A partnership is a legal relationship between two or more persons to form and carry on a business together. The object of partnership is to carry out a business to earn profit and divide it into all partners. There are many types of partnerships that are useful to run a business.
In this article, we will talk about partnerships and their types with advantages and disadvantages of a partnership.
What is a partnership?
It starts with the formation of a contract between two parties who agrees to be the partners, distribute profit, loss and other responsibilities for running a business. The contract between two or more parties to run a business together is called a Partnership deed.
Definition of Partnership
In India, the partnership is governed by the Indian Partnership Act, 1932. The act provides the definition of partnership as “Partnership is a legal relationship between persons who have mutually agreed to share the profit occurred by business carried on by all or any of them for all.”
In simple words, the meaning of partnership is that “a business run by all partners or anyone partner on behalf of other partners to earn the profit and distribute it in all.”
Essential features of partnership
From the definition of partnership, we can extract the essential features of partnership that must be there to constitute the partnership. These elements are:
- Contract of partnership
- Number of partners
- Carrying on a business in partnership
- Sharing the profit
- Mutual agency in partnership
Agreement of partnership
A partnership comes into the existence with the help of an agreement between two or more parties who has the capacity to contract. The minor, lunatic and insolvent person is not eligible to contract. Any contract with a person who is not capable to make a contract is a void contract. The agreement can be oral or written, express or implied as per the situation. But, it is very useful that it should be a written contract. The written agreement is considered a partnership deed.
This agreement includes:
- Details of the partners
- Full details of the working of the business
- Work of partners
- Profit and share ratio
Number of partners
There must be at least two persons required to start a partnership firm. The Indian partnership does not give limits for the number of partners. But, as per the Companies act 1956, the act lays down the guidelines that a partnership consisting of more than 10 partners in the banking business and more than 20 partners for any other business will be considered illegal. By this explanation for the maximum number of partners in the partnership, we can say that the maximum number of partners for the banking business is 10 and for another business is 20.
The partner can be natural or artificial. A company is an artificial person and the company can enter into the contract of partnership. But, the Memorandum of association of that company must allow the company to enter into such types of contract. The law also allows two legal companies to enter into the contract of partnership.
Lawful business in partnership
The main essential of the partnership is lawful business. The term “business” includes any trade, occupation and profession which is legal in the eyes of law. Partnership business must be done to gain some profit. The charitable work is not coming under partnership because there is no motive to earn some profit from the business.
There must be business between the partners, no partnership can be done if there is no business. For instance, if three persons agree to share the profit of a certain property amongst them, there is no partnership between them and such persons cannot be called partners because they are not carrying out a business together.
Sharing the profit
The agreement between partners must specify the sharing manner and percentage of profits and losses among the partners in a business. The institutions like the charitable hospital, charitable trusts, and educational institutions have not come under partnership as there is no intention to earn profit from the business. Also, mere sharing of profit is not conclusive proof of the partnership because the employees or creditor who shares the profit does not come under the definition of partners.
Mutual agency in partnership
The partnership deed binds all the partners in a contract done with free consent that they will work on behalf of other partners. In the case of a partnership, the act of any partner is like an agent in business by doing work on behalf of another partner.
Types of Partnership
A partnership between partners is divided depending upon the role of partner and other features of partnership:
A partnership between two or more persons to run a business, in which, all partners hold equal rights and liabilities is called a general partnership. It provides equal rights and responsibilities to”
- Share equal profit
- Manage activities
- Take decisions
- Equable liable for debts
- Right to control the business
Limited Partnership (LP)
Limited Partnership is a form of partnership in which one partner works as a general partner and the other are a limited partner. The general partner holds all the powers of decision making and to run the business. The rest partners remain without any powers. They just hold financial stakes in the business but are not responsible for the business.
Limited Liability Partnership (LLP)
In the LLP, all the partners have limited liability. Each partner in the LLP is guarded against other partners’ legal and financial mistakes.
Partnership at Will
A partnership where a fixed expiration date is not mentioned in the agreement deed is called partnership at will. If a firm, in which the expiry date has been fixed, but still is continuously working, is called partnership at will.
Dissolution of Partnership
Dissolution of partnership is the process to terminate the relationship between partners. It is done after the settlement of assets, shares, profit and loss of the partnership firm. There are various methods by which the partnership can be terminated. The conditions for dissolution of partnership are:
Admission of the new partner
When a new partner is introduced in the partnership, any other partner who is not happy with the new admission can exit from the agreement.
Death of a partner
If the partner dies or becomes insolvent or lunatic during the contract, the partnership will be terminated.
Change in profit ratio
If there are any new changes in the profit ratio and the partner is not satisfied with the net profit ratio, then he can terminate his part.
Completion of the object
If the contract purpose has been completed.
Expiry of the period
If the term of the contract has been expired, the partnership will be terminated automatically. Though, the partners can make a new agreement for the continuation of the business.
The dissolution of the partnership is different from the dissolution of the partnership firm. After the dissolution of the partnership, the other partners remain in the agreement by continuing the business. Only the person who has terminated his partnership is no longer attached to the firm.
Advantages of partnership
Easy to form
The formation of a partnership can be done orally or by written agreement with a simple process.
After joining the partners, the firm can spend more capital to grow its business fast.
The rules of the partnership can be changed with an easy process. There is no lengthy process for the company to change the articles of association.
Equal sharing of risk
The risk that occurred due to the loss in business is equally divided into every partner.
Source of knowledge
The partners from different fields can give more ideas to grow the business fast which is great for the business development.
Disadvantages of Partnership
Diversity in partners
The diversity in partners creates different opinions of every partner which can become a threat to the business if no partner is ready to implement the other’s idea.
Liable for their actions
The partners in the firm are not guarded by any other party, so if they done any mistake during the agreement, they have to pay.
There is no limit to the liability of the partner. If the firm took the loss, the partner has to pay all the loss even from their personal property.
F&Q for partnership
Is partnership a separate legal entity?
No, the partnership is not a septate legal entity because the right of management and control of business vests with the partners. It is not registered under the act so it cannot be a separate legal entity from the company. The partnership firm neither possess the property in its name nor can perform the banker and customer relationship.
What is the liability of a partner in a partnership?
The liability of partners in a partnership business is unlimited.
What is Non-transferability of interest?
Non-transferability of interest means the partner cannot transfer his position to any other person to make him the partner of the existing partnership without the mutual consent of all the partners.
A partnership is a legal relationship between two or more persons to form and carry on a business together. There are different types of firms that can be used to become partners in the partnership firm. Always keep your eyes open while making any type of agreement for the firm because it contains advantages as well disadvantages.