Partnerships: Key Features and Benefits

A partnership is a form of business which enables two or more persons to co-own an organization, and they agree to share the profits and losses of the company. Each member of such a business is called a Partner, and collectively they are known as a partnership firm. 

In a partnership, every owner contributes something to the welfare of the firm. These can be in the form of ideas, property, money and sometimes a combination of all these. Owners of a Partnership share profits and losses in proportion to their respective investments. 

Partnership businesses in India are regulated by Section 4 of the Indian Parliament Act of 1932.

Characteristic of a Partnership Firm

A few distinct characteristics of partnerships  are mentioned below:

• Agreement- Partners, who decide to start this business, have to make a formal mutual contract between them. This agreement is usually written following the norms of government act. 

• Number of Partners- According to section 11 of Indian Parliament Act 1932, the maximum number would be 10 for a banking Partnership business. Furthermore, this number rises to 20 for other Partnership businesses. 

• Share of Profit- One of the primary features of Partnership is to make and share the profit among the partners as per agreed ratios. However, the income will be distributed equally if there’s no clause mentioned in the agreement about the same.  

• Liabilities- In general partnerships, all the partners are subjected to liabilities. It means all of them are collectively responsible for recovering all debts of the firm, even if they have to liquidate their personal assets. 

• Non-Transferability of Interest- By any means, a partner cannot shift his/her interest from existing firm to others. There is a strict restriction upon inclusion and retirement of the partners. Even a minor change in the ownership of a business has to make with the consent of the other members involved in Partnership. 

Types of Partnership

1. General Partnership- In this Partnership, the partners equally participate in the day-to-day activities and decision-making prospects of a firm. At the same time, they are equally responsible for all profits, liabilities and debts of the company. If one partner is found guilty for any discrepancy in business, the others will be held accountable for the same. 

2. Limited Partnership- A Limited Partnership includes one or more than one partners whose liabilities are limited. A limited partner usually takes his/her share of profit without involving in daily managerial activities and decision making. Because of the limited liabilities, they don’t have to bear the loss incurred upon business. 

3. Limited Liability Partnership- In LLP, liabilities on partners are limited. They are not responsible for any legal and financial crisis of a firm. An LLP partner is somewhat similar to a Limited partner although they are not the same. 

4. Partnership at Will- Such Partnership solely depends on the will of a partner. He/she can break the bond anytime they wish. This type of Partnership is usually created for lawful business which usually lasts for an indefinite time.  

You can research more on this topic to gain knowledge about the other kinds of Partnership prevalent in India.   

Advantages of Partnership Firm

• Easy to Start- A simple agreement, verbal or written, is enough to initiate a Partnership firm. 

• Flexible Operations- There is a considerable scope for making changes in the business operations and strategies if the partners think these are needed for overall growth of the firm.  

• Greater Resources- Since partnership comprises financial contribution from all partners, it infuses large capital to business. As a result, it increases a firm’s borrowing capacity. 

• Reduced Risk Factor- As all the incomes and losses are divided among the partners, the risk for the losing money or defaulting can be narrowed down substantially. 

• Combined Skills- Another great advantage of partnership has to be the conglomeration of unique ideas, knowledge and skills from different partners with expertise in their respective fields. 

Different Kinds of Partners

1. Active Partner- A working or active partner takes part in daily operations and activities that take place within the business. Sometimes they draw remuneration as salary for their hard work.

2. Dormant Partners- Dormant partners only contribute capital to the firm and enjoy his/her share of profit without participating in business affairs. However, like other partners, they have liabilities to business.

3. Partner in Profit Only- This kind of partners venture into Partnership on the condition that they shall only get a portion of the profit of the firm but they will not be entitled to compensate for any loss of it. Mostly, these partners contribute their goodwill and reputation to the company.

4. Limited Partner- Unlike an Active partner, this partner’s endowment is limited to the sum of his/her investment. 

5. Secret Partner- As the name suggests, this partner does not want to reveal himself/herself. However, the rights of these partners are equal to any other partner of Partnership. 

The possibilities and opportunities are, therefore, immense for partnership firms to expand its horizon with the best bunch of professional partners associated. 

What do you think plays the most crucial factor in establishing a Partnership Business?

For more insights about the partnership which will be beneficial for commerce students, visit Vedantu’s website.

Partnership and Sole Proprietorship

The two terms do have a close business relationship. In partnership, one agrees to contribute in terms of money, ideas and share the profit in a business. While sole proprietorship does have a difference from a partnership. Since all of the tasks and handling of business are done by a single person. And there will be no second person involved enough to be responsible for his/her business. And many times people prefer to go for the sole proprietorship as partners can go in disagreement in the long term business works leading to a deterioration of the business flow. 

Starting A Partnership Firm 

By the year 2020, people have been taking initiation towards their business ideas. Since most of the businesses have taken online platforms for attention, it got good monetary support for marketing decreasing the investment we need to an affordable one. 

Below are the seven steps that we must follow:

1. Partnership firm’s name choosing.

2. Drafting the deeds of partnership.

3. Deeds formatted to finalization.

4. Registration of partnership deeds with relevant documents.

5. Initiating and completing the registration.

6. Get authenticated registration with the registrar.

7. Getting certificate issued from the registrar.

The firm name that we choose must be unique. It should not be looking the same as any other firm’s names. And accordingly with the law adding words like an empire, crown, empress, and so on are not allowed. Drafting the deeds of partners are a good way to communicate further. Dividing the tasks will be easier this way for smooth functioning. For drafting, it needs to be done within the proper format for sending it to legalizing. Generally, PAN card and address proof are needed of the partners to submit for register legally. And the same is needed of the firm too.

However, for the firm, there are requirements for additional documents such as GST registration and details of a current bank account. And the registration is completed that way for getting the certificate from the registrar. It is not mandatory to get a certificate for starting a business. Even though the certificate will be delivered to you within two weeks after registration. 

Disadvantages Of Partnership

Just like the coin has a flip side, there are also demerits for partnership. A few of them are mentioned below:

• Disagreement from partners on the ideas and discussions can cause losing growth opportunities.

• The vision of the firm may be entitled just to the founder. However, a partner will not be following the same.

• Having no co-operation.

• Exiting the firm environment work culture after taking away the profit obtained so far.