Apartnership is a business owned by two or more persons who contribute resources into the entity. The partners divide the profits of the business among themselves.
In general partnerships, all partners have unlimited liability. In limited partnerships, creditors cannot
go after the personal assets of the limited partners.
Characteristics of partnership form of business organization
Based on the definition of partnership as given above, the various characteristics of partnership form of business organization, can be summarized as follows:
(a) Two or More Persons: To form a partnership firm at least two persons are required. The maximum limit on the number of persons is ten for banking business and 20 for other businesses. If the number exceeds the above limit, the partnership becomes illegal and the relationship among them cannot be called partnership.
(b) Contractual Relationship: Partnership is created by an agreement among the persons who
have agreed to join hands. Such persons must be competent to contract. Thus, minors, lunatics and insolvent persons are not eligible to become partners. However, a minor can be admitted to the benefits of partnership firm i.e., he can have share in the profits without any obligation for losses.
(c) Sharing Profits and Business: There must be an agreement among the partners to share the profits and losses of the business of the partnership firm. If two or more persons share the income of jointly owned property, it is not regarded as partnership.
(d) Existence of Lawful Business: The business of which the persons have agreed to share the profit must be lawful. Any agreement to indulge in smuggling, black marketing etc. cannot be called partnership business in the eyes of law.
(e) Principal Agent Relationship: There must be an agency relationship between the partners. Every partner is the principal as well as the agent of the firm. When a partner deals with other parties he/she acts as an agent of other partners, and at the same time the other partners become the principal.
(f) Unlimited Liability: The partners of the firm have unlimited liability. They are jointly as well as individually liable for the debts and obligations of the firms. If the assets of the firm are insufficient to meet the firm’s liabilities, the personal properties of the partners can also be utilized for this purpose. However, the liability of a minor partner is limited to the extent of his share in the profits.
(g) Voluntary Registration: The registration of partnership firm is not compulsory. But an unregistered firm suffers from some limitations which makes it virtually compulsory to be registered. Following are the limitations of an unregistered firm.
(i) The firm cannot sue outsiders, although the outsiders can sue it.
(ii) In case of any dispute among the partners, it is not possible to settle the dispute through
court of law.
(iii) The firm cannot claim adjustments for amount payable to, or receivable from, any other parties.
Merits of partnership form
- Easy to Form
- Availability of Larger Resources
- Better Decisions
- Sharing of Risks
- Benefits of Specialization
- Protection of Interest
Limitations of partnership form
A partnership firm also suffers from certain limitations. These are as follows:
- Unlimited Liability
- Limited Capital
- Non-transferability of share
- Possibility of Conflicts
Types of partners
(A) Based on the extent of participation in the day-to-day management of the firm, partners can be classified as ‘Active Partners’ and ‘Sleeping Partners’. The partners who actively participate in the day-to-day operations of the business are known as active partners or working partners. Those partners who do not participate in the day- to-day activities of the business are known as sleeping or dormant partners. Such partners simply contribute capital and share the profits and losses.
(B) Based on sharing of
profits, the partners may be classified as ‘Nominal Partners’ and ‘Partners in Profits’. Nominal partners allow the firm to use their name as partner. They neither invest any capital nor participate in the day-to-day operations. They are not entitled to share the profits of the firm. However, they are liable to third parties for all the acts of the firm. A person who shares the profits of the business without being liable for the losses is known as partner in profits. This is applicable only to the minors who are admitted to the benefits of the firm and their liability is limited to their capital contribution.
(C) Based on Liability: the partners can be classified as ‘Limited Partners’ and ‘General Partners’. The liability of limited partners is limited to the extent of their capital contribution. This type of partners is found in Limited Partnership firms in some European countries and USA. So far, it is not allowed in India.
However, the Limited liability Partnership Act is very much under consideration of the Parliament. The partners having unlimited liability are called as general partners or Partners with unlimited liability. It may be noted that every partner who is not a limited partner is treated as a general partner.
(D) Based on the behavior and conduct exhibited: there are two more types of partners besides the
ones discussed above. These are
(a) Partner by Estoppels; and
(b) Partner by Holding out.
A person, who behaves in such a way as to give an impression that he/she is a partner of the firm, is called ‘partner by estoppels’. Such partners are not entitled to share the profits of the firm, but are fully liable if somebody suffers because of his/her false representation.
Similarly, if a partner or partnership firm declares that a particular person is a partner of their firm, and such a person does not disclaim it, then he/she is known as ‘Partner by Holding out’. Such partners are not entitled to profits but are fully liable as regards the firm’s debts.