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 partner Profit or loss sharing ratio for each partner Salary or commission payable to the partners, if any 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 business 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 claims. 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 partnership. 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 partnership. 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 form. 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. DIFFERENT TYPES OF PARTNERSHIPS Depending on the reason behind which a particular partnership is made, partners may be of different types. To understand this better, consider the following: 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 business. 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 contain: The amount of capital contributed by each partner Profit or loss sharing ratio Salary or commission payable to any partner, if any 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 business 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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