A partnership is an arrangement where parties, known as business partners, agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, businesses, interest-based organizations, schools, governments, or combinations.
Advantages of Partnership:
- Easy Formation – An agreement can be made orally or printed as an agreement to enter as a partner and establish a firm.
- Large Resources – Unlike sole proprietors where every contribution is made by one person, in partnership, partners of the firm can contribute more capital and other resources as required.
- Flexibility – The partners can initiate any changes if they think it is required to meet the desired result or change circumstances.
- Sharing Risk – All loss incurred by the firm is equally distributed amongst each partner.
- Combination of different skills – The partnership firm has the advantage of knowledge, skill, experience, and talents of different partners.
What are the advantages of a partnership?
Ans: Partnerships have many advantages as a form of business, such as
- Formation of partnerships firm is an easy task. You only require a contract of partnership. Registration is not compulsory in most cases.
- Since many partners are involved in a business they all bring their own expertise and management styles. This helps in better management of the business.
- All partners also contribute to the capital of the firm so it has more funds to work with
- The risk of the business is also shared among all partners.
What Is a Partnership?
A partnership is a formal arrangement by two or more parties to manage and operate a business and share its profits.
There are several types of partnership arrangements. In particular, in a partnership business, all partners share liabilities and profits equally, while in others, partners may have limited liability. There also is the so-called “silent partner,” in which one party is not involved in the day-to-day operations of the business.
In India, we have a definite law that covers all aspects and functioning of a partnership, The Indian Partnership Act 1932. The act also defines a partnership as “the relation between two or more persons who have agreed to share the profits from a business carried on by either all of them or any of them on behalf of/acting for all”
So in such a case two or more (maximum numbers will differ according to the business being carried) persons come together as a unit to achieve some common objective. And the profits earned in pursuit of this objective will be shared amongst themselves.
The entity is collectively called a “Partnership Firm” and all the individual members are the “Partners”. So let us look at some important features.
Features of a Partnership
1] Formation/Partnership Agreement
A partnership firm is not a separate legal entity. But according to the act, a firm must be formed via a legal agreement between all the partners. So a contract must be entered into to form a partnership firm.
Its business activity must be lawful, and the motive should be one of profit. So two people forming an alliance to carry out charity and/or social work will not constitute this form of organization. Similarly, a partnership contract to carry out illegal work, such as smuggling, is void as well.
- A partnership is an arrangement between two or more people to oversee business operations and share its profits and liabilities.
- In a general partnership company, all members share both profits and liabilities.
- Professionals like doctors and lawyers often form a limited liability partnership.
- There may be tax benefits to a partnership compared to a corporation.
How Does a Partnership Differ From Other Forms of Business Organization?
A partnership is a way of structuring a business that involves two or more individuals (the partners). It involves a contractual agreement (the partnership agreement) between all of the partners that set the terms and conditions of their business relationship, including the distribution of ownership, responsibilities, and profits and losses. Partnerships outline and clearly define a business relationship and responsibility.
Features of Partnership:
Following are the few features of a partnership:
1. Agreement between Partners: It is an association of two or more individuals, and a partnership arises from an agreement or a contract. The agreement (accord) becomes the basis of the association between the partners. Such an agreement is in written form. An oral agreement is evenhandedly legitimate. In order to avoid controversies, it is always good, if the partners have a copy of the written agreement.
2. Two or More Persons: In order to manifest a partnership, there should be at least two (2) persons possessing a common goal. To put it in other words, the minimal number of partners in an enterprise can be two (2). However, there is a constraint on their maximum number of people.
3. Sharing of Profit: Another significant component of the partnership is, the accord between partners has to share gains and losses of a trading concern. However, the definition held in the Partnership Act elucidates – partnership is an association between people who have consented to share the gains of a business, the sharing of loss is implicit. Hence, sharing gains and losses is vital.
4. Business Motive: It is important for a firm to carry some kind of business and should have a profit gaining motive.
5. Mutual Business: The partners are the owners as well as the agent of their firm. Any act performed by one partner can affect other partners and the firm. It can be concluded that this point acts as a test of partnership for all the partners.
6. Unlimited Liability: Every partner in a partnership has unlimited liability.
What are the 5 characteristics of a partnership?
The following are the five characteristics of a partnership:
- Sharing of profits and losses
- Mutual agency
- Unlimited liability
- Lawful business
- Contractual relationship
What are the 3 disadvantages of a partnership?
The following are the disadvantages of a partnership:
- Unlimited liability
- Risk of disagreement between partners
- Instability of the partnership
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