Business Environment – Meaning of Partnership & its Characteristics
Meaning of Partnership
As per the Partnership Act 1932,
“Partnership is the relation between persons who have agreed to share profit of a business carried on by all or any of them acting for all.”
In general words, Partnership is an association of two or more individuals (but not more than 20) who agree to share the profits of a lawful business which is managed and carried on either by all or by any, or some of them acting for all or an association of persons wherein the persons establish a relationship by agreeing to carry on operations either all of them or any one of them acting for all and agreeing to share profits arising of the same.
When is partnership formed?
The proprietorship form of ownership suffers from certain limitations such as limited resources, limited skill, and unlimited liability. Expansion in business requires more capital and managerial skills and also involves more risk. A proprietor finds him unable to fulfill these requirements. This call for more persons come together, with different edges and starts a business. For example, a person who lacks managerial skills but may have capital. Another person who is a good manager but may not have capital. When these persons come together, pool their capital and skills and organize a business, it is called partnership. Partnership grows essentially because of the limitations or disadvantages of proprietorship.
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Characteristics of Partnership
- Agreement:-
Without an agreement, the partnership cannot be formed. There is a saying “No agreement no partnership.” The agreement may be written or oral. But it must be written to settle the disputes as per the provisions are written in the agreement. - Voluntary Registration:-
It is not mandatory to register a partnership. But its registration entitles a firm of several benefits so it is recommendatory. For example, if it is registered, any partner can file a case against other partners, or a firm can file a suit against outsiders in case of disputes, claims, disagreements, etc. - Number of Partners:-
In a partnership, there should be at last two partners. In ordinary business, the partners must not exceed 20 and in case of banking business not more than 10. - Profit and Loss Distribution:-
The basic aim of the partnership is to earn a profit. This profit is distributed among the partners as agreed and in the absence of any agreement; profit/loss is shared equally. - Conduct of Business:-
The business of the partnership is conducted by all the partners or any of them acting for all. But each partner is allowed to participate in the management by law. - Unlimited Liability:-
The liability of the partner is not limited to his invested amount. They are liable jointly and severally for the debts and obligations of the firm. In case of loss, the private properties of the individual partner or all the partners jointly are also used to pay the business obligations. Even a single partner may be called upon to pay the debts of the firm. Of course, he can get back the money due from other partners. The liability of a minor is, however, limited to the extent of his share in the profits, in case of dissolution of a firm. - Entity:-
Law has not granted it any legal entity, it is not independent of the partners. It has no separate entity apart from its members. - Competence of Partners:- Since individuals have to enter into a contract to become partners, they must be competent enough to do so. Thus, minors, lunatics, and insolvent persons 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.
- Transferability of Shares / Interest:-
No partner can transfer his share to any other person without the consent of the existing partners. - Dissolution:-
It is a temporary form of business. It operates at the pleasure of the partners. It is dissolved if a partner leaves, dies, declared bankrupt or insane. Partners can also dissolve it by obtaining the degree from the court.
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- Share in Capital:-
According to the agreement, every partner contributes his share. It is not necessary all the partners should contribute equally. Some people provide only skill and ability to become a partner. - Management:-
All the partners can participate actively in the business management. Sometimes only a few persons are allowed to handle the business affairs. - Payment of Tax:-
Every partner pays the tax on his share of profit individually. - Co-Operation:-
For the successful partnership, mutual co-operation and mutual confidence is an important factor. - No Audit:-
In the partnership, there is no restriction for the audit of accounts. So this type of organization may operate freely. - Partners are Agent:- Every partner stands as an agent and principal to one another. In the position of an agent, one can do contract with other parties on behalf of the firm.
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