Section 4 of the Indian Partnership Act, 1932 has given the definition of partnership as:
‘Partnership’ is 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.
It has also defined partners as:
Persons who have entered into partnership with one another are called individually “partners.”
A partnership is a form of business wherein two or more people with similar mind set come together to jointly run an organization with a view to making profit. This joint firm is called as a Partnership Firm and the people who run this firm are called as Partners. There should be some type of contract or an agreement between the partners where they voluntarily agree to share the profits or losses of the business.
There are certain requirements for a firm to be called as a Partnership Firm. They are:
- An agreement:
There should be a mutual agreement between the partners and a contract which is binding to all the partners involved. They should voluntarily agree to create a relation between them.
2. Carrying on of business:
The motive of the firm should be to carry on a business. Business refers to engagement of individuals or group of individuals in economic activities such as production, distribution and exchange of goods and services. The business should be of a continuous nature.
3. Sharing of Profits:
A partnership firm is formed to make huge profits. So if a firm is not created with a profit making motive then will not be considered as a Partnership Firm.
4. Mutual Agency:
In a partnership firm each partner acts on other partners’ behalf. Therefore they are bound by each other’s actions. Thus it is important to have trust and good faith between the partners.
Partnership is one of the oldest forms of business. It is an efficient way of conducting business because of its many advantages.
Let’s see the merits of partnership and why it is considered as an easy and popular form of business firm:
- Easy to form:
A partnership firm is easy to start and the registration is optional of the firm. In some places, the registration is mandatory and in the rest of the places registration is not required. Thus a partnership firm can be instantly formed without much legal procedures.
- Capital formation:
As there are many people operating a partnership firm, the capital contribution is higher unlike a sole proprietorship. Each partner contributes his share and brings additional capital as and when required. Bank loans and credit facilities can also be easily availed by these firms.
As there are many people involved in a partnership firm, there is high creativity and innovation. The people possessing expertise, knowledge and special talents lead to expansion of business.
- Sharing of risks:
The partners at the time of contract, agree to bear the profits or losses of the company in a ration decided by them. Thus in case of risks or losses, it is not one but all the partners who share the burden of risk.
- Decision making:
The decision making process of partnership firms are quick as compared to other firms. Only the partners consent is required. However the decisions can also be consented on behalf other partners making the process time efficient.
Partnership businesses can be adjusted or changed as and when required without much legal formalities. All decisions are made by the partners making the operation of the firm easy and flexible.
The dissolution of a partnership firm is simple. Any partner can leave the firm at will by giving a 14 days’ notice to all the partners and with their mutual consent.
As everything has its pros and cons, partnership firm too has its own disadvantages. The disadvantages of partnership firm are:
- Unlimited Liability:
In case of losses in the firm, all the partners are liable to bear its burden. The liability due to one partner causes all the other partners to also become liable. This demotivates the people to become partners.
- Lack of co-operation:
If there are frictions or misunderstandings between the partners, then it would disturb the workings of the business causing more disputes. Thus there should be unity between the partners or else it would disrupt the running of the firm.
- Lack of public trust:
Registration is not mandatory for partnership firms in some places and there is no governmental supervision or administration for these firms. So this often leads to mistrust in the public’s eye.
- Lack of faith:
The essence of the partnership firm is the relationship among the partners. The partners should all have trust and utmost faith in each other because if a partner acts dishonestly then it would have negative consequences on other partners as well.
- Limited capital:
As the minimum number of partners is limited t0 10 and in case of banking business- 20, the capital raising becomes restricted. Thus people opt for other firms like LLP where there is no restriction on the number of partners.
Any partner can leave at his will by giving a 14 days’ notice and with the consent of the other partners. A partnership can also end in case of insolvency or death of a partner. Thus there is no stability in case of a partnership firm and it can anytime be dissolved.
So partnership firms can also be considered as business made on fiduciary relation i.e. relation involving trust and confidence between each other. The main essence of partnership is the honesty and good faith between the partners. Due to its easy formation and various advantages it is a popular form of conducting business. Business is efficiently conducted and there are faster completion of activities and in a partnership firm.
In the recent times, Limited Liability Partnership (LLP) firms are increasing which is adversely affecting the Partnership Firms because the disadvantages of partnership firm are eliminated in the LLP firms.