Due to the limitations of the sole proprietorship, many decide to enter into a partnership. Not everyone has everything. Some may have a capital or some may have skills but not capital or resources, managing or administering skills, etc. Hence, partnership comes into existence where two or more persons from different edges, having different capacities and criteria come together with a motive to earn profits and carry on the lawful business togetherly.
Partnership – Meaning
A partnership is a business structure wherein two or more persons (not exceeding 20 in some cases), coming together as partners, decide to share profits or losses in an agreed proportion, carrying an unlimited liability. managing their business by any one or all of them. But the term partnership is too wide. The involvement of all the partners may or may not be necessary. Also, there are some exceptions as to the carriage of the unlimited liability.
Types of Partnership
General Partnership is a mutual, formal or informal agreement between different persons. Herein, the partners have an equal share in the profits and debts, carrying an unlimited liability. They can equally participate in the management and control of the business. Besides this, is no requirement of business structure formalities. It is fully the choice of the partners to run the business in their way. Each partner assumes his full responsibility towards the business and can act independently on behalf of the company without the other partner’s consent.
In a limited partnership, at least one person has to manage and take all the risks. He possesses an unlimited liability. Rest all other partners carry a limited liability and specific rights and responsibilities which are mentioned in the agreement deed.
Limited Liability Partnership
Limited Liability Partnership, requires a formal agreement. The partners have a limited liability as to their share in the company. Also, they have a protection from the legal and financial faults and actions of the other partners. They are allowed to take part in the management and decision making.
Features of Partnership
- More Persons having an unlimited liability except for minor.
- Profit and loss in an agreed proportion.
- Oral or written agreement.
- Lawful Business. For instance: carrying on a charitable trust would not fall under the partnership.
- Absolute trust and belief in each other.
- Restriction on transfer of share without the consent of the other partners.
- The principal-agent relationship.
- Responsible for other partner’s deeds.
Advantages of Partnership
- There will be combined capital, talents, skills, opinions.
- The ability of funds raising becomes easier as two or more persons will contribute towards the capital. Also, their borrowing capacity will increase.
- Due to the combination of complementary skills, all the partners with different skills will work efficiently in their own way. So, this will result in higher profits and greater sustainability and productivity.
- Start-up costs and reporting requirements are generally low.
- Everyone shares control and management. So, the working will be efficient and effective generating higher incomes.
- There will be more opportunities for tax planning as one can split their incomes between their family members to avoid tax payments.
- Above all, the distribution of the risks lead to lower tension and burden
Disadvantages of Partnership
- Since the partnership is not a separate legal entity, liabilities are unlimited for the partners except minor’s which means that the debts and liabilities are to be paid off from their pockets once the business assets and cash are done up with.
- The differences in the opinion and thoughts of one or more partners for either, the profit sharing ratio, decision making and its implementation, direction, control, administration, etc may lead to chaos. Therefore, frequent disputes may lead to the dissolution of partnership as well.
- There is a burden of implied authority. So, if the other partner has committed a blunder, the other partners will also have to face its consequences. As a result, even though the partners are careful and efficient enough, due to some partners, they may face some problems.
- At the time of admission, retirement, etc of the partners, there is a valuation of the assets and the liabilities. This will lead to costs increment.
- The people are highly dependant on the products. Therefore, there is a loss to not only to the firm but also to the society as a whole if the partnership closes abruptly.
- Due to the unlimited liability, even after the retirement of the partners, they are liable for the acts done when they were the partners. In a limited partnership, the liability ceases on the transfer of shares.
- In partnership, the ideas, thoughts, secrets, are confidential. They are generally not shared with anyone. So, once the partnership dissolves, the secrets are exposed creating a problem, when a new business is started.1,2