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 


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.


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.

            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 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.


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.


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.