Partnership | Meaning | Features | Advantages and Disadvantages

Meaning of Partnership

Partnership is an association of persons who have agreed to run the business and share the profits and losses of a business. The business may be run by all the partners or any of them acting for all.

Partnership - Meaning, Features, Advantages, Disadvantages
Partnership – Meaning, Features, Advantages, Disadvantages

An agreement is signed between the partners before they actually start the business. This agreement is termed as Partnership Deed. The persons who owns the business are called partners and collectively they are known as Firm.

Section 4 of the Indian Partnership Act, 1932, defines partnership as

a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

Features of Partnership

1. At least two persons are required to start and run a partnership firm. It is subject to a maximum of ten persons for banking business and twenty for non banking business.

2. There must be an agreement between all the partners. The agreement may be oral or written.

3. A partnership business exists on the mutual trust and faith of the partners.

4. Each partner has unlimited liability like sole proprietorship.

5. No partner can transfer share without getting the consent of all the other partners.

6. The business may be run by all or any of them acting for all. Each and every partner in a partnership are the joint owners of the business. When a partner deals with other parties in business transactions, he/she acts as an agent of the others and at the same time others become the principal. So, a principal — agent relationship always exist between partners.

7. The agreement contains details about the amount of capital contributed by each partner and profit or loss sharing ratio.

8. The business carried by the partners should be lawful.

Advantages of Partnership

1. It is easy to establish partnership firm as there exists contractual relationship between the partners.

2. Each partner contributes capital and hence more funds are available in the business.

3. A partnership firm comes to an end in the event of lunacy, death or bankruptcy of any partner.

4. A taxation rate applicable to partnership firm is lesser than sole proprietorship.

5. Since two or more partners join hand to start partnership business, it may be possible to pool more talent of partners.

6. It is a flexible organization. At any time the partners can decide to change the size or nature of business or area of its operations.

7. The risks are shared by the partners.

Disadvantages of Partnership

1. Each partner has equal right to participate in the management of the business. So conflict may arise between the partners.

2. Partnership may be discontinued due to death or incapacity of partners.

3. The liability of partners is unlimited.

4. The capital to be raised is always limited as the total number of partners cannot exceed 20.

5. Partners cannot transfer share of interest to outsiders without the consent of other partners.