Partnership is an agreement between two or more persons to carry on a business for profit as co-owners. It is the second commonest form of business after sole proprietorship. It must have at least two partners. In ordinary business the maximum number of partners is twenty. In case of banking, the partners limit is only ten.
In this article we will discuss the following.
1. Contents of partnership agreement.
2. Advantages of partnership
3. Disadvantages of partnership.
4. Dissolution of partnership.
5. Dissolution of partnership firm.
6. Kinds of partners.
7. Rights of partners.
8. Duties of partners.
Partnership agreement includes all the terms and conditions agreed by the partners to run a business as co-owners for profit. It may be written or oral. It may also be referred to as articles of partnership.
The contents of partnership agreement are following.
1. The name and place of the business.
2. Names and addresses of partners.
3. The nature of business.
4. The amount of capital invested by each partner.
5. The duties, rights, and obligations of partners.
6. The life of business.
7. The profit and losses sharing ratio of partners.
8. Method of admission of a new partner.
9. Procedure of retirement of a new partner.
10. A provision of dissolution of the firm.
11. Settlement of disputes among partners.
12. Determination of goodwill.
13. The rate of interest on capital.
14. The rate of interest on loan.
15. Depreciation method.
16. Inventory valuation method.
17. Determination of financial year.
18. The method of preparing of books of accounts.
19. Audit of books of accounts.
20. Advance to partners.
21. Advance from partners.
Advantages of Partnership
. Large Capital
Here capital contribution is higher than sole proprietorship, because partnership is formed by two or more persons. Also capital can be increased by admission of new partners.
2. Greater Borrowing Capacity
The liability of partners is unlimited. Therefore, the creditors do not feel unsecure while providing credit to partnership firm.
3. Combined Abilities and Skills
It is a general truth that two heads are better than one, and this maxim is applied to partnership. Because there are two or more partners and they possess different skills, abilities, experiences, and qualification. This advantage leads to rational decision making and effective management.
4. Tax Advantage
This form of business enjoys tax savings. Here income tax is imposed after distribution of profit among partners. There is no double tax. In case of corporation, the income tax is imposed twice. First on corporation’s profit and secondly, when it is disturbed to shareholders.
Partnership firm is not bound to reveal the business affairs. Here secrecy can be maintained among partners. But in the company secrecy cannot be maintained, because company has to reveal its business affairs.
6. Retention of Key Employees
If there is a key employee in the firm of partnership and he wants to leave a job, he can be given a status of partner in the business with the mutual consultations of others partners. In this way key employees can be retained.
Disadvantages of Partnership
1. Unlimited Liability
This is the major disadvantage of partnership business. Because if the assets of business are insufficient to pay off business debts, the personal property of partners can be utilized. But in the company the liability of shareholders is limited to the amount of their investment. It means the personal property of shareholders cannot be utilized to discharge business debts.
2. Lack of Prompt Decisions
In this form of business, management and control is divided among various partners according to their skills, abilities and choice. This division creates administrative problems and delays in decisions.
3. Problems of Dispute
Even though the partnership firm is formed by partnership agreement but disagreement may occur among partners which may lead to losses.
4. Uncertain Life
The life of partnership is uncertain. It comes to an end by death, admission, retirement, insolvency, conviction, and insanity of a partner.
5. Frozen Investment
A partner cannot withdraw his share from the business. In case he withdraws, the partnership will be dissolved. But in the company shares can be transferred without affecting the continuity of business.
Dissolution of Partnership
Dissolution of partnership is the alteration of partnership agreement. The alteration may occur under the following circumstances.
1. When a new partner is admitted in the firm.
2. When the existing partner retires from the firm.
3. When a partner becomes bankrupt.
4. When a partner becomes insane.
5. When a partner dies.
6. When a partner is declared offender by the court of law.
7. When the period of partnership expired.
8. If the partnership is formed for a particular project, it will dissolve after completion of the project.
Dissolution of Partnership Firm
There is a difference between dissolution of partnership and dissolution of partnership firm. Dissolution of partnership is the end of partnership only. While dissolution of partnership firm is the closure of partnership business.
A firm is dissolved under the following conditions:
1. When all partners in a firm become bankrupt.
2. When the business is declared unlawful by the court of law.
3. If the partnership is at will, the firm can be dissolved at any time by giving notice to all other partners.
4. When all partners agree to dissolve the firm.
Kinds of Partners
1. Active Partner
He is a partner who actively involves in the management of business. He contributes capital and share in profit or loss. He has unlimited liability for debts of the firm.
2. Sleeping Partner
He does not take part in the management of business. He invests capital and shares in profit or loss. He is also liable for debts of the business. He is also known as dormant partner.
3. Secrete Partner
He is not declared to general public as a partner. He invests capital and shares profits or losses. He participates in management and decision making. He is also responsible for debts of the firm.
4. Nominal Partner
He is actually not a real partner but to the general public he is known as a partner. He neither contributes capital nor takes part in the management of business. He does not share in profit or loss and is not liable for the debts of the business. He only lends his name for the goodwill and credit worthiness of the firm.
5. Minor Partner
He is a person who has not yet attained the age of majority. He has investment in the firm and enjoys profits. His liability is limited to the firm investment. He is not allowed to participate in the management of business. However, he is entitled to access the books of accounts of the firm through his attorney.
Rights of Partners
1. Every partner has a right to participate in the management of business.
2. Every partner is entitled to share profit according his share.
3. The partners are entitled to access the books of accounts and demand a copy.
4. Right to get interest on capital only, if partnership allows.
5. A partner has right to retire from the firm with the consent of other partners.
6. Right to stop admission of a new partner or expulsion of an existing partner.
7. A partner has a right to express his opinion before making decisions. In case of differences of opinion the decision is made by majority of votes.
8. A new partner is not responsible for any dues before joining the firm.
9. A partner can act in an emergency for safeguarding the firm from loss with support of other partners.
10. A partner is entitled to be compensated by the firm in respect of expenses incurred by him.
Duties of Partners
1. A partner cannot transfer his share to outsider without the consent of other partners. However, a partner may transfer his shares or profit to outsider without interfering the conduct of business.
2. Every Partner is bound to use assets of the firm exclusively for the firm interest.
3. Every partner has to act fairly and honestly in the conduct of business.
4. A partner is required to work in the best interest of the firm.
5. It is the duty of a partner to disclose all business information with other partners.
6. It is the responsibility of a partner to keep and supply proper books of accounts.
7. Each partner is liable to indemnify the firm losses as agreed upon.
8. Every partner is legally bound to act within limit stated in agreement or partnership Act.