When we talk about the forms a business organisation can take, one of the most prominent ones is a partnership. In India particularly it is a very popular entity to carry out business. Let us take a look at some important features of a partnership and also some types of partners.
A partnership is an arrangement where parties, known as business partners, agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, businesses, interest-based organizations, schools, governments or combinations.
In India, we have a definite law that covers all aspects and functioning of a partnership, The Indian Partnership Act 1932. The act also defines a partnership as “the relation between two or more persons who have agreed to share the profits from a business carried on by either all of them or any of them on behalf of/acting for all”
So in such a case two or more (maximum numbers will differ according to the business being carried) persons come together as a unit to achieve some common objective. And the profits earned in pursuit of this objective will be shared amongst themselves.
The entity is collectively called a “Partnership Firm” and all the individual members are the “Partners”. So let us look at some important features.
Features of a Partnership
1] Formation/Partnership Agreement
A partnership firm is not a separate legal entity. But according to the act, a firm must be formed via a legal agreement between all the partners. So a contract must be entered into to form a partnership firm.
Its business activity must be lawful, and the motive should be one of profit. So two people forming an alliance to carry out charity and/or social work will not constitute this form of organisation. Similarly, a partnership contract to carry out illegal work, such as smuggling, is void as well.
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2] Unlimited Liability
In a unique feature, all partners have unlimited liability in the business. The partners are all individually and jointly liable for the firm and the payment of all debts. This means that even personal assets of a partner can be liquidated to meet the debts of the firm.
If the money is recovered from a single partner, he can, in turn, sue the other partners for their share of the debt as per the contract of the partnership.
A partnership cannot carry out in perpetuity. The death or retirement or bankruptcy or insolvency or insanity of a partner will dissolve the firm. The remaining partners may continue the partnership if they so choose, but a new contract must be drawn up. Also, the partnership of a father cannot be inherited by his son. If all the other partners agree, he can be added on as a new partner.
4] Number of Members
As we know that there should be a minimum of two members. However, the maximum number will vary according to a few conditions. The Partnership Act itself is silent on this issue, but the Companies Act, 2013 provides clarity.
For a banking business, the number of partners must not exceed ten. For a business of any other nature, the maximum number is twenty. If the number of partners increases it will become an illegal entity or association.
5] Mutual Agency
In this type of organisation, the business must be carried out by all the partners together. Or alternatively, it can be carried out by any of the partners (one or several) acting for all of them or on behalf of all of them. So this means every partner is an agent as well as the principal of the partnership.
He represents the other partners in some cases so he is their agent. But in other circumstances, he is bound by the actions of any of the other partners aking him the principal as well.
Types of Partners
Not all partners of a firm have the same responsibilities and functions. There can be various types of partners in a partnership. Let us study the types of partners and their rights and duties.
- Active Partner: As the name suggests he takes active participation in the business of the firm. He contributes to the capital, has a share in the profit and also participates in the daily activities of the firm. His liability in the firm will be unlimited. And he often will act as an agent for the other partners.
- Dormant Partner: Also known as a sleeping partner, he will not participate in the daily functioning of the business. But he will still have to make his share of contribution to the capital. In return, he will have a share in the profits. His liability will also be unlimited.
- Secret Partner: Here the partner’s association with the firm is not public knowledge. He will not represent the firm to outside agents or parties. Other than this his participation with respect to capital, profits, management and liability will be the same as all the other partners.
- Nominal Partner: This partner is only a partner in name. He allows the firm to use the name of his firm, and the attached goodwill. But he in no way contributes to the capital and hence has no share in the profits. He does not involve himself in the firm’s business. But his liability too will be unlimited.
- Partner by Estoppel: If a person makes it out to be, through their conduct or behaviour, that they are partners in a firm and he does not correct them, then he becomes a partner by estoppel. However, this partner too will have unlimited liability.
There can be general partnership with general partners, limited partnerships (or limited liability partnership) etc.
Solved Question for You
Q: What are the advantages of a partnership?
Ans: Partnerships have many advantages as a form of business, such as
- Formation of partnerships firm is an easy task. You only require a contract of partnership. Registration is not compulsory in most cases.
- Since many partners are involved in a business they all bring their own expertise and management styles. This helps in better management of the business.
- All partners also contribute to the capital of the firm so it has more funds to work with
- The risk of the business is also shared among all partners.