Partnership

The weaknesses of sole proprietorship in financing and managing a growing business opened the way for partnership. Partnership answers the need for greater capital, a wider range of skills and the sharing of risk.

Meaning: The Indian Partnership Act, 1932 defines partnership as "the relation between persons who have agreed to share the profit of the business carried on by all or any one of them acting for all." In simpler terms, it is the relationship between persons who combine their property, labour or skill in a lawful business and share the profits from it.

Features

• Formation: Governed by the Indian Partnership Act, 1932, a partnership comes into existence through a legal agreement specifying the terms among partners, the sharing of profits and losses, and how the business is to be run. The business must be lawful and run for profit — so people coming together purely for charity do not form a partnership.
• Liability: Partners have unlimited liability; personal assets may be used to pay debts if business assets fall short. Liability is joint and several — jointly all partners are responsible (contributing in proportion to their share), and individually each partner can be held liable for the full debt, later recovering the excess from the others as per the agreement.
• Risk bearing: Partners bear the risks of the business as a team, sharing profits — and losses — in an agreed ratio.
• Decision making and control: Partners share the responsibility of decision-making and day-to-day control, generally acting by mutual consent.
• Continuity: Partnership lacks continuity — the death, retirement, insolvency or insanity of any partner can end it. The remaining partners may, however, continue on the basis of a new agreement.
• Number of partners: The minimum is two. Under Section 464 of the Companies Act, 2013 the maximum can be up to 100 (subject to the number prescribed by government); at present, under Rule 10 of the Companies (Miscellaneous) Rules, 2014, the maximum is 50 members.
• Mutual agency: The business may be carried on by all or any one partner acting for all. Each partner is therefore both a principal and an agent — an agent because he binds the others through his acts, and a principal because he too is bound by the acts of the others.

Merits

• Ease of formation and closure: It can be formed easily through an agreement among partners; registration is not compulsory, and closing the firm is also easy.
• Balanced decision making: Partners can look after functions in their own areas of expertise, which reduces the work burden and leads to fewer errors and more balanced decisions.
• More funds: Because several partners contribute capital, a partnership can raise larger funds than a sole proprietor and take on additional operations.
• Sharing of risks: Risks are shared by all partners, reducing the anxiety, burden and stress on any one of them.
• Secrecy: A firm is not legally required to publish its accounts or reports, so it can keep its operations confidential.

Limitations

• Unlimited liability: Partners may have to repay debts from personal resources; since liability is joint and several, wealthier partners may have to repay the whole debt if others cannot. …