Nature of Partnership

Introduction

Partnerships or partnership firms are businesses where there is more than one owner of the business. Usually, when two or more individuals join hands to create a new firm, it is known as a partnership. Partnerships have their unique nature and characteristics. Here is all about the nature of partnership businesses.

Nature of Partnerships

In business partnerships, two or more people agree to share the profits or losses by jointly owning the business. The partnership business is actually a business relationship between two more persons. According to the partnership act of 1932, a ‘partnership is the ‘relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all’.

In a partnership business, the partners enter into the legally binding partnership individually. The partners of a partnership business are collectively called a firm. The essential characteristics of a partnership are as follows −

More than one person

There must be at least two individuals with a common objective in a partnership. So, the minimum number of people in a partnership is two.

The Indian Partnership Act of 1932 does not have any upper limit on the number of individuals in a partnership business. However, the Companies Act of 2013 has set the following number of maximum partners in a business:

• In a banking business, the maximum number of partners should be 10.

• For any other business, the maximum number of partners is 20.

• If the maximum number of partners exceeds the limit, the firm becomes illegal.

Agreement

A partnership is necessarily an agreement between two and more partners who agree to do business together according to the agreement. The agreement between the partners is legally binding. The agreement can be oral or written. The oral agreement is equally valid but written agreements are preferred to avoid any future dispute among the partners.

Business

An agreement must be there to carry on a partnership. Having just a co-ownership for property does not amount to a partnership business. Moreover, the business should also be legal in nature. A partnership cannot exist for illegal businesses.

Mutual Agency

In a partnership firm, all members may be active or it may be carried on by some of them acting for all. This implies two things. First, in a partnership, every partner can engage in the conduct of affairs of the business. The second is that there is a relationship of mutual agency among all the members.

For partners who are not engaged directly in the business, the active partners are both principals and agents. They can legally bind all other partners by their acts. In return, the active members are also bound by the acts of business of other members.

Sharing of profits and losses

Sharing of profits and losses is an important feature of a partnership business. Usually, partnership businesses are for-profit, and they are not charitable in nature. So, the sharing of profits and losses is an important issue for partnership businesses.

Sharing of profits and losses is usually done depending on the agreement. The agreement determines and illustrates the share of each individual partner. It is often in proportion to the investment by each member.

Liability of a Partnership Firm

The partners of a partnership firm are legally liable for the business activities. Also, when a member is a partner, he is liable for all the acts of other members of the firm. The liability of partners is not limited in nature. Therefore, the partner’s personal property may be used in the case of debt clearance of the firm.

Partnership Deed

A partnership firm cannot exist without an agreement. The agreement of a partnership firm can wither be oral or written in the form. The oral agreement is equally valid but firms prefer to have written agreements which are called partnership deeds. The partnership deed is the Bible for partnerships.

A partnership deed contains the following details −

• Name and address of the firm along with the main business.

• Name and address of all the partners.

• The contribution to the amount of capital by each member.

• The accounting period of the partnership firm.

• The date of commencement of the firm.

• The rules and regulations with respect to banking.

• Profit and loss sharing ratios.

• Interest rates on loans, capital, and other forms of debt the firm avails.

• The mode of auditor’s appointment, if any.

• Salaries, commissions, and fees payable to partner(s), if any.

• The handling of loss that may arise due to one or more members’ bankruptcy.

• Settlement procedure of accounts in the case of dissolution of the firm.

• Methods for settlement of disputes among the partners.

• The rules and regulations that must be followed due to admission, release, or death of partners.

• All other matters that may be applicable to the business.

Key takeaways

• Partnerships or partnership firms are businesses where there is more than one owner of the business. Usually, when two or more individuals join hands to create a new firm, it is known as a partnership.

• According to the partnership act of 1932, a ‘partnership is the ‘relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all’.

• rtnership is two.

• The Indian Partnership Act of 1932 does not have any upper limit on the number of individuals in a partnership business. However, the Companies Act of 2013 has set the number of maximum partners in a business.

• A partnership is necessarily an agreement between two and more partners who agree to do business together according to the agreement. The agreement between the partners is legally binding.

• An agreement must be there to carry on a partnership. Having just a co-ownership for property does not amount to a partnership business.

• In a partnership, there is a relationship of mutual agency among all the members.

• The sharing of profits and losses is an important issue for partnership businesses.

• The partners of a partnership firm are legally liable for the business activities.

• The partnership deed is the written legal agreement of the partnership that contains all details of the partnership firm.

Conclusion

It is important to learn about the nature of partnerships because partnerships are very rewarding businesses. It shows the way in which the business must be formed and operated and hence may be of use to entrepreneurs.

FAQs

Qns 1. What is meant by a partnership?

Ans. When two or more individuals join hands to create a new firm, it is known as a partnership.

Qns 2. How many maximum partners can be there in a business other than banking in a partnership firm, according to the Companies Act 2013?

Ans. The maximum number of partners is 20, according to the Companies Act 2013.

Qns 3. Is the liability of a member limited in a partnership firm?

Ans. No. The liability is unlimited for partners in partnership firms.