Definition: Partnership is a model of business in which pair of individuals unite their hands to distribute profits of a business incorporated by them based on agreement. The Indian Partnership Act,1932 regulate evolution and administration of partnership firms.
As the business extends, one requires more fund and more persons to regulate the business and spilt its risks. In that condition, people generally embrace the partnership form of firm or company.
Accounting for such companies has its own traits, as the partnership organizations originate when two or more individuals associates to set-up a business and distribute its profits.
- Characteristics of Partnership
- Advantages of Partnership
- Disadvantages of Partnership
- Partnership Deed
- Contents of Partnership Deed
- Relevant Statute in the absence of Deed
Characteristics of Partnership
Based on the above definition, we can determine a few fundamental characteristics:
More than two individuals
A partnership cannot be performed by an individual alone; at least two individuals are essential for forming a partnership relation. However, there is an upper limit that is decided for the maximum number of partners.
In banking concerns, a maximum number of partners can be ten, and in case of all other organizations, this limit is set to maximum twenty partners.
When two individuals mutually get ready to do business together, they sign a written contract in papers stating all the terms and conditions, duties and responsibilities of all partners as well as profit and loss sharing ratio of all the partners. Such papers signed by all the partners are known as a legal contract.
Though the spoken contract is equally valid but to avoid any disputes in future, it is preferred to have a contract in written form.
It is mandatory to do a business or any kind of trade for creating a partnership; purchasing land together does not come under the partnership.
For Instance: If A and B buy land together for making houses for their own personal use, it will not be considered as a partnership, although if they buy land together for making houses and selling them, i.e. if it is their business to built and sell houses, then it will be considered a partnership.
In such concern, not all partners need to be active partners; any partner can operate it on behalf of all other partners as well as all partners altogether can actively participate in any event of the company.
If any of the partners notice any unethical or non- beneficial conduct happening in business, he has a right to stop other partners for doing such conduct.
Business is started with the intention of earning profits in return, but it is the rule of the universe if you get the flowers you will also get thorns along with that.
Similarly, if the business gets a profit, it may also get losses some years, which will be distributed amidst all the partners in their profit and loss sharing ratio as mentioned in the contract.
In partnership, actions of all the partners are inter-related with each other and will make an impact on the business
i.e., if any of the partners has taken any action regarding the company when he is a partner in it, all partners are equally liable for that action and its results. As well as liabilities of all the partners are unlimited for the operations of the company.
Advantages of Partnership
Partnership has the following advantages:
- A partnership firm has more prominent economic holdings in comparison to the sole proprietorship.
- Higher private contacts of the partners deliver more customer set-up and assistance.
- Individuals having distinct competence and talent can work for the improvement of the company or the firm.
- Limited spending per partner is inclined in incorporating a partnership firm.
- Losses will be assigned amidst the partners.
Disadvantages of Partnership
Partnership has the following disadvantages:
- A partnership firm may terminate subject to retirement or death of any partners in case of two partners.
- The life of partnership is for limited span, because of the egotistical posture of partners or in order to avoid losses, every partner criticizes one another, which may result in the dissolution of a partnership.
Presence of an agreement is an obligatory element of partnership; however, the agreement can be written or spoken. A written agreement amidst the partners is termed as “Partnership Deed”. It is excessively beneficial in order to avoid disputes among the partners. All the terms and conditions of the partnership are mentioned in it.
Contents of Partnership Deed
- Name and address of the company and its principal business.
- Name and address of all partners involved in the business.
- Total capital to be provided by every partner.
- The accounting cycle of the company.
- The period of initiation of the partnership.
- Guidelines concerning transactions of bank accounts.
- Profit and loss sharing percentage or ratio.
- Rate of interest on drawings, loan and capital, etc.
- Procedure of auditor’s appointment.
- Commission, salaries, etc., if outstanding to any of the partner.
- Duties, liabilities and rights of every partner.
- Treatment of loss emergent in regard to the insolvency of one or more partners.
- Settlement of accounts at the time of termination of the company.
- Approach of the settlement of conflicts amidst the partners.
- Procedure to be adopted in the event of admission, retirement and death of a partner.
- Any other point empathized to regulate the business.
Relevant Statute in the absence of Deed
- Proportionate allocation of profits.
- No interest on capital is provided to any partner.
- No interest on drawings is given.
- No salary or commission is granted.
- Interest on loan arranged by a partner will be given @ 6% p.a.
The partnership is outlined as the relationship among individuals assent with another to distribute gains and deficits of a business carried on by all the partners or any of them acting for all.