Partnership Firm

When a single person's capital and skill fall short, two or more persons may join to carry on a business together. A partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. It is governed in India by the Indian Partnership Act, 1932. The persons are called partners, and collectively they form a firm.

Features

• Agreement — partnership arises out of an agreement (the partnership deed), not merely from status or birth.
• Two or more persons — a minimum of two; the maximum for an ordinary firm is 50 (prescribed under the Companies Act, 2013).
• Sharing of profit and loss — partners share profits (and losses) in an agreed ratio; if none is agreed, equally.
• Unlimited and joint liability — every partner is personally and jointly liable for all the debts of the firm.
• Mutual agency — each partner is both an owner and an agent; one partner's act in the ordinary course binds the whole firm and the other partners. This is the test of partnership.
• No separate legal entity — the firm has no identity apart from its partners.
• Registration is optional but strongly advisable, because an unregistered firm cannot sue to enforce its rights.

Merits

• Larger capital than a proprietorship, since several partners contribute.
• Combined skill and balanced judgement — different partners bring different expertise, and decisions are discussed.
• Sharing of risk — losses are spread over several partners.
• Easy formation — only an agreement is needed; formalities are few.
• Business secrecy — accounts need not be published.

Limitations

• Unlimited liability — personal property of every partner is at risk.
• Risk of disputes — differences of opinion among partners can disturb the business.
• Lack of continuity — death, retirement or insolvency of a partner can dissolve the firm. …