Starting from the definition and salient features of partnership in this article we will cover the whole topic of partnership including its advantages and disadvantages in our next articles.

Partnership is a form of business organization where two or more parties come together to carry on a business or trade for mutual benefit. The partners share liabilities, profits, debts and losses equally depending on whether one is a general partner or a limited partner. General partners participate equally in daily management of the business while limited partners take a bigger part in investing but are not involved in management directly. Profits and losses are shared amongst the partners after which each person is taxed individually.

Partnerships do not have to be registered with the state hence are not expensive to start up unlike corporations. A partnership is not entitled to corporate taxes because profits and losses are distributed amongst the partners and they are taxed individually. In general partnership, all partners are disadvantaged because they will be personally held liable in case the business incurs liabilities and debts.

The most significant aspect of partnership as per the above definition is that partnership is a relation among persons; and this relation is that of being a partner with one another-very much like relations subsisting among members of a family i.e. relation of brotherhood, sisterhood, parenthood etc.

Partnership relation is a relation of utmost good faith among persons, who want to be partners with one another. Each partner must observe utmost good faith towards each other, while engaged in business dealings.

FEATURES OF PARTNERSHIP:

(i) Agreement:

Partnership relation is the result of an agreement between/among two or more persons. The agreement may be oral or written. A written agreement of partnership is known as the Partnership Deed. It is, however, to put everything in black and white and clear the fog surrounding all knotty issues.

(ii) Two or More Persons:

At least two persons must pool resources to start a partnership firm. The Partnership Act, 1932 does not specify any maximum limit on the number of partners. However, the Companies Act, 1956 lays down that any partnership or association of more than 10 persons in case of banking business and 20 persons in other types of business is illegal unless registered as a joint stock company.

(iii) Legal Business:

A partnership can be formed for the purpose of carrying on any lawful business. There can be no partnership for engaging in illegal acts like theft, dacoity, smuggling etc.

(iv) Sharing of Profits:

The agreement of partnership must provide for sharing of profits of a business, among partners, in the agreed ratio. Sharing of profits is an important test of partnership. In the absence of an agreed ratio, profits are to be shared equally, by all partners.

Point of comment:

Sharing of profits implies sharing of losses also, in the same ratio, in which profits are shared by partners.

(v) Mutual Agency:

The phrase ‘carried on by all or any of them acting for all’, contained in the definition of partnership, as given in the Partnership Act, points out to the element of mutual agency of partnership.

Mutual Agency Implies:

That every partner is an agent of the firm, for purposes of the business of the firm, and every partner is the principal to be bound by the acts of other partners, who act as agents. In fact, mutual agency is the final and conclusive proof of the existence of partnership.

(VI)                Unlimited Liability:

All partners are jointly and severally responsible for all activities carried out by the partnership. In other words in all cases where the assets of the firm are not sufficient to meet the obligations of creditors of the firm, the private assets of the partners can also be attached. The creditors can get hold one any one partner -who is financially sound-and get their claims satisfied.

(vii) Ownership and Control Jointly Held:

Normally, every partner has a right to take part, in the management of the business of the firm i.e. ownership and control are jointly held by all partners.

(viii) Non-Transferability of Share:

No partner can transfer his/her share in the partnership to any other person, without the prior consent of all other partners.

(ix) Registration not Compulsory:

Under the Act, registration of a firm is not compulsory. (In most states in India, registration is voluntary). However, if the firm is not registered, certain legal benefits cannot be obtained. The effects of non-registration are- (i) the firm cannot take any action in a court of law against any other parties for settlement of claims and (ii) in case of a dispute among partners, it is not possible to settle the disputes through a court of law.

Partnership is such a form of business organization which is easy to establish. In partnership a huge capital can be invested unlike the sole proprietorship. It increases business efficiency as synergy is developed due to collective efforts of many minds.

Published in The Daily National Courier, January, 03 2023

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