The limitations of sole proprietorship form of organistation led to the formation of another form of organization known as partnership.
Definition:- In India, partnership organization is formed and managed by Indian Partnership Act, 1932.
Section 4 of Partnership Act defines partnership as the relation between persons who have agreed to share profits of a business carried on by all or any of them acting for all.
Minimum Requirement:- Minimum of 2 persons are required to form a partnership and maximum of 10 persons in case of banking and 20 in case of others.
1. The relation of partners is based on the contract.
2. At least 2 persons are required for the formation of partnership firm.
3. There must be some undertaking of business.
4. The objective must be to earn profits and share among partners.
5. Law of agency applies.
6. Partner’s liability is unlimited.
7. Mutual trust and confidence is the basis of partnership.
8. Every partner can be a principal or agent of other partners during the course of business.
9. Consensus i.e. mutual consent is required for all important decisions.
10. Restriction on transfer of share.
11. No relation between contribution of capital and share of profits.
12. Life span of partnership depends upon the will of partners.
Benefits of Partnership:-
1. Formation of partnership is easy as it does not involve too many legal formalities.
2. Flexibility in the operations of the business.
3. Registration of partnership form of organisation is not compulsory as in the case of company.
4. All major decisions are taken by mutual trust, which results in better decision making.
5. Sharing of risk helps in formation of capital.
6. Relation of effort and reward.
7. Unlimited liability helps in more credit worthiness.
8. It protects the interest of minority as mutual consent i.e. consensus is required to take all the major decisions.
9. Easy to maintain secrecy as partnership firm is not under an obligation to disclose its annual accounts.
10. No legal formalities for dissolution.
1. Unlimited liability increases the risk; this hinders the growth of business.
2. Limited resources for generating capital.
3. No perpetual succession i.e. sudden death or retirement of any one of the partners dissolves the partnership.
4. Lack of good faith and confidence among partners causes great limitations.
5. No transfer of shares.
6. Burden of law of agency.
7. Due to non-disclosure of accounts there is always a lack of public confidence
1. For service industry:- Accounting, Medical, Legal, Transportation, Warehousing etc.
2. Medium enterprises.
3. For distribution.
Types of Partnership:-
1. General Partnership:- In this type of partnership, partners are with unlimited liabilities. It can be further divided into two types: –
(a) Partnership at Will:- Mutual trust, faith and confidence among partners are the key for the existence of this type of partnership.
(b) Particular Partnership:- It is formed for a fixed duration or for specific tasks and it dissolves automatically as soon as the fixed time lapses or the specific task is achieved.
2. Limited Partnership:- This type of partnership has been introduced in US, England and in other European countries. All the partners in this type of partnership have limited liability except one partner.