Partnership firms are owned by two or more people in an agreement, and the profits will be shared among them. One of them can run the business on behalf of all or they can do it jointly. In India, partnership firms are governed by the Indian Partnership Act 1932.
Firms That Form Partnerships: Elements
The proper operation of partnership firms requires a set of rules since several people may be involved. A partnership firm cannot be identified as a partnership without these five essential elements.
- The contract
There must be a proper contract between the parties involved in the business. No relation, inheritance or law can impose this contract. Members of a family can’t be considered partners of a firm if they run the business jointly. A partner is only someone who signs a contract with you.
It is not possible for members of a Joint Hindu Family (HUF) to be partners. A contract must be signed by family members if they wish to be partners in a firm.
- Having a partner
A partnership must have at least two partners. There are set limits too. Banks can have ten partners, whereas other sectors can have 20. The partnership firm will be deemed illegal if the number of partners exceeds these limits.
Two companies can form a partnership, but it will be counted as an individual. In the case of a partnership between firms, the partnership firm cannot be viewed as an independent entity. The members of the firm are in partnership with each other.
Specifically, a business that makes a profit is referred to as a business. A non-profit organization or a business that doesn’t make a profit cannot be considered a partnership.
In addition, if two individuals are involved in a profit-making business and divide the investment between themselves, they cannot be considered partners unless they are party to a contract. Co-owners can be called partners, but not partners can be called co-owners.
- Share of profits
A partnership firm should divide its profits among its members. Members can decide their own share ratio, but there cannot be a situation where only one or two members receive all the profits.
A partnership has no set rules for distributing losses; they can be shared by all members or by some members only. As far as the partners are concerned, it depends. It is usually the partner(s) who have the most liability who suffers the most losses. Losses can also be equal to profits in some cases.
- Mutual Agency
All partners in the partnership must follow any decisions taken by any one of them. Each partner is equally responsible for any decision they make. As well as acting as an agent, a partner is also the company’s head. As well as representing the firm, he or she can also represent others on behalf of the firm.
Partnership Firm Requirements
In addition to these essential elements, the Partnership Deed is a mandatory component of a partnership firm. In addition to the type of business, details of partners, capital contribution, and duration of the partnership, it can be project-based or contractual in nature. The partnership deed must also describe the profit sharing ratio.
Prior to starting a partnership firm, it is important to have a partnership deed. Each partner’s rights, duties, and responsibilities are outlined in the agreement. Since everything is clearly outlined in the partnership deed, it aids in conflict resolution and dispute settlement. All partners sign the deed, and it cannot be breached. The partnership deed specifies the profit sharing and salary or interest to be paid.
Partnership Firms: Their Benefits
The sharing of responsibilities in a partnership helps ensure effective workflow. Additionally, it facilitates better decision-making. Stability is achieved by combining weak aspects and strong aspects of partners.
Additionally, each partner offers unique qualities and capabilities, which can greatly benefit the organization. As an example, one partner may have a good network of clients, while another might be better at retaining them. A partnership also increases capital investment since it is more credible and stable on the market.
In addition to expanding both companies’ perspectives and knowledge, the partnership increases their customer base. As a result, you gain an edge over your competitors. Firms and customers benefit from long-term stability and assurance.
Partnership Firms: Disadvantages
A partnership may not work as expected, resulting in disputes and conflicts between partners. Furthermore, partnership firms have unlimited liability and uncertain existence, causing existing and potential clients to lose faith in their reliability. Furthermore, since each partner exercises authority, they may pursue personal gains rather than the firm’s interests. When each partner has different opinions, the decision-making process can seem daunting.
The availability of resources makes a partnership firm more advantageous for businesses. For newcomers or failing companies, it can be a stepping stone.