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Partnership: Features, Merits, and Demerits

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  • Difficulty Level : Hard
  • Last Updated : 13 Oct, 2022
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There are certain limitations to the sole proprietorship type of ownership, including limited resources, limited skill, and unlimited liability.

Business expansion entails greater risk, as well as demands more resources and management expertise. A business owner finds it difficult to meet these standards. This necessitates that more people, of all ages, get together and start a business.
For instance, one individual may be a poor leader yet owns capital, whereas another individual may be a quality manager, but lacks capital.

A partnership is formed when such people gather together, pool their resources and talents, and build a business. The restrictions or drawbacks of proprietorship are primarily responsible for the development of partnerships.

Meaning of Partnership

A partnership is a form of business where two or more people formally agree to be co-owners, divide up the duties of running the organization, and split the profits and losses the organization earns.

In India, “The Indian Partnership Act 1932” regulates all aspects and activities of partnerships. This particular law indicates that a partnership is an association of two or more people or parties who have agreed to share the profits generated from the firm while managing it jointly or on behalf of other members.

According to L H Haney,“Partnership is the relation between persons competent to make contracts who have agreed to carry on a lawful business in common with a view to  private gain”.

Persons who have formed a partnership with one another are referred to as partners. The firm name is the name under which the business operates.

Features of Partnership 

The features of Partnership are as follows:

1) Formation of Partnership

A partnership is an alliance of two or more people created by an agreement or contract. The agreement (accord) is the basis for the partnership between the parties. This type of agreement is in writing. An oral agreement is legally binding. To minimise misunderstandings, it is always preferable if the partners have a copy of the written agreement. The agreement should be to conduct some business. The mere co-ownership of a property does not establish a partnership.

For Example, if two persons jointly purchase a plot of land, they become the joint owners of the property and not the partners. But if they are in a business of sale and purchase of property for the purpose of profit, then they will be called partners.

The agreement that has been made between partners must be to share all the profits and losses of a business equally or as per the agreement. If some persons join hands for the purpose of some charitable activity, it will not be termed a partnership.

2) Number of Partners for the firm

A partnership must be manifested by at least two people who share a relatively similar purpose. In other words, the minimum number of partners in a business might be two. However, there is a limitation to the number of people they can accommodate. But in the case of banking, the number of members should not exceed ten, and in the case of other businesses, the number should not exceed twenty. If the number of members exceeds this limitation, the firm cannot be classified as a partnership firm.

3) Liability

In general partnerships, all partners are personally held accountable. It means that they are all collectively liable for retrieving all of the firm’s debts, even if it means liquidating their personal assets. Partners’ firm liability is unlimited like that of a sole proprietor,

That seems to be if the firm’s assets are inadequate to pay the obligations, the partners’ personal holdings, if any, can also be used to meet the company liabilities.

For Example, if a company has to pay Rs. 25,000/- to its suppliers of products, and only Rs. 19,000/- can be arranged from the business by the partners., then the remaining Rs. 6,000/- will have to be raised from the partners’ own holdings.

4) Risk bearing  

The risks that come with operating a firm as a team are shared by the partners. Profits are divided among the partners in an agreed-upon ratio as the return. They also share losses in the same ratio if the corporation suffers losses.

5) Decision Making and Control 

Every partner has the right to participate in the organization’s management and decision-making. The partners share responsibility for decision-making and control of day-to-day operations. Decisions are usually made with mutual consent. As a result, the operations of a partnership business are managed via the joint efforts of all partners.

Merits of Partnership

The merits of Partnership are as follows:

1) Easy to form and close: The partnership business, like the sole proprietorship, can be formed immediately and without any legal stipulations. It is not essential to register the company. A simple agreement, either oral or written is all that is required to form a partnership company. A partnership is a contractual arrangement between two or more people to manage a business.  As a result, it is quite simple to form. The legal requirements for formation are limited. on the other hand, the registration of a partnership is desirable, but not required. It’s the same in the case of closure, as it is also an easy task.

2) Better Decision Making 

The firm is owned by the partners. Each of them has an equal right to participate in corporate management. In the event of a disagreement, they can sit down together to work out the issues. Because all partners are involved in decision-making, there is less room for reckless and hasty decisions. Because there are several owners in a partnership, all partners are involved in decision-making. Typically, partners from various specialist fields are brought together to complement one another. For example, if there are three partners, one may be a specialist in production, another in finance, and the third one in marketing.

3) Availability of Funds

In comparison to a sole proprietorship, it could be possible to pool more resources when two or more partners work together to establish a partnership firm. The partners may invest more money, more time, and more effort into the company. 
As we know, a sole proprietorship experiences financial constraints due to its restricted resources. Due to this fact, the partnership firm now has more than one source of funding to solve this issue effectively. Additionally, it also boosts the company’s capacity to borrow money because the risk of loss is shared among numerous partners rather than just one. Banking institutions also see less danger in granting credit to partnerships than to sole proprietorships.

4) Risk Sharing

Each partner contributes to the firm’s losses in accordance with their agreed-upon profit-sharing percentages. As a result, the loss share for each partner will be lower than it would be for a proprietorship. The chance of losing money or defaulting can be greatly reduced because all profits and losses are shared among the partners. All of the partners in a partnership firm share the business risks. For example, if there are three partners and the company incurs a loss of Rs.12,000 over a specific time period, all partners may split it, with each partner bearing just a Rs. 4,000 burden.

5) Secrecy

Since businesses are not compelled to publish their financial statements or submit any reports to the government, secrecy regarding their activities can be easily maintained.  This allows it to keep its operations and policies secret.

Demerits of Partnership

The demerits of Partnership are as follows:

1) Unlimited liability 

The partners are completely responsible for the firm’s debt, both jointly and individually. They can thus divide the liability among themselves or demand that each individual pay for all of the obligations, even any covered by personal property. The parties’ liability in a partnership business is unlimited. Similar to a sole proprietorship, if a partnership is unable to pay its debts, the personal assets of the partners may be in danger. Partners are jointly and separately accountable, and their liability is unlimited. For those partners who have more personal money, it might prove to be a significant disadvantage. If the other partners are unable to pay the loan, they will be responsible for paying it all back.

2) Limited Resources

The number of partners is restricted, and as a result, the capital they provide is also limited. There are restrictions on adding partners, so there won’t ever be enough funds to support a big firm. Partnership businesses thus have difficulties with business expansion.

3) Possibility of Conflicts between Partners

Every partner in a partnership business has an equal right to take part in management. Additionally, each partner has the right to present any matter to management at any moment with their thoughts and opinions. Due to this, there is sometimes a possibility of conflicts and disagreements among individuals, which may frequently result in the closure of the business.

4) Lack of Continuity

The partnership ends when one partner passes away or leaves. So, there is uncertainty in the continuity of the business. A partnership is an unstable type of organisation since it can collapse due to the death, retirement, or insolvency of any partner. The surviving partners, though, may reach new agreements and carry on the business.

5) Lack of Public Confidence

A partnership firm is an entirely private type of organisation. Government neither controls nor regulates it. Public trust in such types of businesses is generally low, as they are not required to publish their financial reports or make other related information public. As a result, it is challenging for the public to determine the genuine financial situation of a partnership business, which lowers public trust in partnerships.

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