Partnership

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‘Partnership’ is an association of two or more persons who pool their financial and managerial resources and agree to carry on a business, and share its profit. The persons who form a partnership are individually known as partners and collectively a firm or partnership firm.

For example: Gopal joins hand with Rahim to start a big grocery shop

Characteristics of Partnership Firm:

Two or More Persons:

  • At least two persons are required.

  • Maximum limit on the number of persons is 10 for banking business and 20 for other businesses.

Contractual Relationship:

  • Persons who have agreed to join hands must be competent to contract.

  • Minors, lunatics and insolvent persons are not eligible to become the partners.

Sharing Profits and Business:

Two or more persons share the income of jointly owned property.

Existence of Lawful Business:

Business of which the persons have agreed to share the profit must be lawful.

Principal Agent Relationship:

Every partner is the principal as well as the agent of the firm.

Unlimited Liability:

  • Partners of the firm have unlimited liability.

  • Liability of a minor partner is limited to the extent of his share in the profits.

Voluntary Registration:

Registration of partnership firm is not compulsory. But an unregistered firm suffers from some limitations.

Advantages of Partnership Form:

  • Easy to form

  • Availability of larger resources

  • Better decisions

  • Flexibility

  • Sharing of risks

  • Benefits of specialisation

  • Protection of interest

  • Secrecy

Limitation of Partnership Form

  • Unlimited liability

  • Instability

  • Limited capital

  • Non-transferability of share

  • Possibility of conflicts

Suitability of Partnership Form

  • Business activities like construction, providing legal services, medical services etc.

  • Suitable where capital requirement is of a medium size.

  • Business like a wholesale trade, professional services, mercantile houses and small manufacturing units can be successfully run by partnership firms.