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Posted on August 7, 2021
Important Aspects Of A Partnership Firm
Partnership is a form of business which came into existence due to the shortcomings of sole proprietorship.
When the business grows and prospers, one person is not enough to procure capital and look after its day-to-day affairs. In such a scenario, more persons join hands and contribute their funds. Thus, partnership firm registration is said to be an extension of sole proprietorship.
Partnership is an association of two or more persons who have mutually decided to carry out business activities jointly and share its profits as well as losses. The partnership agreement may be written or oral.
Some of the features of partnership are:-
- Two or More Persons
- Lawful Business
- Profit Sharing
- Agency Relationship
- Unlimited Liability
- Not a Separate Legal Entity
- Transfer of Interest
- Mutual Trust and Confidence
- Legal Status
- Limited Life
- No Separate Legal Entity
- Capital Contribution by Partners
- Earning of Profit and Distribution
1. Two or More Persons:
At least two persons must pool resources to start a partnership firm. The Partnership Act, 1932 does not specify any maximum limit on the number of partners. However, the Companies Act, 1956 lays down that any partnership or association of more than 10 persons in case of banking business and 20 persons in other types of business is illegal unless registered as a joint stock company.
A partnership comes into being through an agreement between persons who are competent to enter into a contract (e.g. Minors, lunatics, insolvents etc. not eligible). The agreement may be oral, written or implied. It is, however, to put everything in black and white and clear the fog surrounding all knotty issues.
3. Lawful Business:
The partners can take up only legally blessed activities. Any illegal activity carried out by partners does not enjoy the legal sanction.
Under the Act, registration of a firm is not compulsory. (In most states in India, registration is voluntary). However, if the firm is not registered, certain legal benefits cannot be obtained. The effects of non-registration are- (i) the firm cannot take any action in a court of law against any other parties for settlement of claims and (ii) in case of a dispute among partners, it is not possible to settle the disputes through a court of law.
5. Profit Sharing:
The partnership agreement must specify the manner of sharing profits and losses among partners. A charitable hospital, educational institution run jointly by like-minded persons is not to be viewed as partnership since there is no sharing of profits or losses. However, mere sharing of profits is not a conclusive proof of partnership. In this sense, employees or creditors who share profits cannot be called partners unless there is an agreement between the partners.
6. Agency Relationship:
Generally speaking, every partner is considered to be an agent of the firm as well as other partners. Partnership firm in India have an agency relationship among themselves. The business can be carried out jointly run by one nominated partner on behalf of all. Any acts done by a nominated partner in good faith and on behalf of the firm are binding on other partners as well as the firm.
7. Unlimited Liability:
All partners are jointly and severally responsible for all activities carried out by the partnership. In other words in all cases where the assets of the firm are not sufficient to meet the obligations of creditors of the firm, the private assets of the partners can also be attached. The creditors can get hold one any one partner —who is financially sound-and get their claims satisfied.
8. Not a Separate Legal Entity:
The firm does not have a personality of its own. The business gets terminated in case of death, bankruptcy or lunacy of any one of the partners.
9. Transfer of Interest:
A partner cannot transfer his interest in the firm to outsiders unless all other partners agree unanimously. A partner is an agent of the firm and is ineligible to transfer his interest unilaterally to outsiders.
10. Mutual Trust and Confidence:
A partnership is built around the principle of mutual trust, confidence and understanding between partners. Each partner is supposed to act for the benefit of all. If trust is broken and partners work at cross purposes, the firm will get crushed under its own weight.
11. Legal Status:
Partnership firm and partners are inseparable from one another. They do not have separate legal entity from the firm’s business. A partnership firm is terminable by death or insolvency of a partner.
The income tax act has imposed some taxes on partnership firm. Different taxes are levied on different types of partnership firm. In case of a firm which is registered, the profit is divided among partners and tax is levied on the incomes of the partners individually. And if the firm is not registered, tax is charged on the whole income earned by it.
Partnership is governed by the ‘Partnership Deed’, which allows sufficient flexibility in operations to the partners. The deed can also be altered to suit the requirement of changing business conditions. The nature and scope of business can be changed in a short span of time. No approvals are required from any authority.
14. Limited Life:
Partnership is a relationship between partners. It gets dissolved every time there is a death, insolvency or retirement of a partner. A new partnership deed has to be prepared. Thus, partnership firms do not have very long lives.
15. No Separate Legal Entity:
Partnership firm is not separate or distinct from its members. It does not have a separate legal entity of its own. Partners enter into contracts on behalf of each other.
16. Capital Contribution by Partners:
Normally, partners come together to run a business, contribute Capital for the business and share profits earned by the business in the ratio of capital contributed. However, this need not be the case always. A person may be offered a partnership even if that person is not contributing any Capital. The profit sharing ratio and the capital contribution ratio need not be same.
For example, A, B and C decide to start a business of building various Apps (Mobile applications) for Smart phones. While A and B bring in Rs.100,000 each, C does not bring in any money. However, C is the person who has a better understanding of the business and will actually help the firm build the technology platforms.
A and B merely follow what C says, as they are not very well versed with mobile technology. Thus, all 3 of them share profits, although C does not bring in any capital.
A partnership firm can be dissolved at any time. This can be done voluntarily when all partners agree to so. Events such as death or insolvency of a partner can also result in dissolution of the partnership firm. A partnership firm can also be dissolved by the court.
18. Earning of Profit and Distribution:
The main purpose of partnership is to earn profit and to distribute it among partners. Any purpose other than that of profit motive cannot be called partnership whose aim may be to serve society in any manner.