: The main foundation of a partnership business is good faith and mutual trust. Each participant must act honestly and give proper accounts to the other participants. The partnership cannot work if there is doubt between the partners. Distrust and suspicion among shareholders leads to the failure of the company.
7. Principal and agent relationship: There should be an agency relationship between the partners. Each partner is the primary and agent of the firm. When a partner interacts with other parties, he / she acts as the other partner’s agent, while the other partner becomes the principal agent.
8. Restriction on transfer of shares: No participant may sell or transfer his shares to others without the consent of the other partners. If any partner does not wish to continue the partnership, he / she can give notice of termination of the partnership
9. Voluntary Registration: A partnership registration is not mandatory, but some restrictions apply to the unregistered company, which makes registration mandatory.
10. General Management: Every shareholder has the right to participate in the running of the business. Not all participants are required to participate in the day-to-day running of the business, but they do have the right to participate. Although the partnership business is run by some partners, the consent of all other partners is required to make important decisions.
Also Read: Define Joint Stock Company, Features, Advantages & Disadvantages
Advantages and Disadvantages of Partnership Firm
Advantages of Partnership Firm
The participatory form of business is ideal for medium-sized businesses, where the personal efforts of entrepreneurs are essential to work effectively. The main advantages of a partnership are:
1. Easy to form: Separation can be easily created without many legal procedures. Since the firm is not required to register, a simple agreement, oral, written or indirect, is sufficient to create a partnership firm.
2. Large resources: Since two or more partners have joined hands to start a partnership firmee, more resources can be mobilized compared to the sole proprietorship form of the business organization. Partnership concerns can also organize funding from external sources.
3. Outstanding Outcomes: Each shareholder in a partnership firm has the right to participate in business management. All major decisions are made with the consent of all stakeholders. Thus, collective wisdom exists, and irresponsible and hasty decisions are less likely.
4. Benefits of Professionalism: All participants actively participate in the business according to their expertise and knowledge. In a partnership firm that provides legal advice to the public, one partner may handle civil cases, one a criminal case and the other a labor case based on their specificity. Similarly a clinic can be started by two or more doctors with different specialties.
5. Flexibility in operations: A partnership is a flexible organization. At any time after obtaining the necessary approval from all partners, shareholders may decide to change the size or nature of the business or its area of operation.
6. Risk sharing: The loss of the company is shared equally by all partners or at an agreed rate. The weight of each partner is very low compared to the weight of the same partner. Moreover, fear of risk will not hinder business expansion.
7. Serious interest: When shareholders share profits and make losses, they are more interested in business matters. Partners have direct access to employees and can motivate them to do more work.
8. Protecting the interests of minorities: In the form of participation in a business organization, the rights of each partner and his or her interests are fully protected. If a partner is dissatisfied with any decision, he or she may be asked to terminate the partnership or withdraw from the partnership. All major decisions are made with the consent of all stakeholders.
9. Confidentiality: The trade secrets of the Company are known only to the shareholders. There is no need to disclose any information to outsiders. It is not mandatory to publish the annual accounts of the partnership.
10. High Credit Qualification: Shareholders have sufficient contacts in the market. They can provide more securities to financial institutions. The liability of the partners is unlimited and they can raise more funds. Partnership concerns have a higher credit-worthiness compared to sole proprietorship.
Also Read: Define Sole Proprietorship, it’s Features, Advantages & Disadvantages
Disadvantages of a partnership
A partnership company is affected by the following disadvantages or limitations;
1. Unlimited Liability: The most important disadvantage of the partnership firm is the unlimited liability of the shareholders, i.e. the partners are personally liable for the debts and liabilities of the company. In other words, the company can also use their private property to pay off liabilities.
2. Uncertainty: Each partnership firm has a life of uncertainty. The death, bankruptcy or retirement of any partner terminates the partnership. Not only that, any dissenting partner can be notified of termination at any time.
3. Limited Capital: As the total number of shareholders should not exceed 20, the fund raising capacity is less than the number of shareholders as compared to an unlimited joint stock company.
4. Indirect force burden: A partner can connect the business by his actions. He can act as an agent for the business. An dishonest partner can lead the business into difficulties. Other partners must fulfill partner obligations. Providing indirect power will create problems for the business.
5. Immovable Allocation: The interest contribution of one partner cannot be transferred to other partners or outsiders. Therefore, it creates an awkward situation for the partner who wants to transfer his share completely or partially to others. The only solution is to dissolve the firm.
6. Possibility of conflicts: Every shareholder in the firm has an equal right to participate in the management. Each participant can present his or her opinion or point of view to the management at any time. For this reason, there are sometimes quarrels and quarrels between partners. Disagreements can lead to quarrels and disintegration of the firm.
7. Lack of public trust: Accounts of participatory concerns not published. Therefore, the public is not aware of the exact state of the business. There is a perception in the minds of the people that these concerns are making huge profits at the expense of the consumer. There are no legal restrictions on the release of accounts. Therefore, participation is about public distrust.
8. Delay in decision making: All major decisions are made with the consent of the participants, so the decision making process will take time. Slow decision making can lead to loss of business opportunities. In general, decisions are made by consensus, and it is difficult to persuade all participants to agree on a particular decision.
Despite all of the above shortcomings and limitations, the format of the partnership system is appropriate when it requires more management and capital than a business; Ideal for small and medium concerns and when direct contact with customers is required.