Everything you need to know about the features and characteristics of partnership firm. Partnership is a form of business which came into existence due to the shortcomings of sole proprietorship.
When the business grows and prospers, one person is not enough to procure capital and look after its day-to-day affairs. In such a scenario, more persons join hands and contribute their funds as well as other skills to run the business. Thus, partnership is said to be an extension of sole proprietorship.
Partnership is an association of two or more persons who have mutually decided to carry out business activities jointly and share its profits as well as losses. The partnership agreement may be written or oral.
Some of the features of partnership are:-
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1. Two or More Persons 2. Agreement 3. Lawful Business 4. Registration 5. Profit Sharing 6. Agency Relationship 7. Unlimited Liability 8. Not a Separate Legal Entity 9. Transfer of Interest
10. Mutual Trust and Confidence 11. Number of Partners 12. Profit Sharing 13. Principal-Agent Relationship 14. Joint Ownership 15. Ownership and Control 16. Registration 17. Duration 18. Capital and a Few Others.
Features and Characteristics of Partnership Firm: Lawful Business, Agreement, Profit Sharing, Joint Ownership and a Few Others
Features of Partnership Firm: 10 Important Features
The principal features of partnership firm may be listed as:
1. Two or More Persons:
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At least two persons must pool resources to start a partnership firm. The Partnership Act, 1932 does not specify any maximum limit on the number of partners. However, the Companies Act, 1956 lays down that any partnership or association of more than 10 persons in case of banking business and 20 persons in other types of business is illegal unless registered as a joint stock company.
2. Agreement:
A partnership comes into being through an agreement between persons who are competent to enter into a contract (e.g. Minors, lunatics, insolvents etc. not eligible). The agreement may be oral, written or implied. It is, however, to put everything in black and white and clear the fog surrounding all knotty issues.
3. Lawful Business:
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The partners can take up only legally blessed activities. Any illegal activity carried out by partners does not enjoy the legal sanction.
4. Registration:
Under the Act, registration of a firm is not compulsory. (In most states in India, registration is voluntary). However, if the firm is not registered, certain legal benefits cannot be obtained. The effects of non-registration are- (i) the firm cannot take any action in a court of law against any other parties for settlement of claims and (ii) in case of a dispute among partners, it is not possible to settle the disputes through a court of law.
5. Profit Sharing:
The partnership agreement must specify the manner of sharing profits and losses among partners. A charitable hospital, educational institution run jointly by like-minded persons is not to be viewed as partnership since there is no sharing of profits or losses. However, mere sharing of profits is not a conclusive proof of partnership. In this sense, employees or creditors who share profits cannot be called partners unless there is an agreement between the partners.
6. Agency Relationship:
Generally speaking, every partner is considered to be an agent of the firm as well as other partners. Partners have an agency relationship among themselves. The business can be carried out jointly run by one nominated partner on behalf of all. Any acts done by a nominated partner in good faith and on behalf of the firm are binding on other partners as well as the firm.
7. Unlimited Liability:
All partners are jointly and severally responsible for all activities carried out by the partnership. In other words in all cases where the assets of the firm are not sufficient to meet the obligations of creditors of the firm, the private assets of the partners can also be attached. The creditors can get hold one any one partner —who is financially sound-and get their claims satisfied.
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8. Not a Separate Legal Entity:
The firm does not have a personality of its own. The business gets terminated in case of death, bankruptcy or lunacy of any one of the partners.
9. Transfer of Interest:
A partner cannot transfer his interest in the firm to outsiders unless all other partners agree unanimously. A partner is an agent of the firm and is ineligible to transfer his interest unilaterally to outsiders.
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10. Mutual Trust and Confidence:
A partnership is built around the principle of mutual trust, confidence and understanding between partners. Each partner is supposed to act for the benefit of all. If trust is broken and partners work at cross purposes, the firm will get crushed under its own weight.
Features of Partnership Firm – Agreement, Number of Partners, Lawful Business, Profit Sharing, Principal-Agent Relationship, Unlimited Liability and a Few Others
The characteristics or features of a partnership firm are given as below:
1. Agreement:
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The partnership is a result of a contract or an agreement that is entered into between or among the partners. It does not arise from birth, status or inheritance or succession. The contract or agreement between the persons may be oral or written. But usually, the contract is in writing.
2. Number of Partners:
Section 11 of Indian Partnership Act, 1932 provides that the maximum number of persons a firm can have is 10 in case of partnership firm carrying on a banking business. In case of partnership firm carrying on any other business the number of partners can be 20. If the number of partners exceeds the aforesaid limit, the partnership firm becomes an illegal association.
3. Lawful Business:
The aim of a partnership firm should be profit-making by conducting only lawful business activities. Partnership business should be as per the law of land. Association formed for conducting illegal actions like theft, black-marketing and smuggling cannot be called as partnership.
4. Profit Sharing:
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The main object of partnership is to make profit and share the profits as per the agreed ratio. If the partnership agreement does not include any clause on profit-sharing, then the partners share profit equally as per the rules of the Indian Partnership Act, 1932. The non-profit making organisation cannot be called as partnership.
5. Principal-Agent Relationship:
Each partner acts in two capacities, i.e., he is both a principal and agent. As an agent, he can bind the other partners by his acts and as a principal; he is bound by the acts of other partners. Each partner has a right to deal with outsiders in the capacity of the principal and to other partners, every partner is an agent.
6. Unlimited Liability:
In India, all partnership firms are general partnerships and the liability of every partner is unlimited i.e., all partners are collectively responsible for the payments of liabilities of the firm and even their personal property can be utilised for recovery of debts of the firm.
7. Joint Ownership:
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Each partner is a joint owner of the property of the firm and hence, in the eyes of law the firm and the partners are considered to be one and the same. Partnership has no separate existence apart from the partners composing it.
8. Utmost Good Faith:
It means the trust and confidence of partners in each other. Each partner has to work in the best interest of the firm. He must strive to attain and maintain the good faith of his partners. The partner should not make any profit secretly and must disclose all the information which is directly or indirectly related to the business.
9. Non-Transferability of Interest:
A partner cannot, without the consent of other partners, transfer his interest in the firm to an outsider. There is a strict restriction on admission and retirement of any partner. Any changes concerning the partners are done as per the agreement, and or with the consent of all partners.
Features of Partnership Firm – 12 Characteristics: Ownership, Mutual Trust and Confidence, Registration, Duration, Capital, No Separate Individuality and a Few Others
Features of partnership form of organisation are discussed as below:
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1. Two or More Persons:
Minimum two persons are required to start a partnership form of organisation. Although the maximum number of partners are not stated by the Partnership Act of 1932, but the Companies Act specifies that in banking business the maximum number of partners can be 10 (ten) and in the non-banking business the limit is 20 partners.
2. Contract or Agreement:
A partnership firm is an agreement between two or more persons for running a business and for earning profits. This agreement can be oral, written, expressed or implied.
3. Lawful Business:
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The purpose of the partnership agreement is to run a business, which is legally allowed by the government and to earn profits. A partnership to carry on some charitable or social work or some unlawful activity, e.g., black-marketing or smuggling, is not included in it.
4. Sharing of Profits and Losses:
In the partnership organization, the partners share the profits according to the proportions written in the partnership agreement. In case the business faces a loss, it will be shared proportionately.
5. Liability:
The liability of partners is unlimited as in the case of sole proprietorship. Partners are individually and collectively liable to creditors of the firm. Hence, the creditors have a right to recover their dues from the private property of one or all partners, when the assets of the firm are insufficient.
6. Ownership and Control:
Every partner has a right to take part in the management of the business. Hence, the rights of ownership and control are jointly held by the partners. The unanimous consent of all the partners is required to take any major decision.
7. Mutual Trust and Confidence:
Mutual trust and confidence provides the necessary basis for the partnership agreement. Every partner is expected to act in the best interest of other partners and also the firm. He must observe the utmost good faith in all his dealings with his co-partners. He must render true accounts and make no secret profit from the business of the firm or set up a competitive business.
8. Restriction on Transfer of Interest:
In case a partner wants to transfer his share in the agreement or if a partner wants to withdraw from it, he can do so only with the approval of all the other partners. Thus, a partner cannot transfer his interest at his own will.
9. Registration:
To form a partnership firm, it is not compulsory to register it. However, if the partners so decide, it may be registered with the Registrar of Firms.
10. Duration:
The partnership firm continues as to the pleasure of the partners. Legally, a partnership comes to an end if any partner dies, retires or becomes insolvent. However, if the remaining partners agree to work together under the original firm’s name, the firm will not be dissolved and will continue its business after settling the claims of the outgoing partner.
11. Capital:
Finances or the capital of the firm is contributed by the partners in the agreed proportions. Skillful persons may be taken into partnership without any contribution of capital.
12. No Separate Individuality:
A partnership form of organisation does not have separate entity from its partners. All the contracts and agreements are applicable to both i.e., partners as well as the firm.
Features of Partnership Firm – Formation, Liability, Risk Bearing, Decision Making, Control, Continuity, Membership and Mutual Agency
Partnership is governed by the Indian Partnership Act, 1932. It comes into existence through a legal agreement wherein the terms and conditions governing the relationship among the partners, sharing of profits and losses and the manner of conducting the business are specified. It must be noted that the business must be lawful and run with the motive of profit. Thus, two people coming together for charitable purposes will not constitute a partnership.
The partners of a firm have unlimited liability. Personal assets may be used for repaying debts in case the business assets are insufficient. Further, the partners are jointly and individually liable for payment of debts.
Jointly, all the partners are responsible for the debts and they contribute in proportion to their share in business and as such are liable to that extent.
Individually, each partner can be held responsible repaying the debts of the business. However, such a partner can later recover from other partners an amount of money equivalent to the shares in liability defined as per the partnership agreement.
The partners bear the risks involved in running a business as a team. The reward comes in the form of profits which are shared by the partners in an agreed ratio. However, they also share losses in the same ratio in the event of the firm incurring losses.
(iv) Decision-Making and Control:
The activities of a partnership firm are managed through the joint efforts of all the partners. The partners share amongst themselves the responsibility of decision-making and control of day-to-day activities. Decisions are generally taken with mutual consent.
Partnership comes to an end with the death, retirement, insolvency or lunacy of any partner. However, the remaining partners may continue the business on the basis of a new agreement.
The minimum number of members needed to start a partnership firm is two, while the maximum number, in case of banking industry is ten and in case of other businesses it is twenty.
The partnership business can be carried on by all or any one of the partners acting for all. In other words, every partner is both an agent and a principal. He is an agent of other partners as he represents them and thereby binds them through his acts. He is a principal as he too can be bound by the acts other partners.
Features of Partnership Firm – Formation, Finance, Control, Management of Affairs, Duration of Partnership, Taxation and Joint Ownership
1. Formation:
Although a partnership is constituted by means of a contract between the partners, no legal formalities are required for its formation. An oral contract is sufficient to bring it into being. But it is advisable to reduce the agreement to writing, and prepare a properly drafted Deed of Partnership or Articles of Partnership laying down the terms and conditions of partnership and the rights, obligations and duties of partners.
Registration of a partnership firm is not compulsory under our law, nor is any penalty provided for non-registration. The law however, introduces certain disabilities, which make registration necessary at one time or other. In fact, the law has effectively ensured registration of firms without making it compulsory. The first disability is that an unregistered firm cannot file a suit, or take other legal proceedings, to enforce a right arising from a contract.
Secondly, a partner cannot see the firm or other partners arising under a contract or conferred by the Partnership Act. But an outsider can sue an unregistered firm and its partners.
2. Finance:
Normally, the capital of a partnership firm consists of the amounts contributed by the various partners. The capital contributions by all the partners need not be equal, and one or more may not put in any capital at all. This will happen where such partners bring in special skills and abilities. The initial capital may be augmented or more for expansion of business may be obtained, by borrowing on the security of the firm’s property and also on the strength of the private estates of partners.
3. Control:
As partnership results from a contract, the control will depend upon its terms. Where all the partners take active part in the conduct of the partnership business, the control rests with all of them. All major decisions must be made by the unanimous consent of all the partners. There may, however, be some partners who do not take active part in the conduct of the business. They are known as sleeping or dormant or secret partners. In a word, the control is ordinarily shared by the active or ostensible partners.
4. Management of Affairs:
In law, every partner has a right to take part in the conduct and management of the business of the firm. In practice, partnership agreement provides for the division of work among the different partners according to their experience and knowledge. It is not unusual to have one of them as the senior partner who would be in the position of the chief executive, exercising overall supervision.
5. Duration of Partnership:
The partners are at liberty to fix the duration of the partnership or say nothing about it. Where they agree to carry on business for a definite period of time, it is called a partnership for a fixed term. When the term is over, the partnership comes to an end; but if the business is continued after the expiry of the period originally fixed, the renewed partnership will become a partnership at will.
Where a partnership is formed for a particular adventure, it is called Particular partnership which would presumably last until the business is finished. If the partners say nothing about the duration, or agree to carry on the business as long as they wish to do so, the partnership will be one at will. It can dissolve at the will of any partner, on his giving notice. Where partners cannot agree on the dissolution of the firm, the court may, on application, order its dissolution.
6. Taxation:
A partnership firm is liable to pay income tax and other taxes as an individual is liable to pay. But there is a slight difference with regard to the rate of tax according as whether the firm is registered under the Income Tax Act or not. If it is so registered (apart from registration under the Partnership Act), the income will be divided among partners and each partner will be assessed separately. If the firm is not registered, the firm will be required to pay tax on its total profit as distinct from the incomes of the individual partners.
7. Joint Ownership:
Every partner is a joint owner of the partnership property, and has an equal share in it, unless different shares are provided by agreement. The property of the firm is required to be used exclusively for the purposes of the partnership.
Features of Partnership Firm – 7 Main Features: Two or More Persons, Agreement, Lawful Business, Sharing of Profits, Mutual Agency and a Few Others
The main features of partnership firm are as follows:
1. Two or More Persons:
There must be at least two persons to form a partnership. The maximum persons who can be admitted in a partnership are twenty and ten in case the firm is running a banking business.
2. Agreement:
There must be an agreement to form a partnership, called the partnership deed. Partnership emerges out of an agreement between two or more persons who are competent to contract as per the Indian Contract Act, 1872. The Agreement may be written or oral. In order to avoid future disputes and differences it is desirable to have a written agreement.
3. Lawful Business:
The partnership is formed to carry on lawful business, trade or occupation resulting in profit or gain. Partnership therefore cannot undertake business prohibited by law, illicit and illegal activities.
4. Sharing of Profits:
There must be an agreement among the partners to share the profits and losses of the business of a partnership firm in an agreed ratio. This is one of the basic elements of partnership. If two or more persons jointly own some property and share its income, it is not treated as partnership. The profit sharing ratio is generally specified in the agreement. In the absence of profit sharing ratio all the partners share profits and losses equally.
5. Mutual Agency (i.e., Principal Agent Relationship):
The business of the firm can be carried on by all or one or more partners acting for all. Every partner is entitled to participate in the management of firm’s affairs. One partner may be authorized by other partners to manage the activities of the business on their behalf. In that case, all partners are bound by his acts. Therefore, each partner is both an agent and a principal. A partner is an agent for other partners and principal for himself.
6. No Separate Legal Existence:
A partnership has no separate or distinct legal personality or life. Firm and partners are inseparable from one another.
7. Unlimited Liability:
The liability of the partners is unlimited. All partners are jointly and severally liable irrespective of capital contributed by them. There is no distinction between the property of the firm and of individual partners i.e., the personal property of the partners is always at stake. In the event of loss, partners are liable to pay the loss from their private assets or personal property, if the need arises.
Features of Partnership Firm – Number of Members, Existence of Business, Contractual Relationship, Legal Business, Agency Relationship, Unlimited Liability and a Few Others
1. Number of Members / Two or More Persons:
For forming the partnership firm minimum two persons are required. There is a restriction on maximum number of partners. A banking firm can have maximum ten partners where as other firms can have maximum twenty partners.
2. Existence of Business:
The partners must carry on some business. If they come together to carry on some social, religious or charitable work such association of persons cannot be called a partnership firm.
3. Contractual Relationship:
The relationship between partners arises out of a contract and not out of status as in Joint Hindu Family. There must be an agreement between the partners which may be oral, written or implied. Individuals who are competent to contract only can enter into partnership agreement. Minors, lunatic, insolvent, insane are not allowed to enter into a valid contract.
4. Law / Legal Business:
All partners must agree to carry on only lawful or legal business. No unlawful business is permitted under the Partnership Act 1932.
5. Agency Relationship:
Amongst all the partners there exists an agency relationship. The existence of the partnership is based on this agency relationship only. The business of the partnership can be carried on by all partners together or any of them can do so, on behalf of others. This implies that every partner is an agent of all other partners of the firm.
6. Unlimited Liability:
As in sole proprietorship the liability of partners is unlimited. The partners are personally liable for the debts of the firm. Because of contractual relationship among the partners of the firm, they all are liable jointly and severally for all debts and obligation of the firm. Their private assets, personal belongings, wealth, property are liable for firms’ debts, in case firms’ assets are not sufficient enough to meet firms’ liabilities or debts.
7. Sharing Profit:
Every partnership firm must have the object of sharing profit arising from business activities. And for this there must be an agreement to share the profit and losses of the firm’s business. Sharing profit is not a real test of partnership, the employees, creditors also share the profit but cannot be called partners in the absence of agreement of partnership.
8. Transfer of Share:
A partner is not permitted to sell or transfer his share to any outsider without the consent of other partners. Free transfer-ability of share is not possible in partnership firm.
9. Principal and Agent Role:
Partners are acting as principal as well as agent at one and the same time. For third party or outsider, a partner is a principal and for partners of the firm he is simply an agent.
10. High Team Spirit and Motivation:
The essence of partnership is high team spirit, high motivation, mutual trust, co-operation and confidence in each other. All this gives long survival to the partnership firm and ensures the unity too.
11. Legal Status:
Partnership firm and partners are inseparable from one another. They do not have separate legal entity from the firm’s business. A partnership firm is terminable by death or insolvency of a partner.
12. Taxation:
The income tax act has imposed some taxes on partnership firm. Different taxes are levied on different types of partnership firm. In case of a firm which is registered, the profit is divided among partners and tax is levied on the incomes of the partners individually. And if the firm is not registered, tax is charged on the whole income earned by it.
Features of Partnership Firm – Number of Partners, Unlimited Liability, Deed, Earning of Profit and Distribution and Restriction on Transfer of Interest
(i) Number of Partners:
For the partnership, it is essential that there should be at least two members. If at all, due to any circumstances the membership comes down to one, then it would be a compulsory winding up of a partnership. In that situation it would only be a sole trader-ship.
Indian Partnership Act 1932 is silent on the subject of maximum number of partners but this malady has been removed by the Indian Companies Act 1956 where in the Section 11 it is highlighted that in case of ordinary business there can be 20 maximum members whereas in case of banking and insurance business, this number cannot exceed beyond 10.
(ii) Unlimited Liability:
Like the sole trader-ship, in partnership also the liability of the partners is unlimited. Therefore, they are not only responsible up to their invested capitals but also from their personal property.
(iii) Deed:
According to Indian Partnership Act 1932, it is essential that there should be a kind of contract or deed between the partners. It may be in written form or in verbal but if it is written, better it is. All the conditions of the business of partnership are specified in this deed in the beginning of the business so as to avoid any kind of dispute in the future.
In the contents of the deed, generally documents relating to followings are included-
(a) Name and address of the firm where it should be kept in mind that it should not resemble to any other existing name and it should not name like crown, emperor, empress, imperial, king, queen, royal or parliament, etc.;
(b) Name and address of the partners;
(c) Scope of business;
(d) Nature of business;
(e) Duration of partnership;
(f) Capital invested by partners;
(g) Loan to and by partners;
(h) Proportion of profit and loss;
(i) Inspection of accounts book; and
(j) Dissolution of partnership.
(iv) Earning of Profit and Distribution:
The main purpose of partnership is to earn profit and to distribute it among partners. Any purpose other than that of profit motive cannot be called partnership whose aim may be to serve society in any manner.
(v) Restriction on Transfer of Interest:
No partner can transfer his or her share to anybody without the prior consent of other partners. For this purpose, development of consensus is must among the partners.
After knowing certain features of partnership, let us know who can be a partner. Can everybody a partner? No. According to Indian Partnership Act 1932 (Sec. 30), any person who (1) is not below the age of 18 years (2) should be of sound mind (3) should not have been between declared insolvent and (4) should not have been the person of enemy country. A minor can also be a partner but only to share profit and he cannot access to the books of records.
Partnership is such a form of business organization which is easy to establish. In partnership a huge capital can be invested unlike the sole proprietorship. It increases business efficiency as synergy is developed due to collective efforts of many minds.
Due to many partners credit worthiness is increased and you can dare to take more risk. But the position of the partnership falls in between the company and sole trader-ship. As compared to company, the means and sources are limited with a fear of mutual conflict. Like the sole trader-ship, your liability remains unlimited and also there is restriction on transfer of share without permission, which does not provide a kind of liberty as in case of company. All these reasons paved the way to give birth to another form of business organization, i.e., joint stock companies.
Features of Partnership Firm – Formation, Financing, Control, Management, Duration and Taxation
Feature # 1. Formation:
Since partnership rests on a contract among persons, its formation does not involve any special legal problems. Generally, the partnership agreement is reduced to writing and a Partnership Deed laying down the terms and conditions of partnership and the rights, duties and obligations of partners is drafted.
Since there can be possibility of bad blood and disagreements developing among partners in future (money is a great divider) legal assistance may be sought from a lawyer in drafting the Deed.
Law does not make it compulsory for a partnership firm to be registered but registration becomes necessary in view of the fact that certain disabilities attach to the firm if it is not registered. The most serious of these is that an unregistered firm cannot file a suit to enforce rights against outside parties if such rights arise out of a contract.
Likewise, a partner cannot file a suit to enforce his rights against the firm and other partners under the Partnership Deed. For these reasons, registration with the Registrar of Firms may well be regarded as a part of the formation procedure for partnership organisation.
Feature # 2. Financing:
The capital of partnership firm consists of the amounts contributed by different partners. The capital contributions of partners need not necessarily be in proportion to their profit-sharing ratio. Sometimes, a partner may be admitted to partnership without any capital contribution.
This is usually accepted for those partners who bring special skills, abilities or contacts into the partnership organisation. A partnership may augment its initial finances by borrowing from outsiders but such borrowing will be on the strength of the security of the firm’s property and of the private estates of partners.
Feature # 3. Control:
In a partnership firm where all the partners are active, control vests with all of them. No major business decision can be taken without the unanimous will of all the partners. In some firms, only one or two partners are active and the rest are sleeping or dormant.
The sleeping or dormant partners do not take an active part in the operations of the firm. But the right of even such partners to control the functioning of the firm cannot be denied. In short, then, control is shared by the partners in a firm.
Feature # 4. Management:
Law confers on every partner the right to take an active part in the management of the firm’s affairs. Each partner has the authority to bind the firm and other partners through his acts in the ordinary course of business. Each firm is free to choose a pattern of management according to agreement among partners. In many cases a managing partner looks after the work of the firm (and its departments, if any) as the chief executive.
In some others, the partners allocate areas of management among themselves, e.g., one partner may look after the factory, the other may take care of purchases, the third may be put in charge of sales, and so forth. Where a firm has branches in the same or other towns, each partner may be put in charge of each branch. Of course, decision on major issues of objectives, policies and programmes will be taken by them jointly.
Feature # 5. Duration:
The partnership firm continues at the pleasure of the partners. Legally, a partnership comes to an end if any of the partners dies, retires or becomes insolvent. However, if the remaining partners agree to work together under the original firm name and style, the firm will not be dissolved and will continue its business after setting the claim of the outgoing partner.
The Indian Partnership Act lays down the circumstances in which a firm will be dissolved, e.g., when the business becomes illegal or when all partners (or all except one) become insolvent. The Court is also empowered to order dissolution of the firm in certain circumstances, e.g., when the business cannot be carried on except at a loss or partner becomes incapacitated etc.
Feature # 6. Taxation:
Like an individual’s income, the income of a partnership is taxed on slab system. The rate of tax rises progressively as the income goes up. If the firm is registered under the Income Tax Act (as distinct from registration under the Indian Partnership Act), the income of the firm will be divided among partners and each partner will be assessed to income-tax separately. But if the firm is not registered, the firm will have to pay tax on its profits as distinct from the incomes of partners.
Features of Partnership Firm – Multiplicity of Persons, Contractual Relationship, No Separate Legal Entity, Unlimited Liability, Existence of Business and a Few Others
(i) Multiplicity of Persons:
A partnership is an association of two or more persons. The limit of maximum number differs from country to country. In India there is no upper limit provided under the Partnership Act; but The Companies Act, 1956 has put the limit indirectly. Accordingly the maximum membership for a trading concern is 20; while for banking business it is 10.
(ii) Contractual Relationship:
Partnership is the result of contractual relationship between two or more persons. Accordingly, the relation of partnership arises from contract and not from the status. The contract may be oral or written but, in practice, written agreement is made because it helps to settle the disputes if they arise later on.
(iii) No Separate Legal Entity:
A partnership firm has no separate legal entity. Firm and partners are inseparable from one another. The liability of the firm becomes the personal liability of the partners. At the same time, death, retirement or insolvency of partners affects the partnership firm immediately.
(iv) Unlimited Liability:
The partners are liable to an unlimited extent jointly as well as severally for all the debts and obligations of the firm. That is, the creditors can recover their dues from the property of any or all partners in case the assets of the firms are insufficient to meet the obligations. However, after a partner has paid dues from his personal assets, he can claim rateable contribution from all other partners.
(v) Existence of Business:
Partnership implies business and where there is no business there is no partnership. It must be clearly noted that a partnership is not a club or a charitable association and its main purpose is to carry on some lawful and profit seeking business.
(vi) Sharing of Profit:
A partnership is formed to carry on business with the object of making profits and sharing it among all the partners. Profits unless otherwise agreed are to be shared equally by all the partners. It may be noted that the sharing of losses by the partner is implied However, a partner may join a firm with the condition that he shall not share any loss; but this does not mean that he shall not have unlimited personal liability.
(vii) System of General Agency:
There exists a system of general agency in partnership. Every partner is a general agent of the firm as well as of his co-partners. It follows, therefore, that a partner can act simultaneously as a principal and an agent of the firm. To the third parties, the partner is a principal while to other partners he is an agent.
(viii) Common Management:
Legally, every partner has a right to take part in the running of the business. Practically, however, it is not necessary for all the partners to participate in day to day activities of the business. If partnership business is run by some partners; the consent of all the partners is necessary for taking important decisions.
(ix) Restriction on Transfer of Interest:
No partner can transfer his share in the partnership to anybody else without the consent of the other partners. This restriction on transferability of interest is based on the legal principle which prohibits a delegated agenda from delegating his authority. Being an agent himself a partner of the firm cannot delegate his authority to the outsider.
(x) Utmost Good Faith:
The survival of a partnership firm depends on utmost good faith and selflessness. The essence of partnership is team spirit and cooperation. All the partners must be just and faithful to one another and they must render true accounts full information relating to the operation of partnership business. A partner acts as a trustee of other partners. He is morally and legally bound to be honest and sincere in his dealing with other partners.
Features of Partnership Firm – Plurality of Persons, Restriction on Number of Partners, Contractual Relationship, Only Individuals can Become Partner and a Few Others
1. Plurality of Persons:
One person cannot have a partnership. It is a joint effort of at least two persons to start a partnership. A partnership is essentially a contract between one or more persons with respect to a business venture. The two persons entering into partnership should be competent to enter into a contract. For example, a father and his minor son cannot start a partnership.
2. Restriction on Number of Partners:
Unlike a Joint Hindu Family or a Cooperative Society, there is a restriction on the maximum number of people who can start a partnership. The number of partners cannot exceed 20 persons, and in case of banking business, the maximum number of partners is restricted to 10 persons.
3. Contractual Relationship:
The relationship of partners is bound by the legal agreement or contract entered into by each of them. This agreement is called a ‘Partnership Deed’. The partnership can be formed either by agreeing to the terms orally or in writing. There is no legal requirement to register a partnership deed but it is in the interest of the partners to register the deed.
In case of any disputes among the partners, in future, oral agreements cannot be enforced in the courts of law. Hence, a written partnership deed would serve the interest of all the partners.
4. Only Individuals can Become Partner:
Although this looks obvious, we will understand later that in other forms of organizations, non-individuals can also become owners of the business. In case of partnership, only natural individual persons can become partner. Artificial entities such as Banks, Cooperative Society, other partnership firms, etc. cannot become “Partner”.
5. Definite Name:
The partnership business should have a name by which it is recognized. For example, if A and B start a partnership firm, they may want to call it AB and Company. Similarly, if two brothers, Ram Sharma and Shyam Sharma start a partnership, they may wish to call it as Sharma Brothers. This is the name with which the partnership will be registered with the Registrar of firms.
6. Business:
A Partnership is started with the intention of doing business. The activities undertaken should have the characteristics of a business.
Two or more people coming together for the purpose of carrying out charitable acts cannot be considered as partnership. Moreover, the business must be in present and not sometime in future. The objectives of doing the business may be varied. However, the business being carried on should be lawful.
7. Sharing of Profits:
The intention of partners is to earn profit through collective effort. The profits earned are shared by partners as per the terms agreed upon by them. Any loss arising out of business transactions is also shared by the partners. It is not necessary that profit or loss is to be shared on the basis of capital contributed by partners. The profit and loss sharing ratio among the partners can be different from the capital contribution ratio depending on the mutual agreement among the partners.
8. Collective Management:
Partnership is an agreement to carry on business in common. Thus, each partner is entitled to take part in day to day management of the business. Decisions are taken by consensus. In other words, no major business decision can be taken without the unanimous will of all the partners. However, responsibilities are divided amongst partners. One person may manage the business on behalf of others.
9. Principal Agent Relationship:
Each partner is both an agent and a principal of the partnership firm. The partner is a principal because he is responsible for his own acts and the acts of other partners. He is an agent of the firm as he can act on behalf of other partners and bind them with his acts. It is possible that some partners might not actively involve themselves in the business, while other might manage the business actively.
10. Joint and Several Liability:
Each partner is liable for all the obligations of the firm. If the assets of the firm are not sufficient to satisfy the claims of creditors of the firm, the personal property of one, all or few partners can be used for the purpose. It does not matter that the partner whose personal property is being attached, had nothing to do with the management of the firm and the decision resulting in the claim. Thus, each partner is jointly and severally liable.
For example, let us say X, Y and Z enter into partnership by contributing Rs.100,000 each. X and Y are wealthy businessmen, while Z is from a middle class family. Z is the person who is having lot of ideas for making profit. Z goes to a bank and borrows Rs.500,000 for the business. Unfortunately, the business suffers a huge loss.
The Bank has the right to claim its money from all the 3 partners. This is what we understand as Joint Liability. X and Y cannot say that Z did not consult them or that they did not sign the loan document.
It is also possible that the Bank may decide to collect all the money from X and Y, as it finds that Z does not have any assets and it is futile to chase him for money. X and Y cannot say that they are liable only to the extent of 2/3rd of the loan and that the bank should recover the balance from Z. X and Y are liable to repay the entire loan. This is what we mean by “Several” liability.
11. Restriction on Transfer of Interest:
A partner is not free to transfer his interest in the firm to anybody. In other words, if a partner wants to quit the partnership firm and wants his friend to take his place in the partnership firm, he cannot do so unilaterally. He has to take the consent of other partners before such transfer, as partnership is a contract between individual partners.
If any partner does not want to continue to be a partner then he can either sell his partnership interest to existing partners or to third parties only after obtaining the consent from other partners. If no partner or any third party is willing to purchase his partnership interest then he may give a notice of dissolution of the partnership.
12. Utmost Good Faith:
Partners can bind each other by their action. Hence, each partner must be true to all other partners and disclose all the information in his possession to the other partners. Thus, utmost good faith is very crucial as the business cannot be run without mutual trust.
13. Flexibility:
Partnership is governed by the ‘Partnership Deed’, which allows sufficient flexibility in operations to the partners. The deed can also be altered to suit the requirement of changing business conditions. The nature and scope of business can be changed in a short span of time. No approvals are required from any authority.
14. Limited Life:
Partnership is a relationship between partners. It gets dissolved every time there is a death, insolvency or retirement of a partner. A new partnership deed has to be prepared. Thus, partnership firms do not have very long lives.
15. No Separate Legal Entity:
Partnership firm is not separate or distinct from its members. It does not have a separate legal entity of its own. Partners enter into contracts on behalf of each other.
16. Capital Contribution by Partners:
Normally, partners come together to run a business, contribute Capital for the business and share profits earned by the business in the ratio of capital contributed. However, this need not be the case always. A person may be offered a partnership even if that person is not contributing any Capital. The profit sharing ratio and the capital contribution ratio need not be same.
For example, A, B and C decide to start a business of building various Apps (Mobile applications) for Smart phones. While A and B bring in Rs.100,000 each, C does not bring in any money. However, C is the person who has a better understanding of the business and will actually help the firm build the technology platforms.
A and B merely follow what C says, as they are not very well versed with mobile technology. Thus, all 3 of them share profits, although C does not bring in any capital.
17. Dissolution:
A partnership firm can be dissolved at any time. This can be done voluntarily when all partners agree to so. Events such as death or insolvency of a partner can also result in dissolution of the partnership firm. A partnership firm can also be dissolved by the court.
18. Taxation:
The Income Tax Act, 1961 has separate provisions for calculation of tax on income earned by the firm. It distinguishes the income of the firm against income of partners.