A partnership is a form of business which enables two or more persons to co-own an organisation, 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.

FAQ (Frequently Asked Questions)

1. What is the Nature of a Partnership Firm?

Ans. In a Partnership business, there have to be two or more partners. They must sign a Partnership Deed, and they should agree to all the terms and conditions of the firm. The profit gained by Partnership should be divided among the partners.

2. What are the Liabilities of a Partner?

Ans. All the partners are equally liable to all the acts of Partnership business. A partner is liable to compensate for any loss sustained to the business because of his/her negligence. On the other hand, a partner is liable for any profit made by the company, to the firm.

3. What is a Partnership Deed?

Ans. It is a written document of mutual agreement between the partners who decide to venture into a partnership business. This deed contains all the terms and conditions related to Partnership.

4. Can Partnership Firm be a Partner?

Ans. A partnership firm is not a person; hence it cannot be a partner of other individuals or firms. However, a partner of a partnership business can join other persons into partnership and share the profits of that business with his/her parent company’s partner.