PARTNERSHIP
Features
Definitions given
above point to the following major characteristics of the partnership form of
business organization
(i)
Formation:
The partnership form of business organisation is governed by the Indian
Partnership Act, 1932. It comes into existence through a legal agreement
wherein the terms and conditions governing the relationship among the partners,
sharing of profits and losses and the manner of conducting the business are
specified. It may be pointed out that the business must be lawful and run with
the motive of profit. Thus, two people coming together for charitable purposes
will not constitute a partnership.
(ii)
Liability:
The partners of a firm have unlimited liability. Personal assets may be used
for repaying debts in case the business assets are insufficient. Further, the
partners are jointly and individually liable for payment of debts. Jointly, all
the partners are responsible for the debts and they contribute in proportion to
their share in business and as such are liable to that extent. Individually
too, each partner can be held responsible repaying the debts of the business.
However, such a partner can later recover from other partners an amount of
money equivalent to the shares in liability defined as per the partnership
agreement.
(iii)
Risk bearing: The partners bear the risks involved in running a business as a team.
The reward comes in the form of profits which are shared by the partners in an
agreed ratio. However, they also share losses in the same ratio in the event of
the firm incurring losses.
(iv)
Decision making and control: The partners share amongst themselves the responsibility of
decision making and control of day to day activities. Decisions are generally
taken with mutual consent. Thus, the activities of a partnership firm are
managed through the joint efforts of all the partners.
(v)
Continuity:
Partnership is characterised by lack of continuity of business since the death,
retirement, insolvency or insanity of any partner can bring an end to the
business. However, the remaining partners may if they so desire continue the
business on the basis of a new agreement.
(vi)
Membership:
The minimum number of members needed to start a partnership firm is two, while
the maximum number, in case of banking industry is ten and in case of other
businesses it is twenty.
(vii)
Mutual agency: The definition of partnership highlights the fact that it is a business
carried on by all or any one of the partners acting for all. In other words,
every partner is both an agent and a principal. He is an agent of other
partners as he represents them and thereby binds them through his acts. He is a
principal as he too can be bound by the acts of other partners.
Merits
The following points
describe the advantages of a partnership firm.
(i)
Ease of formation and closure: A partnership firm can be formed easily by putting an
agreement between the prospective partners into place whereby they agree to
carryout the business of the firm and share risks. There is no compulsion with
respect to registration of the firm. Closure of the firm too is an easy task.
(ii)
Balanced decision making: The partners can oversee different functions according to
their areas of expertise. Because an individual is not forced to handle
different activities, this not only reduces the burden of work but also leads
to fewer errors in judgements. As a consequence, decisions are likely to be
more balanced.
(iii)
More funds: In a partnership, the capital is
contributed by a number of partners. This makes it possible to raise larger
amount of funds as compared to a sole proprietor and undertake additional
operations when needed.
(iv)
Sharing of risks: The risks involved in running a partnership firm are shared by all the
partners. This reduces the anxiety, burden and stress on individual partners.
(v)
Secrecy: A
partnership firm is not legally required to publish its accounts and submit its
reports. Hence it is able to maintain confidentiality of information relating
to its operations.
Limitations
A partnership firm of
business organisation suffers from the following limitations:
(i)
Unlimited liability: Partners are liable to repay debts even from their personal
resources in case the business assets are not sufficient to meet its debts. The
liability of partners is both joint and several which may prove to be a
drawback for those partners who have greater personal wealth. They will have to
repay the entire debt in case the other partners are unable to do so.
(ii)
Limited resources: There is a restriction on the number of partners, and hence
contribution in terms of capital investment is usually not sufficient to
support large scale business operations. As a result, partnership firms face
problems in expansion beyond a certain size.
(iii)
Possibility of conflicts: Partnership is run by a group of persons wherein decision
making authority is shared. Difference in opinion on some issues may lead to
disputes between partners. Further, decisions of one partner are binding on
other partners. Thus an unwise decision by some one may result in financial
ruin for all others. In case a partner desires to leave the firm, this can
result in termination of partnership as there is a restriction on transfer of
ownership.
(iv)
Lack of continuity: Partnership comes to an end with the death, retirement,
insolvency or lunacy of any partner. It may result in lack of continuity.
However, the remaining partners can enter into a fresh agreement and continue
to run the business.
(v)
Lack of public confidence: A partnership firm is not legally required to publish its
financial reports or make other related information public. It is, therefore,
difficult for any member of the public to ascertain the true financial status
of a partnership firm. As a result, the confidence of the public in partnership
firms is generally low.
