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.
- Partnership Deed
- Contents of Partnership Deed
- Relevant Statute in the absence of Partnership Deed
Based on the above definition, we can determine a few fundamental characteristics:
Two or more persons
To establish it, there must be at least two individuals participating for a common aim. However, there is a limit on the maximum number of partners.
If an organization is employed in the banking business in that case, they can have a maximum of ten partners. However, in any other business maximum, twenty partners can be employed.
It is the outcome of agreement amidst two or more individuals to perform business and distribute its profits and losses.
An Agreement turn into the base of relations among the partners. It is not essential to have such agreement in writing; a spoken agreement is evenly valid, still, to refrain arguments, it is preferred to have a written agreement signed by all the partners.
The agreement must be to engage in some business. An absolute co-ownership of an estate does not develop into a partnership.
For instance, If A and B buy a plot together, they turn into a joint landowner and not the partners. However, if they do a business of purchasing and selling of plots intending to make profits, they will be known as partners.
The partnership concern can be operated by all the partners or by any partner acting for all. This assertion has two significant suggestions.
First, each partner holds the right to engage in the event of its business.
Second, there remains a relation of collective actions among all the partners. Every partner engage in the business is the principal and agent for all other partners, he can restrict other partners by his actions and is also obligated by the actions of other partners concerning business actions of the firm.
Relationship of collective actions is as much essential that one can say that there will be no partnership if the factor of collective actions is absent.
Sharing of profit
Another significant aspect of the partnership is, the agreement amidst partners must be composed to contribute the profit and loss of the business. However, the partnership Act describes it as a relationship amidst two persons who acknowledge sharing the profits and losses of the business.
Liability of Partnership
Every partner is obligated with all the other partners and also individually to the third party, for all the actions of the company depleted when he is a partner. The liability of a partner for the operations of the company is also unlimited.
This signifies that his personal assets may also be used for discharging the company’s liabilities.
It 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.
It 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 Partnership 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.