Partnership as a form of organisation has come into existence due to failure and limitations of the sole proprietorship.
In a sole proprietorship, financial resources and managerial skills are limited. One person could provide only a limited amount of capital and could not start the business on a large scale. The risk-bearing capacity of sole proprietorship was also limited.
When business activities started expanding, the need for more funds arose. So, more persons were associated to form groups to carry on business and as a result partnership form of the organisation came into existence.
Features or Elements of Partnership:
1. Contractual Relationship: The partnership arises only from a contract between a certain number of persons called partners. An oral contract is sufficient but it is always better to draft a deed of partnership.
2. Two or More Persons: In a partnership, there must be at least two persons. According to partnership Act, there is no maximum limit of partners, but according to Companies Act 1956, the maximum number of partners is 10 in case of banking business and 20 in case of other business operations.
3. Existence of Business: Where there is no business, there is no partnership. By business is meant all activities concerning production and distribution of goods and services for the purpose of earning profits.
4. Sharing of Profits: The agreement to carry on business must be with the objective of making a profit and sharing it among all partners.
5. The extent of Liability: The liability of each partner for the firm is unlimited.
6. Mutual Agency: The business may be carried on by all partners or one or more actions on behalf of other partners.
Advantages of Partnership:
A) Easy formation: Like sole proprietorship, a partnership firm of the organisation came to be formed without legal formalities.
B) Large Resources: The partnership form of organisation enjoys large resources than a sole proprietorship.
C) Flexibility: A partnership is formed by an agreement. The partners can introduce any change they consider desirable to meet the changed circumstances.
D) Sharing of Risk: The losses incurred by the firm are shared by all partners and hence the share of loss of each partner will be minimum.
E) Prompt Decisions: In comparison to the company form of business, decisions can be taken quickly in partnership.
Disadvantages of Partnership:
1. Instability: The partnership form of organisation may come to an end at any time on the death, lunacy or insolvency of a partner.
2. Limited Resources: The resources of the firm are limited because of the limited number of persons that can join the firm.
3. Unlimited Liability: 0The liability of a partner is unlimited which is a great drawback to him.
4. Delay in decision making: A firm cannot always take prompt and quick action because the consultation of all the partners is essential.
5. Restriction on transfer of Interest: A partner can not sell his share in the partnership without the consent of the other partners.
Formation of Partnership:
A partnership usually is formed only by agreement, expressed or implied, between two or more persons.
The maximum person maybe 20 in case of ordinary business but 10 in case of a banking business. A partnership arises not from status but from the contract between partners which may be written or verbal and registered or unregistered.
The partnership agreement must satisfy the following requirements to form a partnership firm:
A) Agreement between two or more persons based on mutual trust and confidence.
B) Agreement to carry on business only.
C) To earn and share profit therefrom.
Types or Kinds of Partnership:
There are two kinds of Partnership:
I) General Partnership.
II) Limited Partnership.
I) General Partnership: Generally all kinds of partnership are a general partnership. In general partnership, the liability of all the partners is unlimited.
It means that the personal property of a partner is also attached to the payment of debts to the creditors.
II) Limited Partnership: In a general partnership, the liability of all the partners in which the liability of some members is limited only to the extent of their individual contribution made to the firm. Such a partnership is called a Limited partnership.
Difference Between Partnership And Sole Proprietorship:
1. A partnership is formed under the Indian Partnership Act, 1932.
There is no separate Act for sole traders.
2. A minimum number of members is 2 and the maximum number of members is 20.
It is owned and controlled by an individual.
3. It contribution by all partners.
It contributed by the owner only.
4. Management is vested in all the partners.
Managed and controlled by the sole proprietor.
5. Profit or loss is distributed among the partners equally.
The sole trader enjoys the whole profit.