Many of you would think about doing business. But, what form of business should you do? According to my for a medium level of business, which is not so big and not so small. It would help if you went with Partnership.
Now, questions arise about what is this partnership? So, for that, I will tell you about the partnership, its characteristics, merits, and demerits. So, let us begin.
What is Partnership?
A partnership is a popular form of business for medium-level businesses. As the size of the business grows, one person is not enough to carry on managerial activities.
A partnership is a relationship between two or more persons who have agreed to share the profit of their business carried on by all of them or acting for all.
Characteristics of Partnership
1. Formation
The partnership firm of a business is governed by the Indian Partnership Act of 1932. It comes into existence by a legal agreement between the partners. In this agreement, all the terms and the conditions are written.
If two partners join for a charitable purpose, that is not called a partnership, and even if two people join but are doing illegal activities, that will be not considered a partnership.
2. Liability
The liability of all members of a partnership firm is unlimited. The partners of individually and collectively liable to pay back the debts of the firm.
At the time of loss, if the firm's assets are not sufficient to pay back the debts, then the creditors can also have a claim over the partners' personal property.
3. Risk Bearing
The partners of the partnership firm share the firm's profits in the ratio specified in the agreement. If no ratio is specified in the agreement, then the profit is divided equally among all the members.
4. Decision Making
All the partners are allowed to manage the partnership firm. They may specify the work area of each partner in the partnership deed also.
Generally, day-to-day management is carried on by one or two partners whereas, for crucial decisions, all the partners are consulted.
5. Continuity
The partnership firm continues till all the partners desire to continue it. Legally, it comes to an end at the retirement or death of any one partner. Even after retirement and death also the partnership firm can continue.
Only if all the remaining partners agree, in that case, they settle the claim of outgoing and then continue with the business.
6. Number of Partners
The minimum number of partners to form a partnership firm and two and, the maximum number of partners is 100.
7. Mutual Agency Relationship
Every partner is the owner and the agent of the firm, and the agent of the other partner. The act of one partner binds the other partner also. Each partner is entitled to take part in the management and enter into a contract with outsiders.
The contract signed by any one partner is binding on the partners. Partnership business can be carried on by all the partners or by any one of them acting on behalf of the other.
Merits of Partnership
1. Easy to form
It is straightforward to form a partnership firm, as no legal formalities must be completed. Even registration of the partnership firm is not compulsory according to the partnership act.
2. Balanced Decision Making
In a partnership firm, the partners can divide them according to their skills and knowledge. The division of work leads to specification and efficiency in management and other activities of the firm.
3. Larger Financial Resources
In a partnership firm, all the partners contribute some amount of capital. As a result, the financial resources of the partnership firm are larger than the Sole Proprietorship firm or Joint Hindu Family Business.
4. Risk Sharing
In a Sole proprietorship firm, only one person has to bear the risk, whereas, in a partnership firm, all the partners share the risk in the same ratio as they share the profit. The sharing of risk motivates partners to undertake riskier projects and earn more profit.
5. Secrecy
The partnership firm is not required to publish its accounts. Therefore the affairs of the partnership firm remain secret. On the other hand, all the activities of a partnership firm are carried on by all partners.
Demerits of Partnership
1. Unlimited Liability
The liability of all the partners is unlimited. In case of losses, the partners will lose their business property, but creditors can claim over the personal property to get their accounts settled.
2. Limited Resources
There is a restriction on the number of partners, and hence contribution in terms of capital investment is not sufficient for the large-scale enterprise. As a result, partnerships face the problem of expansion beyond a specified size.
3. Conflicts
The partners in the partnership firms come from different backgrounds, different families; therefore, they may have different opinions. If partners adopt a rigid attitude, then it may lead to conflict among the partners.
4. Lack of Continuity
the existence of a partnership firm gets affected by the death, insolvency, or incapacity of any one partner. Even a partner can demand the dissolution of the firm any time he desires so.
5. Lack of Public Confidence
The public has less trust and faith in partnership firms because partnership firms' accounts and annual reports are not published. So people do not have trust in their dealings.
6. Risk of Mutual Agency
The contract signed by any one partner is binding on the other partners due to the principle of mutual agency. A dishonest partner may enter into a contract for benefit. In that case, all the partners will have to suffer the loss.
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