BUSINESS ORGANISATION

CHAPTER 8
PARTNERSHIP
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 DEFINITION

• Partnership has two or more members ,each of

whom is responsible for the obligation of the
partnership. Each of the partners may bind the
others and the assets of the partners may be
taken for debts of partnership.
 CHARACTERISTICS OF PARTNERSHIP
• Association of two or more partners: In partnership there must be at least two persons. Partnership
is the outcome of a contract, so there must be two or more persons.
• Contractual Relation: The persons joining the partnership enter into a contract for running the
business. According to Partnership Act, the relation of partnership arises from contract and not
from 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.

• Earning of Profits: The purpose of the business should be to make profits and distribute them
among partners. If a work is done for charity purposes or to serve the society it will not be
called partnership.

• Existence of Business: Partnership can only be for some kind of business. The term 'Business'
includes any trade, profession or occupation. business we mean all activities concerning
production, distribution and rendering of services for the purpose of earning profits. If the work
is related to social service, we do not call it a business and, hence, no partnership.
• Unlimited Liability: Like a sole-trade business, liability of the partners of a firm is unlimited. In
case some obligation arises then not only the partnership assets but also the private property of
the partners can be taken for the payment of liabilities of the firm to the third parties.
 DIFFERENCE BETWEEN PARTNERSHIP
AND CO-OWNERSHIP

PARTNERSHIP CO-OWNERSHIP
• Partnership arises from a contract. • Co ownership arises from status or from
• Business is necessary for the existence of a contract.
partnership. • Co ownership can exist even without a
• Partnership is formed with an objective business.
to earn and share profits of a business. • Its objective is to share property in joint
• Partners are mutual agents. ownership

• There is a limit on maximum members. • Co owners are not mutual agents

• There is no limit on number of members.
 DIFFERENCE BETWEEN PARTNERSHIP
AND JOINT HINDU FAMILY BUSINESS
JOINT HINDU FAMILY
PARTNERSHIP BUSINESS
• It arises from status or birth in the family
• Formed through an agreement between
and no formal agreement is necessary.
the partners.
• There is no maximum limit of members in a
• Maximum number of members shall not
joint Hindu family business.
exceeds 100.
• Only the Karta has an unlimited liability
• Unlimited liability.
.liability of other Co partners is limited to
• Profits and losses can be shared in an their share in the family business.
agreed ratio which can be changed
• Every Member has an equal share in
only with mutual consent of all partners.
profits. PSR keeps on changing with the
• In a partnership generally, every partner birth and death of members of the family.
takes part in the management of
• The right to manage and control is vested
business.
only in the Karta.
 DISTINCTION BETWEEN
PARTNERSHIP AND SOLE TRADE
PARTNERSHIP SOLE TRADE
• Partnership is owned by two or more • Sole business is owned and controlled by
persons known as partners. only one person.
• To constitute partnership, an agreement • A sole trader trader does not require any
is required in the form of a partnership formality to start the concern.
deed. • No registration of sole trade business is
• A partnership concern needs registration required.
to get certain advantages of • This business is controlled by one person
registration. only.
• All partners have equal rights and all of • In the whole risk is beard by the sole
them can participate in the trader.
management.
• The business risk is shared by all the
partners in proportion of their shares.

GENERAL OR UNLIMITED
PARTNERSHIP
 A partnership in which the
liability of all the partners is
unlimited is known as
unlimited partnership. In
such a firm. All the partners
have the right to take part in
the management of the firm.
Such a partnership. Maybe
of the following types-
1. Partnership at will
2. Particular partnership
3. Joint venture
TYPES OF PARTNERSHIP
LIMITED PARTNERSHIP LIMITED LIABILITY
PARTNERSHIP
 The limited partners have limited Chapter 9
liability and their rights are also
very much restricted as far as the
drawings and management are
concerned.
 There must be atleast one
GENERAL PARTNER whose liability
is unlimited.
 The death of a limited partnership
does not affect the continuity of
the firm
• A. partnership at will- partnership at Will is a partnership which
is formed to carry on business without specifying any period of
time. It is formed for an indefinite period of time and no
provision is made as to when and how the partnership will
come to an end.

• B. Particular partnership- it is a partnership established for a

stipulated period of time or for the completion of a specified
venture.

• C. joint venture- joint venture is a temporary partnership which

is formed to complete a specific job during a specified period
of time. In such a partnership, every partner does not have
the right of implied agency. The right of management is
delegated to one of the partners. No partner Can withdraw
his interest in the firm before the completion of the venture.
 MAIN FEATURES OF LIMITED PARTNERSHIP
• (i) The limited partnership consists of one or more general or unlimited partners
whose liability shall be unlimited, while the liability of the "limited partners" shall be
limited to the extent of their capital only.

• (ii) A 'limited partner' cannot take part in the management of the firm. He will
contribute capital and share in the profits of the firm. In case he takes part in the
management of the business, he shall be liable for all debts and obligations of
the firm.

• (iii) Limited partnership must be registered so that the "limited partners" may
receive the benefit of limited liability otherwise they would be treated as general
or unlimited partners.

• (iv) Limited partners can assign their shares in the partnership. It is not dissolved on
the death, lunacy or insolvency of a limited or unlimited partner.
 REGISTRATION OF PARTNERSHIP FIRM
• The Indian Partnership Act, 1932 has introduced provision for registration of
partnership firms. Prior to this Act, there was no provision for registration of
partnership firms in India. Consequently (i) fraudulent activities at the
instance of "unscrupulous" partners were very common. (ii) partners flatly
refused and denied their membership in the firm when any liability arose,
(iii) the general public was often deceived as there was nothing to prove
and justify the existence of partnership, (iv) there was a demand for
compulsory registration on the same lines as prevalent in England. Hence
the Act of 1932 was introduced on an optional basis. That is to say the Act
does not make registration of firms compulsory. It does not impose any
penalty for failure to register the firm. It is entirely left to the option of the
firms to get themselves registered or not.

• But an unregistered firm suffers from certain disabilities. Therefore,

registration of a partnership firm is desirable.
 EFFECTS OF REGISTRATION

• 1. Any statements or document signed by the partners or persons concerned and

recorded in the Register of Firm is a conclusive proof of its truthfulness. It cannot be
tampered.

• 2 At times of dispute relating to the statement recorded with the Registrar, a certified
copy of an entry of a disputed point can be obtained as a proof of the statement.

• 3. If any information supplied turns out to be false, the persons supplying them are
liable to punishment.
 DISABILITIES OF NON-REGISTRATION

• The unregistered firm or its members cannot enforce their rights between
themselves or against any outside party. For instance, if the firm supplies,
goods on credit to A and A fails to pay the price in due time, the firm has
no legal remedy But on the other hand, if the firm fails to honour the
contract, the outside party is free to file any such suit on the firm..

• In case of an unregistered firm none of the partners has the right to bring
any suit against the firm or against any of the other partner for the
enforcement of any right arising from a contract. Thus if any dispute arises
among the partners with regard to any clause in the partnership deed,
the court will not entertain any suit in this connection. The partners are free
to bring suits relating to their personal property or personal obligations
which are not connected with the firm.
 ADVANTAGES OF REGISTRATION
• The major advantage of registration is that a partner of registered
partnership can sue the co-partners and as well as the firm in case
of dispute.
• The registered firm can also sue third parties as well as any of its
partners in its own name to enforce its claim.
• The third parties who have dealings with the firm can sue the firm to
enforce their claim against the firm.
• The retired partner is liable to all the acts of the firm dealing
with third parties before his retirement.
• The incoming partner can enforce his right against the remaining
partners rather than relying on the honesty of co-partners.
 Partnership Deed
• It is nothing but a detailed agreement between the partners drafted
into various clauses that determine their mutual rights and liabilities.
• it is highly desirable to have a partnership deed that may cover the
following important points:
The name of the firm and the names and addresses of partners
who compose it.
Amount of capital that each partner has to bring into the firm.
Division of profits and losses and their ratios.
Amount that each partner can draw, interest on partner's capital,
loans and drawings
Amount of salary and commission, if any, to be given to any partner.
 ADVANTAGES OF PARTNERSHIP ORGANISATION
 Easy Formation: A partnership can be easily formed as no legal formalities are to be observed to
establish it. At the same time, unlike a company .not much of expenses are incurred for its
formation.
 Flexibility: A partnership organisation is highly flexible as well as mobile. Change can be
introduced without much difficulty. Business of the firm can also be expanded or contracted
according to the needs.
 Division of Risks: Under a pártnership, the risks of business are divided among the partners and
are not shouldered by one person alone. Thus, it is more useful for business with large
investments.
 Greater Managerial Talent: A partnership firm has a large pool of managerial talent because
different partners have different qualities. This talent pool is boon to the firm and can be utilised
for the benefit of the firm.
 Balanced Decisions: Partners possess different qualities and have varied experience. Hence the
decision taken by them are likely to be more balanced as compared to a sole proprietor.
 More Possibility of Growth and Expansion: As compared to sole proprietorship, the possibility
of growth and expansion of partnership business is more. The partners can bring in more capital,
put in more labour and efforts and raise large amount of loan.
 DISADVANTAGES OF PARTNERSHIP
ORGANISATION
Unlimited Liability: One of the serious limitations of partnership organisation is that the
liability of partners is not limited. The partners like the sole trader, may be personally held
liable for the debts incurred by the firm.

Instability: It is often found that a firm's business comes to an end on account of petty
quarrels among the partners. If a partner is dishonest and short-tempered, it may become
difficult for other partners to carry on business with him.

Fear of Dispute: Partners are human-beings and may fall into misunderstanding and
suspicion with other partners. Hence, the partners may lose mutual trust and confidence.
This may lead to dispute among them.

Limited Managerial Skill: Usually, partners personally manage the partnership business. A
firm generally cannot hire professional managers. Hence, it has to work with limited
managerial skills of partners.

 Risk of Mutual Agency Relations: All partners are mutual agents and principals. In other
words, when a partner deals with third parties, he is an agent of his co-partners or the firm
This relation of mutual agency sometimes may put the entire firm to a great risk when any
partner does any act recklessly or with malafied intentions.
 ESSENTIALS OR REQUISITES OF AN
IDEAL PARTNERSHIP
 Mutual Trust and Good Faith: Partners who enjoy the good faith of each other must be chosen.
Ideal partners are those who are not of an autocratic or secretive nature. All partners must be
honest and sincere and dedicated to the firm.

 Supplementary Contributions: Each partner should make a distinct contribution to the firm in
terms of capital, business ability, technical ability, experience, widespread contacts or
resourcefulness.

Written Agreement: The agreement of partnership should be in writing and signed by

all the partners to avoid the possibility of mis-understanding and dispute among
partners.

 Registration: An ideal partnership should not suffer from any disadvantage. It should,
therefore, be registered because an unregistered firm cannot enforce its rights against
outsiders in the court of law.

 Proper Size: An ideal partnership should be large enough to have financial and managerial
strength, but should not be unwieldy and unmanageable. Generally, the number of
partners should not exceed five.