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Thursday, 29 August 2019

Partnership-Meaning, Features, Merits and Demerits | HSC | Class 12

Partnership - Meaning, Features, Merits and Demerits, Class 11

What is Partnership? What are its Characteristics, Advantages and Disadvantages?

Definition of Partnership - "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".

A partnership is a form of business organization which has two or more owners. So for forming a partnership firm, you need at least two people. Owners of a partnership firm are called partners.


What are the features of a partnership firm?

1. Agreement - Without an agreement, a partnership cannot be formed. However, it is not mandatory to have a written agreement. The agreement can be oral as well. To avoid disputes in future, it is better to have a written agreement. The written agreement is also called as a Partnership Deed. So partnership deed is a written agreement between the partners

2. Registration - The registration of a partnership firm is not mandatory except in the state of Maharashtra. Even if registration is not mandatory, it is advisable to register the partnership deed with the office of the registrar (in case the partners have prepared a partnership deed). This helps in case of any disputes between the partners in future.

3. Lawful Business - Needless to say a partnership firm cannot conduct a business which is not permitted by law.

4. Membership - Minimum two persons are required to form a partnership firm as I have already stated earlier. The maximum number of owners or members cannot be more than 20. In case the partnership is formed to run a banking business, the maximum number of partners can be 10 only.

5. Sharing of profits and losses - Partnership involves sharing of profits or losses arising out of partnership business. The profit-sharing ratio is mentioned in the partnership deed. If it is not mentioned in the partnership deed, it is assumed to be equal. Again, if partners have not prepared a partnership deed and if there is a dispute with respect to profit sharing ratio, profit sharing ratio will be assumed to be equal by law

6. Unlimited Liabilities - All partners have unlimited liabilities except the minor partner. In case the assets of the business are not sufficient to pay off the creditors of the business, personal assets of the partners will be used to pay off the creditors of the partnership firm.

7. Management - The management of a partnership firm can be done by all or any one of the partners or a few partners together. It depends upon the agreement between the partners.

8. Dissolution- Dissolution means the closure of the partnership firm. Any partner can initiate dissolution. In case of death or retirement or insolvency of a partner, the partnership can be dissolved.

9. Relationship between the partners - All partners manage the business jointly or maybe only one partner manages the business or maybe a few partners manage the business together. Thus, every partner acts as a principal as well as the agent. Let's assume that there is only one partner who is managing the business. In such a case that partner is working as an owner or the principal. At the same time, he is working on behalf of other partners which means he is also working as an agent for other partners.




Also Read - Sole Proprietorship

What are the merits of a partnership firm? 1. More Manpower - In a partnership firm, there are more than one owners. Due to the presence of more than one owner, the partnership firm has the advantage of having more manpower as compared to sole proprietorship firms.

2. More Financial Resources - Since there are more than one owner in a partnership firm, the partnership firm has access to more financial resources. A partnership firm can raise more capital as there are more than one owners. 3. Ease of formation - The formation of a partnership firm is easy because registration is not compulsory. Again it is not mandatory for partners to register their partnership agreement or partnership deed. 4. Easy Dissolution - The dissolution or the closure of a partnership firm is not very difficult. There are not many legal formalities involved in closing the business and hence it is possible to close down the business very smoothly.

5. Division of risk- In case of partnership firm, there is a division of risk. In case of sole proprietorship concern, there is only one owner and hence there is no division of risk. However, in case of partnership firm, there are two or more than two owners and hence there is a division of risk. The risk is not borne by a single person. The risk of loss gets divided among all the partners. 6. Secrecy - There is more secrecy in the partnership firm as compared to some other bigger forms of business organisations like a private limited company or a public limited company. This is because the partners do not have to publish the partnership firm's financial statements anywhere. In case of some other forms of business organisations like a public limited company, you need to publish your financial statements to the public on a regular basis. 7. Better Decision Making - In case of partnership firm, the decision is taken by the owners jointly. Since the decision is taken jointly, it results in better decision making. 8. Flexibility - In case of partnership firm, there is more flexibility in the operation of the business as compared to some other bigger forms of business organisations like a public limited company. In case of a public limited company in certain decision making, you have to involve shareholders. So you need to call shareholders meeting before making the decision which is not the case in case of the partnership firm. So there is a lot of flexibility in decision making as well as the operation of the business.


What are the demerits of Partnership Firm?
1. Unlimited Liabilities: In case of partnership firm, the owners have unlimited liability which means that in case the business assets are not sufficient to pay off the business liabilities, then the property of the owners can be used to pay off the external liabilities of the business. 2. No Separate Legal Status - The partnership firm does not have any separate legal status. In the eyes of the law, the partnership firm and owners are one an and the same. That is the reason why owners have unlimited liabilities. So the law sees a partnership firm and the owners as one and the same entity. In case of a private limited company or a public limited company, the business has its own separate legal identity, which means that in eyes of law the business and the owners are two separate entities, which means that the liability of the owners is limited its not unlimited since the business is considered to be a separate legal entity from the owners. 3. Limited Resources - Though the partnership firm has more resources financial as well as human as compared to sole proprietorship firm, however when you compare it with other bigger forms of business organizations like public limited or a private limited company the resources of a partnership firm are less. So this form of business organization has limited resources when you compare it with other bigger forms of business organizations like a public limited company or a private limited company.

4. Disputes among the Partners - Quite often in this form of business organization there is a difference of opinions among the partners. This can damage the reputation of the firm in the market. Sometimes it may also result in conflicts and eventually the dissolution of the business. 5. No perpetual existence- Partnership firm does not enjoy a perpetual existence or a permanent existence because it does not have any separate legal identity in the eyes of law. Law considers partnership business and the owners one and the same. As a result, death or insolvency of partners can lead to the closure of the partnership firm. 6. Risk of Implied Authority - Every partner in the partnership firm has an authority to enter into contracts or agreements on behalf of the firm. So one partner can enter into agreement or contract with anyone on behalf of all the other partners. A wrong decision by anyone partner can result in heavy losses of the business and since the liability of all the partners is unlimited, all the partners have to bear the loss. So sometimes all the partners or all the owners of partnership firm have to bear the loss because of a wrong decision of anyone partner.

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