Understanding Partnership Businesses

When one is starting a business, one may form a sole proprietorship when the business is small. The problem with this kind of business is that it cannot grow beyond a certain limit. This is because a sole proprietorship will not be readily sponsored by banks other sources of finance.

Also the amount of money that the sole proprietor can contribute to the business “alone” is not very high. Besides this, the sole proprietor has to take wise decisions in running the business. If he is unable to do so, the business will not be very successful and will not grow.

A sole proprietor might be an expert at marketing or might be technically strong. But it is not likely that he will be strong in all the fields that are important for making wise and successful business decisions.

For all the above reasons, one may choose to form a partnership firm right from the start or later change their firm to a partnership firm. So, one may start a partnership firm with the objective of pulling in people so that more capital is generated or making specifically skilled people partners so that wise business decisions may be made.

Before a partnership is formed, a “partnership deed” should be prepared. This partnership deed may be oral or in writing. However it is wise to make sure that the partnership deed is in writing so that future conflicts may be resolved. More about the partnership deed shall be explained ahead.

To understand all the characteristics of a partnership consider the following:

Two or more members:
At least two members are required to start a partnership business. But the number of members should not exceed 10 in case of “banking business” and 20 in case of “other business”. If the number of members exceeds this maximum limit, then that business is not called as a partnership business legally. (All the rules stated in this complete article are for a business in India)

Partnership agreement:
Whenever you think of starting a partnership business, there must be an agreement between all the partners. This agreement must contain-

  • The amount of initial capital contributed by each partner
  • Profit or loss sharing ratio for each partner
  • Salary or commission payable to the partners, if any
  • Duration of business, if any
  • Name and address of the partners and the firm
  • Duties and powers of each partner;
  • Nature and place of business; and
  • Any other terms and conditions to run the business

The partnership deed is usually not very hard to prepare through a trusted local lawyer.

Lawful business:
The partners should always carry on any kind of lawful business. To start a business in smuggling, black marketing, etc., is not termed as a partnership business in the eye of the law. Again, doing social work is not termed as a partnership business.

Competence of partners:
Since individuals join hands to become partners, it is necessary that they must be “competent” to enter into a partnership. Thus, minors, lunatics and insolvent people are not eligible to become partners. However, a minor can be admitted to the benefits of partnership i.e., he can have a share in the profits only.

Sharing of profits:
The main objective of every partnership firm is to make and share the profits of the business. In the absence of any “agreement” for profit sharing, it should be shared “equally” among the partners. Suppose, there are two partners in the business and they earn a profit of Rs.20,000. They may share the profits equally i.e., Rs.10,000 each or in any other agreed proportion, say one forth and three fourth i.e. Rs.5,000/- and Rs.15,000/-

Unlimited liability:
Just like a sole proprietorship, the liability of partners in a parnership is also unlimited. This means, if the assets of the firm are insufficient to meet the liabilities, the personal properties of the partners, if any, can be utilized to meet the business liabilities. Suppose, the firm has to make payment of Rs.25,000/- to the suppliers for some goods. The partners are able to arrange for only Rs.19,000/- from the business. The balance amount, of Rs.6,000/- will have to be arranged from the personal properties and assets of the partners.

Voluntary registration:
It is not compulsory that you register your partnership firm. However, if you don’t get your firm registered, you will be deprived of certain legal benefits, therefore it is desirable to register. The effects of non-registration are:

  • Your firm cannot take any action in a court of law against any other parties for settlement of claims.
  • In case there is any dispute among partners, it is not possible to settle the disputes through a court of law.

Note: Registration is voluntary in most states. However it would be best to check up the rules of your state to be sure. In states like Maharashtra, registration is almost compulsory.

No separate legal existence:
Just like sole proprietorships, partnership firms also have no separate legal existence from its owners. The partnership firm is just a name for the business as a whole. If somone sues the firm, it is as good as someone sueing all the partners.

Restriction on transfer of interest:
No partner can sell or transfer his share or part or parnership of the firm to any one without the consent of the other partners. For example, A, B, and C are three partners.If “A” wants to sell his share to “D” as his health problems prevent him from working, he can not do so until B and C both agree.

Continuity of business:
A partnership firm comes to an end at death, lunacy or bankruptcy of any partner. Even otherwise, it can stop it’s business at the will of the partners. At any time, they may take a decision to end their partnership.

Next - Advantages of a Parnership Business >>

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Table Of Contents

  1. How to incorporate?
  2. Understanding Sole Proprietorships
  3.   - Advantages of Sole Proprietorships
  4.   - Disadvantages of Sole Proprietorships
  5.   - What kind of business is suitable for Sole Proprietorships?
  6.   - How to start a Sole Proprietorship business?
  7. Understanding Partnerships Business
  8.   - Advantages of a Partnership Business
  9.   - Disadvantages of a Partnership Business
  10.   - Different types of partnership firms
  11.   - Business suitable for Partnerships legal structure
  12.   - How to form partnership deeds & start a partnership firm?
  13. Understanding Joint Stock Companies (Private & Public Ltd.)
  14.   - Advantages of Joint Stock Companies
  15.   - Disadvantages of Joint Stock Companies
  16.   - Business suitable for Joint Stock Companies
  17.   - Procedure to start a Joint Stock Company? (Incorporation)