Partnership & Its Advantages, Disadvantages, Types

The partnership is a popular form of business for small-scale and medium-scale businesses. As the size of the business grows, one person is not enough to carry on managerial activities. Therefore two or more persons form partnerships to carry on business. This form of business starts to overcome the problem of sole Proprietorship.

A partnership is a relation between two or more people who have agreed to share the profit of the business carried on by all or any of them acting for all.

Features of Partnership

1. Formation

The partnership firm of business is governed by the Indian Partnership Act 1932. It comes into existence by a legal agreement between the partners.

In this agreement, the terms and conditions of partners, the ratio of sharing of profits and losses are specified. The partners must enter into an agreement for carrying a lawful business, run with the motive of earning profit.

2. Liability

The liability of all the members of a partnership firm is unlimited. The partners are 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 have a claim over the personal property of the partner also.

3. Risk Bearing

The partners of the partnership firm share the profits of the firm in the ratio specified in the agreement. In case 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 anyone’s partner.

Even after retirement and death also the partnership firm can continue if all the remaining partners agree. In that case, they settle the claim of the outgoing partner and then continue with the business.

6. Number of Partners

The minimum number of partners to form a partnership firm are two and the maximum as per section 464 of the Companies Act 2013 is 100 subject to the number prescribed by the government.  

At present as per Rule 10 of the Companies Act 2014, the maximum number prescribed by the government is 50.

Advantages of Partnership

1. Easy to Form: It is very easy to form a partnership firm, as no legal formalities are required to be completed. Even registration of a partnership firm is not compulsory according to Partnership Act.

2. Balanced Decision Making: In partnership, the partners can divide the work according to their skill and knowledge. The division of work leads to specialization 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 a 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 account. Therefore the affairs of the partnership firm remain secret. On the other hand, all the activities of a partnership firm are carried on by the partners. Only they take all the major decisions, so they are no chances of leakage of trade secrets.

Disadvantages of Partnership

1. Unlimited Liability: The liability of all the partners is unlimited. In case of losses, the partners will not only lose their business property but creditors can claim over their personal property also 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 problems of expansion beyond a specified size.

3. Conflicts: The partners in partnership firms come from different backgrounds, different families, therefore they may have differences of opinion. 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 anyone partner. Even a partner can demand the dissolution of the firm anytime he Desires so.

5. Lack of Public Confidence: The public has less trust and faith in partnership firms because the accounts and annual reports of partnership firms 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 personal benefit. In that case, all the partners will have to suffer the loss.

Types of Partnership

Types of Partnership on the basis of Duration

1. Partnership at will: The partnership formed for an indefinite period is known as a partnership at will. This type of partnership exists at the will of the partner and comes to an end whenever partners desire so.  Any one partner can give notice of dissolution and the partnership will come to an end.

2. Fixed Period Partnership: The partnership formed for a specific period of time, say 3 years of 5 years, etc., is known as a fixed-period partnership. This type of partnership firm automatically gets terminated on the expiry of that specified time period.

3. Particular Partnership: The partnership which is formed to carry on a particular venture is known as a particular partnership.  This type of partnership comes to an end automatically on completion of that venture.

Types of Partnership based on the Liability of Members

1. General Partnership: The partnership in which the liability of all the members is unlimited is known as a General partnership which means if the assets of the firm are not enough then creditors can settle their accounts by having a claim over the personal property of the partners.

2. Limited Liability Partnership: The partnership firm in which liability of all the partners except one partner is limited to the extent of their share in the partnership firm is known as a limited partner.

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