partnership by noidarocker


									Definitions of partnership:

           the members of a business venture created by contract
           a cooperative relationship between people or groups who agree to share
             responsibility for achieving some specific goal; "effective language
             learning is a partnership between school, teacher and student"; "the
             action teams worked in partnership with the government"

it is a contract between two or more persons who agree to pool talent
and money and share profits or losses Definition of partnership

Partnership means a formal agreement between two or more parties that have agreed to
work together in the pursuit of common goals.

   Indian Partnership Act, 1932
   • Partners
Persons who have entered into partnership with one another are called individually "partners".
   • Partnership
The relationship between the persons is called "partnership".
   • Firm
The partners are collectively called a "firm".
   • Firm Name
The name under which the partnership business is carried on is called the "firm name".

Conditions for success
           Create a bond of trust and demonstrate openness
           Work as a team, for consensus and consultation
           Respect the organizational mission of each partner
           Respect the expectations and limits of each partner
           Share power, risks and responsibilities
           Invest jointly in resources
           Encourage commitment and permanency from the stakeholders

   Understanding Partnership Businesses

            When one is starting a business, one may form a sole

            proprietorship           when        the    business        is    small.       The

            problem with this kind of business is that it cannot
grow beyond a certain limit. This is because a sole

proprietorship will not be readily sponsored by banks

other sources of finance.

Also the amount of money that the sole proprietor can

contribute to the business “alone” is not very high.

Besides this, the sole proprietor has to take wise

decisions in running the business. A sole proprietor

might   be     an   expert   at    marketing      or    might   be

technically strong. But it is not likely that he will be

strong in all the fields that are important for making

wise and successful business decisions.

For all the above reasons, one may choose to form a

partnership firm right from the start or later change

their firm to a partnership firm. So, one may start a

partnership firm with the objective of pulling in people

so   that    more    capital      is    generated      or   making

specifically   skilled   people        partners   so    that   wise

business decisions may be made.

Before a partnership is formed, a “partnership deed”

should be prepared. This partnership deed may be oral

or in writing. However it is wise to make sure that the

partnership deed is in writing so that future conflicts
may be resolved. More about the partnership deed

shall be explained ahead.

To understand all the characteristics of a partnership

consider the following:

Two                  or         more              members:

At    least    two    members   are   required   to   start   a

partnership business. But the number of members

should not exceed 10 in case of “banking business”

and 20 in case of “other business”. If the number of

members exceeds this maximum limit, then that

business is not called as a partnership business

legally. (All the rules stated in this complete article are

for a business in India)

Partnership                                      agreement:

Whenever you think of starting a partnership business,

there must be an agreement between all the partners.

This agreement must contain-

    The amount of initial capital contributed by each


    Profit or loss sharing ratio for each partner

    Salary or commission payable to the partners, if

   Duration of business, if any

   Name and address of the partners and the firm

   Duties and powers of each partner;

   Nature and place of business; and

   Any other terms and conditions to run the


The partnership deed is usually not very hard to

prepare through a trusted local lawyer.

Lawful                                                business:

The partners should always carry on any kind of lawful

business. To start a business in smuggling, black

marketing,     etc.,   is   not   termed   as   a   partnership

business in the eye of the law. Again, doing social

work is not termed as a partnership business.

Competence                        of                  partners:

Since individuals join hands to become partners, it is

necessary that they must be “competent” to enter into

a partnership. Thus, minors, lunatics and insolvent

people are not eligible to become partners. However, a

minor can be admitted to the benefits of partnership

i.e., he can have a share in the profits only.
Sharing                              of                         profits:

The main objective of every partnership firm is to

make and share the profits of the business. In the

absence of any “agreement” for profit sharing, it

should     be   shared       “equally”    among        the   partners.

Unlimited                                                      liability:

Just like a sole proprietorship, the liability of partners

in a partnership is also unlimited. This means, if the

assets     of   the   firm     are    insufficient     to    meet       the

liabilities, the personal properties of the partners, if

any, can be utilized to meet the business liabilities.

Suppose, the firm has to make payment of Rs.25,000/-

to the suppliers for some goods. The partners are able

to arrange for only Rs.19,000/- from the business. The

balance     amount,      of    Rs.6,000/-       will    have       to   be

arranged from the personal properties and assets of

the partners.

Voluntary                                               registration:

It is not compulsory that you register your partnership

firm. However, if you don’t get your firm registered,

you will be deprived of certain legal benefits, therefore

it   is   desirable   to      register.   The    effects      of    non-

registration are:
      Your firm cannot take any action in a court of

       law against any other parties for settlement of


      In case there is any dispute among partners, it is

       not possible to settle the disputes through a

       court of law.

  Note: Registration is voluntary in most states.

  No             separate           legal        existence:

  Restriction          on    transfer       of      interest:

  No partner can sell or transfer his share or part or

  partnership of the firm to any one without the consent

  of the other partners. For example, A, B, and C are

  three partners.If “A” wants to sell his share to “D” as

  his health problems prevent him from working, he can

  not do so until B and C both agree.

  Continuity                   of                 business:

  A partnership firm comes to an end at death, lunacy or

  bankruptcy of any partner. Even otherwise, it can stop

  it’s business at the will of the partners. At any time,

  they may take a decision to end their partnership.

Advantages of Partnerships
Easy                              to                               form:

Like sole proprietorships, partnership businesses can

be   formed     easily     without        any     compulsory       legal

formalities.    It   is   not    necessary to         get    the    firm

registered. A simple agreement or partnership deed,

either oral or in writing, is sufficient to create a


Note: Registration of the partnership is voluntary in

most states. However it would be best to check up the

rules    of   your   state      to   be    sure.    In   states     like

Maharashtra, registration is almost compulsory.

Availability              of              large             resources:

Since two or more partners join hands to start a

partnership business, it may be possible to pool

together more resources as compared to a sole

proprietorship.      The       partners    can     contribute      more

capital, more effort and more time for the business.

Better                                                      decisions:

The partners are the owners of the business. Each of

them has equal right to participate in the management

of the business. In case of any conflict, they can sit

together to solve the problem. Since all partners
participate in the decision-making process, there is

less scope for reckless and hasty decisions.

Flexibility                in                   operations:

A partnership firm is a flexible organization. At any

time, the partners can decide to change the size or

nature of the business or area of it’s operation. There

is no need to follow any legal procedure. Only the

consent of all the partners is required.

Sharing                                              risks:

In a partnership firm all the partners “share” the

business risks. Because of this, the partners may be

encouraged to take up more risk and hence expand

their business more.

Protection    of     interest     of    each       partner:

In a partnership firm, every partner has an equal say

in decision making and the         management       of   the

business. If any decision goes against the interest of

any partner, he can prevent the decision from being

taken. In extreme cases an unsatisfied partner may

withdraw from the business and can dissolve it. In

such   extreme     cases   the   “partnership    deed”    is

required. In absence of the partnership deed, no legal

protection is given to the partners.
  Benefits               of               specialization:

  Since all the partners are owners of the business, they

  can actively participate in every aspect of business as

  per their specialization, knowledge and experience.

Disadvantages of Partnerships

  Unlimited                                     liability:

  All the partners are jointly liable for the debt of the

  firm. They can share the liability among themselves or

  any one can be asked to pay all the debts even from

  his personal properties depending on the arrangement

  made between the partners.

  Uncertain                                          life:

  The partnership firm has no legal existance separate

  from it’s partners. It comes to an end with death,

  insolvency, incapacity or the retirement of a partner.

  Further, any unsatisfied or discontent partner can also

  give notice at any time for the dissolution of the


  Lack                    of                   harmony:

  In a partnership firm every partner has an equal right

  to participate in the management. Also, every partner

  can place his or her opinion or viewpoint before the
management       regarding   any    matter    at   any    time.

Because of this, sometimes there is a possibility of

friction and discontent among the partners. Difference

of opinion may lead to the end of the partnership and

the business.

Limited                                              capital:

Since the total number of partners cannot exceed 20,

the capital to be raised is always limited. It may not be

possible to start a very large business in partnership


No             transferability          of               share:

If you are a partner in any firm, you cannot transfer

your share or part of the company to outsiders,

without the consent of other partners. This creates

inconvenience for the partner who wants to leave the

firm or sell part of his share to others.


Depending on the reason behind which a particular

partnership is made, partners may be of different

types.    To   understand    this   better,   consider     the

Active                                              partners:

The partners who actively participate in the day-to-

day operations of the business are known as active

partners. They contribute capital and are also entitled

to share the profits of the business. They also share

the losses that the business faces.

Dormant                                             partners:

Those partners who do not participate in the day-to-

day activities of the partnership firm are known as

dormant or “sleeping partners”. They only contribute

capital and share the profits or bear the losses, if any.

Nominal                                             partners:

These partners “only” allow the firm to use their

“name” as a partner. They “do not” have any real

interest in the business of the firm. They do not invest

any capital, or share profits and also do not take part

in the business of the firm. However, they do remain

liable to third parties for the acts of the firm.

Minor              as               a                partner:

In special cases a minor can be admitted as partner

with certain conditions. A minor can only share the

profit of the business. In case of loss his liability is
     limited to the extent of his capital contribution for the


  How to form “partnership deeds” and start a
  partnership firm?

     As we have explained before, it is not “necessary” to

     register a partnership with the Govt. in most states of

     the country. (In Maharashtra it is almost compulsory.

     Check the laws in your state to be sure.)

     However, if you do not register your partnership, you

     will not be legally protected from disputes between

     partners etc. So, it is always wise to register your

     partnership with the Govt.

     In any case, even if you choose not to register your

     partnership, you should still prepare a “Partnership

     Deed” which will help resolve problems when disputes

     between partners arise.

Preparing the “Partnership Deed”

     The   “Partnership   Deed”,   as   stated   above,   must


        The amount of capital contributed by each

   Profit or loss sharing ratio

   Salary or commission payable to any partner, if


   Duration of business, if any

   Name and address of the partners and the firm

   Duties and powers of each partner

   Nature and place of business; and

   Any other terms and conditions to run the


The partnership deed is usually not very hard to

prepare through a local lawyer.This partnership deed

must be made on stamp paper as per the laws of the

place of signing. The whole process of drafting the

partnership deed can be done through a trusted

lawyer. It should cost around Rs.1000/- to prepare

the deed.

After preparation of the deed, it must be signed by all

the   partners.     It   must    also   have   signatures    of

independent witnesses.

The deed is then submitted to the “Registrar Of Firms”

along with the registration form and other supporting

documents. On approval of these documents by the

“Registrar     Of   Firms”      the   “Partnership   Firm”   is
established as a legal entity and can start business

under the chosen name.

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