Advantages And Disadvantages Of Partnership.docx

Partnership Act 1932 Elements of a Partnership: The Indian Partnership Act 1932 defines a partnership as a relation between two or more persons who agree to share the profits of a business run by them all or by one or more persons acting for them all. As we go through the Act we will come across five essential elements that every partnership must contain. 1) Contract for Partnership: A partnership is contractual in nature. As the definition states a partnership is an association of two or more persons. So a partnership results from a contract or an agreement between two or more persons. A partnership does not arise from the operation of law. Neither can it be inherited. It has to be a voluntary agreement between partners. A partnership agreement can be written or oral. Sometimes such an agreement is even implied by the continued actions and mutual understanding of the partners. 2) Association of Two or More Persons: A partnership is an association between two or more persons. And persons by law only include individuals, not other firms. The law also prohibits minors from being partners. But minors can be admitted to the benefits of a partnership. A partnership can only have a maximum of 10 partners in a banking firm and 20 partners in all other kinds of firms. 3) Carrying on of Business: There are two aspects of this element. Firstly the firm must be carrying on some business. Here the business will include any trade, profession or occupation. Only that some business must exist and the partners must participate in the running of such business. Also, the business must be run on a profit motive. The ultimate aim of the business should be to make gains, which are then distributed among the partners. So a firm carrying on charitable work will not be a partnership. If there is no intention to earn profits, there is no partnership. 4) Profit Sharing: The sharing of profits is one of the essential elements of a partnership. The profit sharing ratio or the manner of sharing profits is not important. But one partner cannot be entitled to the entire profits of the firm. However, the sharing of losses is not of any essence. It is up to the partners whether the losses will be shared by all the partners. If nothing is said then the losses are also split in the profit sharing ratio. Say for example two individuals are operating out of the same warehouse. So they agree to divide the rent amongst themselves. This is not a partnership since there is no profit sharing between the two. 5) Mutual Agency: The definition states that the business must be carried out by the partners, or any partner/s acting for all of them. This is a contract of mutual agency another one of the five elements of a partnership. This means that every partner is both a principle as well as an agent for all the other partners of the firm. An act done by any of the partners is binding on all the other partners and the firm as well. And so every partner is bound by the acts of all the other partners. This is one of the most important aspects of a partnership. It is, in fact, the truest test of a partnership.

Advantages and Disadvantages of Partnership Introduction: Before moving towards the advantages and disadvantages of partnership, it is important to know what partnership? Partnership is an association of two or more persons to carry on a business and share its profit and loss among them”. It is not same like sole proprietorship, where a single person may take the capital and start his business. In partnership two or persons get together, brings capital, organized the business activities and share the profit and loss as per the agreement and capital ratio. It is formed to meet the need for more capital, division of work, effective supervision and control and spreading of risk in business. Advantages: The main advantages of partnership business are under, 



     

Simplicity in Formation: This type of business of organization can be formed easily without any complex legal formalities. Two or more persons can start the business at any time. There is no complex procedure to be drawn up as in the case of a joint stock company. Though, the registration of a partnership is desirable, but not obligatory. Greater Management Ability: As there are more than one owners in partnership, all the partners are involved in decision making. Usually, partners are pooled from different specialized areas to complement each other. For example, if there are three partners, one partner might be a specialist in production, another in finance and the third in marketing. This gives the firm an advantage of collective expertise for taking better decisions. Thus, the old maxim of “two heads are being better than one” aptly applies to partnership. Sufficient Capital: Partnership can collect more capital in the business by the joint efforts of the partners as compared to sole proprietorship. Skilled Workers: As there is sufficient capital so a firm is in a better position to hire the services of qualified and skilled workers. Flexibility: It is flexible business and partners can change their business policies with the mutual consultation at any time. Expansion of Business: In this type of business organization, it is very easy to expand business volume by admitting new partners and can borrow money easily. Distribution of Work: There is distribution of work among the partners according to their ability and experience. This increases the efficiency of a firm. Less risk of Fraud: In partnership each partner can look after the business activities. He can check the accounts. So, there is less risk of fraud.

Disadvantages     

Unlimited Liability: It is the main disadvantage of partnership. It means in case of loss, personal property of the partners can be sold to pay off the firm's debts. Limited Life of Firm: The life of this type of business organization is very limited. It may come to an end if any partner dies or new partner enters into business. Lack of Prompt Decision: In partnership all decisions are made by mutual consultation. Sometimes, delay in decisions becomes the cause of loss. Chances of Dispute among Partners: In partnership there are much chances of dispute among the partners because all the partners are not of equal mind. Frozen Investment: It is easy to invest money in partnership but very difficult to withdraw it.



Transfer of Rights: In partnership no partner can transfer his share without the consent of all other partners.

Rights and Duties of Partners Introduction: Chapter-III, containing section 9 to 17 of the Indian partnership Act, 1932 entitled "Relations of partners to one another" lays down the provisions relating to "Rights and Duties of partners". Partnership is a special kind of contract/agreement. It need not be in writing and its registration also is not necessary/compulsory. However, to avoid further disputes, the relation of partnership is created by means of a written instrument called "the partnership deed" Further to avoid certain disabilities, of non-registration; it is desirable to register the partnership firms. Section 11 of the partnership Act empowers the determination of rights and Duties of partners by agreement between them. Such agreement/contract may be expressed in the partnership deed or may be implied by a course of dealing. Rights of Partners If the partnership agreement is silent as to (do not contain) the rights of the partners, the following provisions as laid down in the partnership Act are applicable:  Right to take part in conduct of the business: Section 12(a) of the partnership Act confers on every partner a right to take active part in the conduct of the business. Every partner has got an inherent right to take part in the conduct of the business. Partners can curtail this right to allow only some of them to contribute to the functioning of the business if the partnership deed states so.  Right to be consulted: According to Section 12 (c) of the Partnership Act, when a difference of any sorts arises between the partners of a firm concerning the business of the firm, it shall be decided by the views of the majority among the partners. Every partner in the firm shall have the right to express his opinion before the decision is made. However, there can be no changes like the business of the firm without the consent of all the partners involved. As a routine matter, the opinion of the majority of the partners will prevail.  Right to access books and accounts: According to Section 12 (d), every partner of the firm, regardless of being an active or a dormant partner, is entitled to have access to any of the books of the partnership firm. The partner has the right to inspect and take a copy of the same if required.  Right to remuneration: According to Section 13 (a), where it is customary to pay remuneration to a partner for conducting the business of the partnership firm, the partner may claim it even in the absence of a contract for the payment of the same.  Right to share profits: According to Section 13 (b), Partners are entitled to share all the profits earned in the business equally. Similarly, the losses sustained by the partnership firm are also equally contributed.  Right to be indemnified: According to Section 13 (e), All the partners of the firm have the right to be repaid by the firm in respect of the payments made and the liabilities incurred by him in the ordinary and proper conduct of the business of the firm. This also includes the performance

of an act in an emergency for protecting the firm from a loss, if the payments, liability and action are such as a prudent man would make, incur or perform in his case, under similar circumstances.  Right to retire: According to Section 32 (1), every partner of a partnership firm has the right to withdraw from the business with the consent of all the other partners. In the case of a partnership formed at will, this may be done by giving a notice to that effect to all the other partners.

Duties  General duties: Section 9 of partnership act 1932 deals with General duties of a partner, Partners are legally bound to carry on the business of the partnership firm. The general responsibilities of a partner are listed below.  A partner is required to carry on the business to the highest common advantage.  A partner is required to be just and faithful to each other  A partner has to render to any other partner or his legal representative about the true account and all the information of all the things affecting the partnership firm.  To indemnify for fraud: According to Section 10, a partner of the partnership firm is liable to compensate the firm for any damages caused to its business or the firm because of a partner’s fraud in the conduct of the business of the firm.  To indemnify for willful neglect: According to the Section 13 (f), a partner of a partnership firm must compensate the firm for any damages or loss caused to it by willful neglect in the conduct of the business of the firm.  To share losses: According to Section 13(b), all the partners of a partnership firm are liable to contribute equally to the injury sustained by the firm.  To account and pay for profits of competing for business: According to Section 16 (b), If a partner carries on a company of the same nature as the firm and competes with that of the firm, the partner must be accountable for and pay to the firm all the profits made in the business by the partner. The partnership firm will not be held liable for any losses caused in the business.