Sam and Peter are friends. They both are running individually their businesses of textiles. Both of them are facing some problems as sole propieters viz. deficiency of funds in case of an opportunity to expand the business, difficulty in managing the affairs of business, the problem of bearing all the risks of the business individually, lack in expertise in all the matters of the business. They want to find a solution to their problems. They also want to retain all the decision making powers in their hands only. Now the questions arise, Is their any type of business in which; the owner can share the risk of the business with others, they can together pool their resources to invest in the business, they can share the responsibilities of the business on the basis of their skills. The solution to all these questions is 'Partnership'. They want to know in detail about partnership.
Partnership is a form of business in which two or more persons come together with their resources to invest in a common business with the purpose of sharing the profits of the business.
There are some limitations of Sole proprietorship viz limited capital, no risk sharing, limited skill etc. Partnership is the solution to such problems faced by a sole proprietor. In a partnership a few persons can come together to start a new business with an agreement to share the profits and losses of the business.
According to Section 4 of the Indian Partnership Act 1932, "Partnership is a relation Between persons who have agreed to share the profits of of a business carried on by all or any of them acting for all."
Thus Partnership is the starting of a relationship among its members i.e. the partners who have agreed to share the profits of a business to be carried on by all or by any of them acting for all. Here we are giving some of the basic features of a Partnership Firm. In the absence of any of these features, a business can not be termed as a Partnership.
1. Two or more Persons:
Minimum number of persons to start a partnership is two however there is no maximum limit on the number of partners according to the Indian Partnership Act. But the Indian Companies Act has restricted the number of partners in a Banking Business to ten and for any other business it is 20.
2. Agreement among Partners:
Partnership comes into existence by an agreement among the partners willing to enter into a partnership. The agreement can be written or oral. Partnership is not the result of any operation of Law. It is the result of an agreement on the basis of which the rights and duties of the partners are defined.
The purpose of a Partnership firm is to carry on a business. The business must be legal. Any agreement to share the profits of an illegal business is not partnership. Also joint ownership of a property can not be termed as partnership. The business must be continuous in nature. Coming together for a single venture is not partnership.
4. Agreement to share profits:
In a Partnership business the main aim of the partners is to carry on some business for the purpose of earning profits. They share the profits or losses of the business among themselves according to a predetermined ratio. If there is no agreement over the profit sharing ratio these are to be shared equally. A person not having the right to share profits can not be called partner. However the partners can agree that one or more partners among is not liable to share the losses.
5. Business is to be carried on by all or any of them acting for all:
Each partner has the right to participate in the proceedings of the business. The business can be carried by any one or more of them or by all of them. Some partners may be sleeping i.e. they are not actively involved in the activities of the firm. Each partner is an agent as well as a principal. As an agent he can bind all the other partners by his acts. As a principal he is bound by the acts of the other partners.
These were the essentials of a partnership firm. In the absence of any of these a partnership business can not come into existence.