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Partnership: All The Partners Jointly Manage The Business or Can Any of Them Manage The Business

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You have studied that sole proprietorship form of

business organisation has certain limitations. Its financial


and managerial resources are limited. It is also not
possible to expand the business activities beyond a
certain limit. In order to overcome these drawbacks,
another form, i.e., partnership form of business has
come into existence. Let us first find out what is
'partnership'.

It is basically a relation between two or more persons


who join hands to form a business organisation with
the objective of earning profit. The persons who join
Partnership
hands are individually known as „Partner‟ and
collectively a „Firm‟. The name under which the business
is carried on is called „firm name‟. Sultan Chand & Co,
Ram Lal & Co, Gupta & Co. is the names of some
partnership firms.

The partners provide the necessary capital, run the business jointly and share the
responsibility. You must be thinking how much capital each partner contributes? Do
all the partners jointly manage the business or can any of them manage
the business on behalf of others? Who will take the profits? If there is any loss then
who will suffer the loss? Yes, these are the few questions that might be coming to
your mind. Actually, when you invite your friends to start such a business, it should
be the duty of all of you to decide (i) the amount of capital to be contributed by each
one of you; (ii) who will manage; (iii) how will the profits and loss be shared. Thus,
there must be some agreement between the partners before they actually start the
business. This agreement is termed as „Partnership Deed‟, which lays down certain
terms and conditions for starting and running the partnership firm. This agreement
may be oral or written. Actually, it is always better to insist on a written agreement
among partners in order to avoid future controversies.

“Minimum 2 and Maximum 20 partners get together


for the same purpose is to earn profit”.

“Partnership has two or more members, each of


whom is responsible for the partnership. Each of the
partners may bind the others for debts of the
partnership”
Partnership Act – “Partnership is the relation
between persons who have agreed to share
profit of a business carried on by all or any one
of them acting for all. “

A partnership firm is governed by the


provisions of the Indian Partnership Act, 1932.
Partnership Act 1932 Section 4 of the Indian Partnership Act, 1932,
defines partnership as “a relation between
persons who have agreed to share the profits
of a business carried on by all or any of them
acting for all”.

Partnership Act

Features of Partnership form of business organisation


After having a brief idea about partnership, let us identify the various features of this
form of business organisation.

i. Two or more Members –


You know that the members of the partnership firm are called partners. But do you
know how many persons are required to form a partnership firm? At least two
members are required to start a partnership business. But the number of members
should not exceed 10 in case of banking business and 20 in case of other business. If
the number of members exceeds this maximum limit then that business cannot be
termed as partnership business. A new form of business will be formed, the details of
which you will learn in your next lesson.
ii. Agreement:
Whenever you think of joining hands with others to start a partnership business, first
of all, there must be an agreement between all of you. The agreement may be
written or the oral. The written agreement is preferable. The relation of partnership
arises from the formation of a contract not from the birth. This agreement contains
o the amount of capital contributed by each partner;
o profit or loss sharing ratio;
o salary or commission payable to the partner, if any;
o duration of business, if any ;
o name and address of the partners and the firm;
o duties and powers of each partner;
o nature and place of business;
iii. Lawful Business –
The partnership can be formed only for the purpose of carrying on a business. The
partners should always join hands to carry on any kind of lawful business. To indulge
in smuggling, black marketing, etc., cannot be called partnership business in the eye
of the law. Again, doing social or philanthropic work is not termed as partnership
business.
iv. Competence of Partners –
Since individuals join hands to become the partners, it is necessary that they must be
competent to enter into a partnership contract. Thus, minors, lunatics and insolvent
persons are not eligible to become the partners. However, a minor can be admitted
to the benefits of partnership i.e., he can have a share in the profits only.
v. Sharing of Profit –
The main objective of every partnership firm is sharing of profits of the business
among the partners in the agreed proportion. The agreement between the partners
must be to share the profits of the business. In the absence of any agreement for the
profit sharing, it should be shared equally among the partners. Suppose, there are
two partners in the business and they earn a profit of Rs. 20,000. They may share the
profits equally i.e., Rs. 10,000 each or in any other agreed proportion, say one forth
and three fourth i.e. Rs 5,000/- and Rs. 15000/-.
vi. Unlimited Liability –
Just like the sole proprietor the liability of partners is also unlimited. That means, if the
assets of the firm are insufficient to meet the liabilities, the personal properties of the
partners, if any, can also be utilised to meet the business liabilities. Suppose, the firm
has to make payment of Rs. 25,000/- to the supplier of goods. The partners are able
to arrange only Rs. 19,000/- from the business. The balance amount of Rs. 6,000/-
will have to be arranged from the personal properties of the partners.
vii. Voluntary Registration –
It is not compulsory that you register your partnership firm. However, if you don‟t get
your firm registered, you will be deprived of certain benefits, therefore it is desirable.
viii. No Separate Legal Existence –
Just like sole proprietorship, partnership firm also has no separate legal existence
from that of it owners. Partnership firm is just a name for the business as a whole.
The firm means the partners and the partners collectively mean the firm.
ix. Principal Agent Relationship –
All the partners of the firm are the joint owners of the business. They all have an
equal right to actively participate in its management. Every partner has a right to act
on behalf of the firm. When a partner deals with other parties in business
transactions, he/she acts as an agent of the others and at the same time the others
become the principal. So there always exists a principal agent relationship in every
partnership firm.
x. Restriction on Transfer of Interest –
No partner can sell or transfer his interest to any one without the consent of other
partners. For example - A, B, and C are three partners. A wants to sell his share to D
as his health does not permit him to work anymore. He cannot do so until B and C
both agree.
xi. Continuity of Business –
A partnership firm comes to an end in the event of death, lunacy or bankruptcy of
any partner. Even otherwise, it can discontinue its business at the will of the partners.
At any time, they may take a decision to end their relationship.

Difference between Sole Proprietorship and Partnership:

Basis Sole Proprietorship Partnership


Members

Agreement

Division of Profit

Implied agency

Ownership

Secrecy

Continuity

Co-ordination

Self -Assessment Task: Difference between HUF and Partnership


Activity:

1. In group of two or three, discuss a business that


you could set up as a partnership.
2. Agree on a name for the partnership, and the
terms that should be included in a deed of
partnership.
3. Draw up a partnership deed including the terms
you have agreed so that each partner is happy to
https://sites.google.com/a/tges.org/comme
sign it.
rcial-application/partnership - This link will
take you to a format of Partnership Deed.

Merits of Partnership:

More Capital Resources

Better Decisions Easy To form

Sharing Risk/Loss

Benefit of Specialization Flexibility

Direct Motivation

Secrecy Scope of Operation

a) Easy to form:
Like sole proprietorship, the partnership business can be formed easily without any
legal formalities. It is not necessary to get the firm registered. A simple agreement,
either oral or in writing, is sufficient to create a partnership firm.
b) Availability of large financial resources –
Since two or more partners join hand to start partnership business it may be possible
to pool more resources as compared to sole proprietorship. The partners can
contribute more capital, more effort and also more time for the business.
c) Better decisions –
The partners are the owners of the business. Each of them has equal right to
participate in the management of the business. In case of any conflict they can sit
together to solve the problems. Since all partners participate in decision-making,
there is less scope for reckless and hasty decisions.
d) Flexibility in operations –
The partnership firm is a flexible organisation. At any time the partners can decide to
change the size or nature of business or area of its operation. There is no need to
follow any legal procedure. Only the consent of all the partners is required.
e) Sharing risks –
In a partnership firm all partners share the business risks. For example, if there are
three partners and the firm suffers a loss of Rs. 12,000 in a particular period, then all
partners may share it and the individual burden will be Rs. 4,000 only.
f) Protection of interest of each partner –
In a partnership firm every partner has an equal say in decision making. If any
decision goes against the interest of any partner he can prevent the decision from
being taken. In extreme cases a dissenting partner may withdraw himself from the
business and can dissolve it.
g) Benefits of specialization –
Since all the partners are owners of the business they can actively participate in every
aspect of business as per their specialisation and knowledge. If you want to start a
firm to provide legal consultancy to people, then one partner may deal with civil
cases, one in criminal cases, another in labour cases and so on as per their
specialization. Similarly two or more doctors of different specialization may start a
clinic in partnership.
h) Direct motivation:
Ownership and management are vested in the hand of the same persons. There are
direct relationship between effort and reward. Every partner is motivated to work
hard and to ensure the success of the firm.
i) Secrecy:
A partnership firm is not required to publish their annual accounts. Audit of accounts
is not essential and no reports are to be filed with the government authorities.
Therefore, the affairs of partnership business can easily be kept secret and
confidential.
J) Scope for Expansion:
There are greater possibilities for the expansion and growth of business. More
partners can be taken in to meet the financial and managerial requirements of the
growing business.

Limitations of Partnership form of Business Organisation


Unlimited Liability: All the partners are jointly as
well as separately liable for the debt of the firm to
an unlimited extent. Thus, they can share the
liability among themselves or any one can be asked
to pay all the debts even from his personal
properties. It means partners personal assets are
attached to the obligations of the business.

Uncertain Life: The partnership firm has no legal


entity separate from its partners. It comes to an end
with the death, insolvency, incapacity or the
retirement of any partner. Further, any dissenting
member can also give notice at any time for
dissolution of partnership. If any one partner dies or
become insolvent whole partnership comes to an
end.

Lack of Harmony: You know that in


partnership firm every partner has an equal
right to participate in the management. Also
every partner can place his or her opinion or
viewpoint before the management regarding
any matter at any time. Because of this
sometimes there is a possibility of friction and
quarrel among the partners. Difference of
opinion may lead to closure of the business on
many occasions. Many partnership in past
comes to an end because of conflicts.
Limited Capital: Since the total number of
partners cannot exceed 20, the capital to be
raised is always limited. It may not be possible
to start a very large business in partnership
form. It is not possible to collect huge financial
resources. Borrowing capacity is also limited
for the firm. A partnership may not provide the
required technical and administrative skills.
No transferability of share : If you are a
partner in any firm you cannot transfer your
share of interest to outsiders without the
consent of other partners. This creates
inconvenience for the partner who wants to
leave the firm or sell part of his share to
others. A partner wanting to withdraw his
capital from the business cannot do so unless
the other partners agree to it.
Conflicts: Lack of confidence, unity and
harmony among partners may lead to
delayed decisions and inefficiency. Chances of
conflicts are so high because every partner
has equal right to take part in the
management of the firm.

Risk of Implied Agency:


Every partner is an agent of the firm. A
dishonest partner may cause a great loss to the
firm. All the partners may suffer due to the
negligence or dishonesty of any one partner.

Suitability of Partnership form of business organisation

We have learnt that partnership form of business has its own advantages and
disadvantages. But at times we find that partnership form of business organisation is
most suitable for us to run a small business. Let us look into such instances:

1. Wholesale trade and retail trade of large size, wherein capital required is
generally beyond the capacity of single individual.
2. Where direct access to customer is possible
3. Small scale and medium size industries wherein the capital and management
skills are moderate and risk involved is not very high. Examples toys, stationary,
books etc.
4. Professional firms like CA, lawyers, doctors, management consultants.
5. Commercial services like advertising, transportation, warehouse etc…
Formation of partnership: A partnership deed usually contains the
following details:
A partnership can be formed only 1. Name and Address of the firm
through an agreement between two or 2. Name and Address of the partners
more persons. These agreement may 3. Name of the firms Business
be oral or in writing. A written 4. Duration of the partnership
agreement is preferable because it 5. Amount of capital invested by all the
serves as a record for future. It will help partners
to resolve disputes, if any they may arise 6. Profit and loss sharing ratio
between the partners. 7. Amount permitted to withdraw by
each partner
A written agreement of the partnership 8. Rate of interest on partner‟s Capital
is called “Partnership Deed” or and Drawing
partnership agreement. It contains all 9. Salary ,Fees or Commission payable to
the terms and conditions on which partner
partnership have been formed. It is 10. Procedure for admission or retirement
signed by all the partners. Partnership of any partner
deed is not a public document. It can 11. Procedure for dissolution of the firm
be altered by mutual consent of all the 12. Rights and duties of the partners.
partners only. No legal formalities are
needed in its alteration.

Consequences of Non- Registration:


An unregistered partnership firm may suffer from the following limitations:
1. It cannot enforce its claims against a third party in a court of law.
2. It cannot sue any of its partners.
3. Partners of the unregistered firm cannot sue the firm to enforce their
claims.
4. Partners of the unregistered firm cannot sue each-other in the court of law.
5. It cannot claim adjustment of a claim exceeding Rs. 100 (Adjustment in the
court).
Registration of the partnership Firm:
Registration of the partnership is not compulsory under partnership act 1932. The Act
provides that if partners so desires they may get the firm registered at the time of the
formation of partnership or afterwards.

The registration of the partnership firm is a simple and easy process. In order to get itself
registered, a partnership must submit a statement in the prescribed form along with the
prescribed fees to the Registrar of firms. The statement should contain following
particulars:

1. Name of the firm


2. The principal place of the firm
3. Names of other places where the firm carries on business
4. The date when each partner joins
5. Name and permanent address of the partners
6. Duration of the partnership

The statement must be signed by all the partners. If the Registrar of the firm is
satisfied with the statement, he shall make an entry in the register of the firms. The
firm becomes registered when such entry is made and a certificate of registration is
issued.

Types of partnership:

General Partnership- In this type of partnership the liability of every


partner is unlimited. The firm’s creditors can realize their debts from the
personal property of any partner. Every partner can take active part in the
management of the firm’s business; unless agreed upon by partners.
Partnership at will:
It is the partnership formed
for an indefinite period. The Particular Partnership :
Limited Partnership:
time period or the purpose of It is the partnership formed
In this type of partnership the
the firm is not mentioned at for a specific time period or to
liability of all the partners
the time of its formation. It achieve the specific
except one is limited to their
can continue for any length of objectives. It is automatically
investment in the business.
time depending upon the will dissolved on the completion
This kind of partnership is not
of the partners.it can be of the desired objectives for
allowed in India.
dissolved by any partner by which it is formed.
giving a notice to other
partners.
Limited Partnership:
In this type of partnership the liability of all the partners except one is limited
to their investment in the business. This kind of partnership is not allowed in
India.
A) Features :
1. There is at least one general partner whose liability is unlimited.
2. The liabilities of other partners are limited to their capital investment.
They are called limited partners.
3. A special or limited partner has no authority to take part in day to day
management of the firm. He has no right to act on behalf of the firm.
4. A special partner has right to inspect the books of accounts of the
business.
5. A special partner has also right to withdraw his capital from the
business.
6. The death, lunacy, retirement or bankruptcy of a special partner does
not affect the existence of the firm.
7. A limited partnership must be registered under the law.

B) Merits:
1. It enables the mobilization of capital from persons who do not want to
take unlimited risks.
2. It facilitates independent control by the general partner since the
special partners cannot interfere in day to day management of the
business.
3. Quick decisions and reduced possibility of errors.
4. It is more stable as death , lunacy or bankruptcy does not affect the
existence of the business.

C) Limitations:
1. The firm‟s creditworthiness is reduced due to the limited liability of
special partners.
2. Special partners have no say in the management of the business.
3. The main partner may take undue advantage of his position in the
business. He may exploit the special partners. He may also indulge in
fraudulent activities.

Concept and
Advantages of LLP.d
Difference between Limited Partnership and General Partnership

Limited Partnership General Partnership


Only General partner has unlimited All partners have unlimited liability
liability
Special partners cannot take active part Each partner can take active part in the
in the management of the business management of the business.
Death, lunacy or bankruptcy does not Death, lunacy or bankruptcy, dissolve the
affect the existence of the business. firm.
Must be registered Need not to be registered
Not allowed in India Allowed in India.

Types of Partners

In a partnership firm you can find different types of partners. Some may actively
participate in the business while others prefer not to keep themselves engaged
actively in the business activities after contributing the required capital. Also there are
certain kinds of partners who neither contribute capital nor actively participate in the
day-to-day business operations. Let us learn more about them.

Active partner –The partners who actively participate in the day-to-


day operations of the business are known as active or working
partners. They contribute capital and are also entitled to share the
profits of the business. They are also liable for the debts of the firm.

Sleeping or Dormant partners –Those partners who do not


participate in the day-to-day activities of the partnership firm are
known as dormant or sleeping partners. They only contributed capital
and share the profits or bear the losses, if any. His liability for the
firm‟s debt is unlimited.

Nominal or Ostensible partners –These partners only allow the


firm to use their name as a partner. They do not have any real interest
in the business of the firm. They do not invest any capital, or share
profits and also do not take part in the conduct of the business of the
firm. However, they remain liable to third parties for the acts of the
firm.
Minor as a partner –You have learnt that a minor i.e., a person under 18 years of
age is not eligible to become a partner. However in special cases a minor can be
admitted as partner with certain conditions. A minor can only share the profit of the
business. In case of loss his liability is limited to the extent of his capital contribution
for the business. He may be admitted to the benefits of the partnership with mutual
consent of all the partners. He can inspect the books of account of the firm but he
cannot take active part in the management as a minor cannot enter into any
contract with anyone.
After becoming major, minor must give public notice within 6 months if he wanted
to break off his connection with the partnership. If he does not do so then his
liability will be unlimited once he will be major.

Partner by estoppel – If a person falsely represents himself as a partner of any firm


or behaves in a way that somebody can have an impression that such person is a
partner and on the basis of this impression transacts with that firm then that person is
held liable to the third party. The person who falsely represents himself as a partner is
known as partner by estoppel. Take an example. Suppose in Ram Hari & Co firm there
are two partners. One is Ram, the other is Hari. If Giri- an outsider represents himself
as a partner of Ram Hari & Co and transacts with Madhu then Giri will be held liable
for any loss arising to Madhu. Here Giri is partner by estoppel.

Partner by holding out –In the above example, if either Ram or Hari declares that
Gopal is a partner of their firm and knowing this declaration Gopal remains silent then
Gopal will be liable to those parties who suffer losses by transacting with Ram Hari &
Co with a belief that Gopal is a partner of that firm. Here Gopal is liable to those
parties who suffer losses and Gopal will be known as partner by holding out.

Sub- Partner:- A partner may associate anybody in his share of the firm. Such an
associate who shares a partner‟s profit is known as sub-partner. The sub-partner is non-
entity for partnership firm. His relationship is not with partnership firm but with the
partner. The sub-partner is not liable for any debts of the firm.

Partner in profit only-


He shares in the profits of the firm but not the losses. His liability for the firm‟s
debt is unlimited but he does not take part in the management of the firm.
Secret partner-
This type of partner contributes capital and takes active part in the
management of the firm‟s business. He shares in profit and loss of the
business and his liability is also unlimited. However, his connection with the
firm is not known to the outside world.

Activity for You


Ask any sole proprietor of your locality whether he/she is interested in converting
his/her business to a partnership firm. Note down the reasons given by the sole
proprietor.

Assignment Questions:

2 Marks Question
1. Define Partnership.
2. State three feature of Partnership.
3. What is implied agency in Partnership?
4. How is Partnership formed?
5. State the advantages of registration of partnership.
6. Distinguish between partnership at will and particular partnership.
7. Explain minor as a partner.
8. What is general partnership?
9. Who is a nominal partner?
10. What led to the emergence of a partnership form of
business?
11. Explain the Following: General partner and Silent partner
12. Mention 4 types of partner.
13. Mention 4 types of partnership.
14. What do you mean by Active / Working partner?
15. What do you mean by Sleeping / Dormant partner?
16. What do you mean by Nominal partner?
17. What do you mean by partner in profit only?
18. What do you mean by partner by estoppel and partner by
holding out?
19. What is partnership deed?
20. In which types of business partnership business is suitable?

5 Marks questions:

1. What is Partnership? Explain any 4 features of it.


2. Explain 5 merits of Partnership.
3. Explain 5 de-merits of Partnership.
4. Distinguish between Sole Proprietorship and Partnership.
5. Distinguish between HUF and Partnership.
6. Explain the types of Partners.
7. Explain the types of partnership.
8. Distinguish between Limited partner and General Partner.
9. What is Partnership Deed? State its contents.
10. How is partnership registered?
11. What are the consequences of non-registration of
partnership?
12. Explain the merits and de-merits of limited partnership.

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