Partnership Business

Because of all the stipulations of less capital, unlimited liability and narrow scope of sole proprietorship business, despite of being the oldest and popular business form it became necessary to establish business enterprises on partnership basis with widening scope and reducing risk. For this, more than one individual together combining their capital and capacity formed a new type of business which is called partnership business.

After completing this chapter, we shall be able to

·         Describe the idea, features, and advantages and disadvantages of partnership firm

·         Explain the formation process of partnership firm

·         Explain the contents of the deed of partnership agreement

·         Explain the registration of a partnership firm and its advantages.

·         Explain the reasons for dissolution of partnership business

Mainly, the partnership business evolved to eliminate the deficiency of sole proprietorship business. But, this business also has some problems. Complexity of dispute and trust may rise among partners specially, for distribution of profit, decision making, division of tasks and responsibilities, determining partners’ relations to each other. As a result, deed of partnership and partnership act had to be introduced. Generally, when more than one individual willingly comes together to form business on the basis of partnership deed is called partnership business. As per Partnership Act 1932, ‘more than one individual’ means minimum two and maximum twenty partners. If the partnership is for banking business, then maximum number of partners should not be more than ten. Partnership business is the relation between individuals based on a deed with a view to share profit of a business operated by all or by one on behalf of all. Those who builds this type of relation is called “partner” and altogether their business is called partnership business.

Formation of Partnership Business

Characteristics of Partnership Business

In the present context, partnership business is as old as the sole proprietorship business. But, partnership business has been evolved to eliminate some limitations of sole proprietorship business. Though, it has some similarities with sole proprietorship business in nature, partnership business has some characteristics which has made it different from sole proprietorship and other form of joint ownership business. The characteristics of partnership business are analyzed below:

·         Formation of Partnership Business is very easy since there is no legal complexity. More than one individual eligible to enter in to contract can start the business with an oral or written agreement. More than one individual means minimum two and maximum twenty people. For banking business the maximum number is stipulated to ten.

·         The agreement between the partners works as the basis for the partnership business. This business is formed, operated and controlled on the basis of relation based on agreement. The agreement can either be oral or written, registered or unregistered.

·         The partners in the business supply their fund according to the agreement. Profit of business also distributed according to the agreement. Profit shall be distributed equally if there is no indication in the agreement. Some body may even become partner without any investment if it is mentioned in the agreement. But, the liabilities of the partners are unlimited by jointly and severely. This means, if the asset of the company is not sufficient to meet up a particular liability then the personal property of the partners shall be liable for this. If any partner becomes Bankrupt, then other partners shall be liable to bear his portion of liability.

·         The business is formed on the basis of reliability and trust on each other and the success of the business is also depended on this. On the other hand, partnership business gets dissolved, if there raise any unreliability, mistrust and argument among the partners.

·         Registration of partnership firm is not mandatory. But, the registered company enjoys some facility over the unregistered companies. Registration does not make it a legal entity. So, the business cannot be run on its own name. It is considered that all the business transactions have been made personally on behalf of the partners. The existence of this business depends upon the willingness of partners since it has no legal entity.

Deed of Partnership Business

Partnership Business is form with the agreement between two or more people. The agreement can be oral. Or the agreement can be written and registered. It is mandatory to have an agreement to start a partnership business. It does not matter whether the agreement is oral, written, registered and unregistered. For this reason agreement is treated as the main basis for partnership business. As per statement from Partnership Act -1932, ‘Partnership relation is built from agreement, not from statuses. Written agreement is called Partnership Deed. Partnership deed is such evidence that describes the objective of the business, operational guideline, position of each partner, responsibilities, activities and right and specific method to solve potential problem in future. The agreement is to be signed by all the partners. This is to be kept in mind that business conducted to earn and distribute profit shall not be considered as partnership business if there is no such agreement. If the children of a deceased person become the heir and they operate the business and share the profit among them, then it will not be a partnership business since there is no agreement among the children.

Contents of Partnership Deed Format

Deed of agreement is treated as the guideline of partnership business. Various important issues are incorporated in the deed to avoid the contradiction among partners and let alone complexities in operational procedure of the business. Generally the following issues are stated in the deed of agreement:

·         Name and address of the partnership business.

·         Nature of business, objective and scope

·         Expiry or validity of the business

·         Name, address and profession of the partners,

·         Total capital of the firm

·         Capital to be paid by each partner and payment method

·         Rules to run the business

·         Introduction of the partners who will directly run the business

·         Profit & Loss distribution method

·         Responsibilities, power and rights of the partners

·         Name of the bank, Address and nature of account to be opened.

·         Name of the partners to operate the Bank account

·         Guideline to include new partner and exclusion of existing partner.

·         Estimation, reservation and repayment method for share in case of death of a partner

·         Retirement & dismissal process of partner

·         Solution method for future contradiction

·         Method of dissolution of partnership

Registration of partnership Business

Registration of partnership business refers to enlistment of the name of company with the government appointed office of the registrar. In a registered partnership business the partner can sue against other partner for his rights as per partnership deed which not possible in case of an unregistered firm. Unregistered companies cannot take any legal measures against any third party as well for the rights as in the deed of agreement. On the other hand, if any third party sues any unregistered partnership firm or against its partners, it cannot claim any receivables against the plaintiff. So it is more logical to register a partnership firm since it has the benefit of some additional facility. The following things are to be attached with the application for registration of a partnership business:

·         Name of the partnership business Address of the head office

·         Address of the branches (if any) Objective of the business

·         Date of business commencement Expiry or validity of the business

·         Partners name, address and profession

·         Date of joining as a partner in the business

The registrar shall check all the paper submitted along with the application for registration. If the registrar is satisfied, he shall enlist the company and informed the company in written. The registration process ends with receipt of the letter.

Classification of Partners

The partners in a partnership firm can select their role in a business considering the various conditions of the business, advantages and disadvantages, duties and responsibilities. The concepts and characteristics of different types of partners are mentioned below:

Different Types of Partners	Concept & Characteristics
Ordinary Partner	* Partners invest capital in the business and actively participate in the operational activities of the business * Partners have unlimited liabilities * Equally shares the profit and loss as per deed of agreement * Gets remuneration if mentioned in the agreement
Sleeping Partner	* Partners invest capital into the business * Shares the profit as per agreement * Does not participate actively in the operational activities of the firm having rights though. * Sleeping partner has limited liabilities * Is not liable to any third party for the activities of the business
Nominal Partner	* Does not invest capital into the business * Does not participate in the business operational activities * Allows to use name/goodwill against profit sharing or in return of particular amount of money as per deed of agreement. * Nominal Partners does not have unlimited liabilities like the ordinary partners * But, if anybody lends money to the firm considering him as a partner and able to prove it, then the partner shall be equally liable like others.
Quasi Partner	* This type of partner does not withdraw the money invested as capital and retains in the business as a loan * In fact, this sort of partners are the creditors to the business * If, any ordinary partner remains in the business in such a way without publishing notice, then he/she will be liable to the third party for the activities of the business.
Limited Partner	* If liability of a partner is limited as per deed of agreement or if any minor is taken as partner legitimately to facilitate him with the consent of other partner is called a limited partner. * The liability of such partner is limited to the amount of invested capital. * Does not take part in the business operation * Any major person can also be such partner on the basis of deed of agreement.
Partner by Holding Out	* When any person introduce himself as the partner of a business verbally, written or in any other manner though he is not a partner, then he is called partner by holding out. * If, anybody being influenced by his attitude; lends money to the business, then such partner shall be liable.

Dissolution of Partnership Business

Partnership business is formed for a particular time period or to complete a specific task. As per Partnership Act 1932, Section 39, dissolution of the relationship among the partner is the dissolution of the partnership business. According to the partnership act dissolution of the partnership business can be in many ways:

Dissolution by mutual consent

·         According to Section 40 of Partnership Act, all the partners of the firm mutually dissolute the business.

Forced Dissolution

·         According to Section 41 of Partnership Act, because of the following two reasons forced dissolution can happen:

1.       All but one or one of all the partners become bankrupt or

2.       If the business become anti legal or illegal for any reason.

Eventual Dissolution

·         According to Section 42 of Partnership Act,

1.       If the specific time of the business ends

2.       If the specific task for which the business started is finished

3.       In case of death of any partner

4.       If any partner is declared bankrupt by the court

Dissolution through Notice

·         Section 43 of the Partnership Act states that Partnership business can be dissolute through the notice by any partner of his desire to quit the business.

Dissolution by the Order form the Court

·         Section 44 of the Partnership Act states that for any of the following reasons partnership firm can be dissolved:

1.       If any partner becomes insane,

2.       If a partner becomes incapable forever,

3.       If the trust and faith among the partners are affected by the misdeeds of any partner;

4.       If any partners transfers his share to any third party by violating the terms and condition of the partnership deed.

5.       If the business incurring continuous loss and if it seems impossible to run the business without incurring loss.

The court may order for dissolution for a partnership firm for other logical reasons.

End

More topics about Business Entrepreneurship…