Objectives:
1.
To
understand the meaning and characteristics of partnership firm.
2.
To
understand types of partnership and types of partners
3.
To
understand the merits and limitations of partnership organisation.
The sole partnership has inherent strengths
and weaknesses. It has’ serious limitations such as lack of adequate finance,
and managerial capability, particularly when the business expands. The
expansion of business thus, requires more capital and requires more managerial
ability. This made some kind of an association among individual businessmen and
resulted in a new form of organisation called ‘Partnership
Organisatoin’.
Partnership is an agreement between two or
more than two individual to carry on the business for profit.
See 4 of the partnership Act 1932 defines
‘partnership’ as 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’.
The person who have entered into
partnership with one another are called individually ‘partners’ and
collectively ‘a firm’ and the name under which their business is carried on is
called the ‘firm name’.
Characteristics of Partnership
Organisation:
1.
Existence
of business:
Partnership is formed to carry on a
business. It includes production and / or distribution of goods and services
with a view to earn profit.
2.
Existence
of an agreement:
There must be an agreement between two or
more persons to carry on business. The agreement may, preferably, be in
writing.
3.
Number
of members:
The minimum number of members required to
constitute a partnership is two. The maximum number of persons is ten in case
of a banking business and twenty in case of any other business.
4.
Sharing
of profits:
The purpose of business should be to earn
profits and to share it in the agreed proportions. In the absence of any
agreement, the partner should share profits in equal proportions.
5.
Agency
Relationship:
The partnership business may be carried on
by one or any of them acting for all. This means that each partner is a
principal as well as he is an agent while acting on behalf of other partners.
Thus, the law of partnership is a branch of law of agency.
6.
Nature
of liability:
The nature of liability of the partners is
unlimited. All the partners are jointly and severally liable for the debts of
the firm.
7.
Non-transferability
of interest:
No partner can assign or transfer his
partnership share to any other person without the consent of all other
partners.
TYPES OF PARTNERS:
1.
Active
Partner:
A person who takes active interest in the
conduct and management of the business of the firm is known as active partner.
2.
Sleeping
or dormant partner:
A sleeping row dormant partner is one who
does not take active part in the management of the business. Such a partner
only contributes to the share capital of the firm and shares the profits and
losses of the business. He is bound by the activities of other partners.
3.
Nominal
or Ostensible partner:
A nominal partner is one who does not have
any real interest in the Business but lends his name to the firm. Thus, he
neither makes capital contribution nor shares the profits of the business. He
is admitted with the purpose of taking advantage of his name or reputation. He
is liable to an outsider as an actual partner.
4.
Partner
by estoppels or holding out:
If a person, by his words or conduct, holds
out to another that he is a partner, he will be stopped from denying that he is
not a partner. The person who, thus, becomes liable to third partners to pay
the debts of the firm is known as a partner by holding out.
5.
Partner
in profits only:
When a partner agrees with the others that
he would only share the profits of the firm and would not be liable for its
losses, he is known as partner in profits only. However he shall be liable to
third parties like all other partners.
6.
Minor
as a Partner:
A minor cannot become a partner as he is
not capable of entering into a contract. But with the consent of all the
partners, he may be admitted to the benefits of partnership.
PARTNERSHIP DEED:
The
agreement creating partnership may be express or implied. However, it is in the
interest of the partners the agreement must be in writing. The document which
contains this agreement is called ‘partnership deed’.
Contents of Partnership deed:
i. Name
of the firm
ii. Nature
of business
iii. Names
and addresses of partners
iv. Place
of business
v. Duration
of partnership
vi. Amount
of capital to be contributed by each partner
vii. Profit
sharing ratio
viii.
Mode
of management, powers of partners
ix. Valuation
of good will
x. Accounts
xi. Arbitration
xii. Dissolution
Registration of Firms:
Indian Partnership Act does not make it
compulsory for registration of firms. But an unregistered firm suffers from
certain disabilities and therefore, registration is desirable for carrying on
business.
The registration of firm may done at any
time by submitting a statement in the prescribed form with prescribed fee to
the Registrar of Firms. The statement showed contain the following particulars.
a.
name
of the firm
b.
principle
place of business
c.
names of other places where the firm carries
on business
d.
Names
and addresses of the partners
e.
The
duration of the firm
The statement is to be signed by all the
partners. On receipt of the statement and fees the Registrar of firms records
an entry and the Registration Certificate is issued.
Type of Partnership:
1.
Partnership
for a fixed term:
In this case, partnership is entered into for a fixed
period of time. When the period expires, the partnership comes to an end.
2.
Partnership
– at will:
A partnership is called a partnership at will when it
is carried it is carried on for period at the will or desire of the partners.
No specific period is fixed.
3.
Particular
partnership:
A particular partnership is one which is formed for
some definite purpose and on completion of that purpose; the partnership will
come to an end automatically.
Dissolution:
Dissolution
of firm and dissolution of partnership are different. In dissolution of
partnership, the business of the firm does not come to an end and it continues
as before. There is only change in relation of partners due to death,
retirement etc. but in the case of dissolution of firm, partnership between all
the partners come to an end. Thus, dissolution of firm automatically dissolves
partnership.
A partnership of dissolved automatically
a.
When
the term for which the partnership was entered into expires.
b.
When
the purpose and which the partnership was formed is completed, and
c.
When a
partner dies, retires or becomes insolvent.
A partnership firm may be dissolved
1.
Without
the intervention of the court in the following cases:
i. Dissolution by agreement of all the
partners,
ii. Compulsory dissolution when all the
partners are declared insolvent,
iii. When the business becomes illegal,
iv. On the expiry of the term fixed,
v. On the completion of an adventure for which
the partnership was started
vi. On the death of partner
vii. On the declaration of insolvency of a
partner
B. With the intervention of the court in the following cases:
i. Insanity of a partner
ii. Permanent inacapacity
iii. Quality of misconduct affecting the
business
iv. Persistent breach of agreement
v. When a partner transfers his interest to
third person.
vi. When the business cannot be carried on
except at a loss.
vii. When it appears just and equitable to the
court.
ADVANTAGES OF PARTNERSHIP
1.
Easy
to form:
Partnership is easy to form and no cumbersome legal
formalities are to be adopted. All that is required is agreement among the
partners.
2.
Legal
capital:
As there are more number of partners and each one of
them contributes his share, the total amount of capital collected is much
greater than what a sole proprietary can do.
3.
Prompt
decisions:
The decisions are quiet prompt because they can meet
frequently
4.
Better
decisions:
Since all the partners study in detail all the issues,
they will be able to take better and balanced decisions.
5.
Greater
personal supervision:
Partners take a lot of personal care and
interest as the profit or loss directly affect them.
6.
Flexibility:
The partnership business has greater
flexibility in its operations.
7.
Protection
of minority interests:
Every partner is entitled to participate in the
decision-making process and hence minority interest is protected.
8.
Shouldering
of risk:
The risks of partnership are shared by all the
partners and hence the share of loss of each partner will be less.
LIMITATIONS OF PARTNERSHIP:
1)
Lack
of understanding:
Harmony may be difficult due to lack of understanding,
especially when they are many partners.
2)
Limited
resources:
There is a limit beyond which it will not be possible
for the partners to collect capital. therefore, large scale business cannot
generally be started by partners.
3)
Instability:
The business is instable because anything that happens
to a partner such as death, lunacy or retirement will often put an end to the
partnership.
4)
Risks
of additional liability:
The partner is liable not only for his own acts but
also for the acts and mistakes of other partners.
5)
Lack
of public confidence:
The Partnership suffers from lack of public confidence
because there is no legal mechanism to enforce the registration of a
partnership firm and the disclosure of its affairs.
On the whole, the partnership form of organisation is
most suitable when the size of the business is not large and when partners can
work in full co-operation and understanding. Thus, it is suitable for a
medium-size organisation.
