Partnership denotes a business structure where two or more individuals agree to share profits, losses, and responsibilities in running their business. The characteristics that define a partnership are mutual agreement, shared decision-making, and unlimited liability. In this way, a partnership is distinguished from sole proprietorships or companies. Depending on the partnership agreement or partnership deed, a partnership works. This agreement specifies the duties of each partner, profit-sharing ratios, and responsibilities.
The special characteristics of partnerships make them the preferred choice for businesses that need mutual investments, knowledge, and better decision-making. Some key features of a partnership are agreement, profit-sharing, mutual trust, and liability for the partners. The features of partnerships, types of partners, and legality of the partnership will be discussed in this article as provided under the Indian Partnership Act.
What is Partnership?
A partnership involves an agreement between two or more persons that binds them in introducing a business. Usually, this partnership shares the profits of the company and accepts losses. The agreement can be oral or written, but a written partnership deed offers the highest legal clarity.
The features of partnership state under the Indian Partnership Act that partners need to work together with mutual trust and confidence, contribute capital, share profits, and be liable for the business debts. A partnership depends on mutual trust and understanding, which makes drawing up clear agreements essential to avoiding disputes.
Defining Partnership
According to the Indian Partnership Act of 1932, a partnership is a relation between two or more persons who have agreed to share the profits of a business carried on by all or any of them further acting for all. This means that partners are not only considered owners but also agents of the firm since every partner can act on behalf of the business.
Features of Partnership
The features of the partnership firm distinguish it from other business entities. These features of partnership lay down the foundation of how a partnership operates and ensure the smooth functioning of the business.
Agreement Among Partners
The partnership begins with an agreement, termed the partnership agreement or partnership deed. This agreement specifies the roles and responsibilities, sharing of profit, and other regulations. A partnership deed can be oral or written; however, written form is best whenever disputes arise. The partnership deed will state the firm’s name, capital contributions, and rules for entering or withdrawing partners.
Sharing of Profits and Losses
Headings and Titles: The features and benefits of a partnership firm are shared by the partners, who share profits and losses. The partners divide the profit of the firm according to the agreement. However, the law believes that gains and losses are shared equally without a written contract. It means that every partner profits from the successes, and every one of them is afflicted when there are losses. Such an approach motivates partners to exert maximum effort and make shrewd decisions.
Unlimited Liability
The unlimited liability of partners is a special feature of partnerships. All business debts are borne by the partners individually by their assets in case the business has financial debt, which is in sharp contrast to companies, which limits the liability to shareholders.
For example, a partnership firm incurs losses of up to 10 lakhs, and the businesses’ assets account for only five lakhs; the rest has to be financed from their pockets.
Mutual Agency
The special nature of a partnership is that it is a mutual agency by which each partner acts as an agent of the firm. If one partner takes action regarding the firm’s business, all partners are bound by such action.
For example, a partner signs a loan agreement on behalf of the firm, and all the partners are obligated to repay that loan, irrespective of whether they were present there or not.
Limited Life of Partnership
A partnership is not immortal. It is dissolved automatically when a partner dies, resigns, or becomes bankrupt unless an agreement states differently. The main points of a partnership firm include the flexible relocation or dissolution of the business itself.
Legal Recognition Under the Indian Partnership Act
The features of partnership provided within the Indian Partnership Act boil down to the point that no partnership requires mandatory registration. This is because a registered partnership firm enjoys legal benefits such as the ability to sue and enforce contracts.
Such legal features of partnership tend to give importance to registration as an important step in the security of the business in the long shot.
Features of Partnership as per Indian Partnership Act, 1932
The 1932 Indian Partnership Act is the statute in India that regulates partnerships of various kinds and enables the partnership firm to function in the legal framework set as per the Act. It contains how a partnership constitutes the rights, duties and liabilities of the partners in a partnership business. Thus, it protects the lawful conduct of partnerships and ensures adequate protection for all persons involved.
Legal Recognition of Partnerships
According to the Indian Partnership Act of 1932, a partnership is an agreement between two or more persons to carry on a mutual business and share the profits and losses. From this, it may be construed that this partnership is recognised as an entity, though it cannot be regarded as a company since it has no separate legal existence in law.
A partnership firm is not a separate legal entity like a company. This means that the firm and its partners are legally regarded as one. If a lawsuit is filed against the firm or if the firm incurs debts, the partners will be personally accountable for those liabilities.
A firm does not possess the characteristic of perpetual succession, meaning it is dissolved upon any partner’s death, resignation, or dispute unless stated in the agreement. On the whole, partnerships can either be oral or written, but a written partnership deed is always better for avoiding confusion when asserting legal rights.
Key Legal Features of Partnerships
- There are provisions for recognising registered and unregistered partnerships within the Act.
- The firm has no separate legal status, making the partners immediately liable for business activities.
- Partners act as agents of the firm, being able to bind the firm to contracts and responsibilities.
- This helps ensure that legal characteristics promote the transparency and accountability of business operations.
Registration Obligations of a Partnership Firm
Mandatory registration for a partnership firm is not mentioned in the Indian Partnership Act of 1932. Unregistered partnerships enjoy certain legal advantages, such as contract enforcement and filing suits in a court of law.
Steps in Partnership Firm Registration
To legally register a Partnership Firm, the process entails the following:
- The procedure of Registering a Partnership Firm
- To legally register a partnership firm, the steps should be as follows:
- Drafting of the Partnership Deed
Details in Partnership Deed
- Name of the firm and partners
- Profit-sharing ratio
- Duties and responsibilities of each partner
- Capital contribution by each partner
- The rule for the admission or removal of partners
- Dissolution process
- Application to the Registrar of Firms
After preparing the partnership deed, a formal application should be submitted to the Registrar of Firms in the respective state.
Payment of Registration Fees
The registration fees vary from state to state and usually lie in the range of ₹200-₹2000.
Verification and Approval
The Registrar verifies the submitted documents and, on being satisfied, issues the Registration Certificate.
Rights and Liabilities of Partners
The Indian Partnership Act 1 of 1932 confers certain rights upon partners for carrying out their business activities fairly.
Right to Participate in Business
Unless otherwise agreed, every partner has a right to participate in the business and management. No partner can be excluded from management without the consent of others.
Right to Share Profits
Partners share the profits and losses of the business according to the profit-sharing ratio in the partnership deed. If no particular ratio is stated, profits will be shared equally.
Right of Access to Accounts and Books
Every partner can examine the firm’s accounts and account books. This promotes trust and transparency among partners.
Right to Claim for Losses
If any partner suffers a loss due to the firm’s acts, he can claim from the firm for such loss. This protects partners from sudden losses in business.
Right to be Advised
If a partner has to incur expenses from his pocket for the partnership, he has the right to claim such costs from the partnership.
Liabilities of Partners in Partnership Firm
With rights go responsibilities. The partners in a partnership firm have serious liabilities per the law.
Unlimited Liability
The greater liability foisted on partners is that they are personally liable for the business’s debts. If the firm cannot pay off its debt, the partners are responsible for paying off the debts from their assets. In contrast to companies, partners do not benefit from limited liability.
Joint Liability
All partners share the business debts jointly. In this case, if one partner borrows from the bank, all partners must repay the loan jointly.
Liability for Acts of Third Parties
Partners can be held liable for acts of third parties even if they do not know such acts in fraud cases.
The Duty to Act in Good Faith
Every partner has to act in the best interest of the firm. Partners are not allowed to compete against the firm or do anything detrimental to its interest.
Types of Partners
Different Businesses Require Different Types of Partners Based on Their Roles and Contributions. Types of partners are used to define their rights, responsibilities, and liabilities in the firm.
1. Active Partner
An active partner is a fully engaged partner in the day-to-day working of the business. He is responsible for making decisions, supervising employees and dealing with customers.
For instance, at almost any law firm, the senior partners will carry a caseload, meet clients and manage the whole active partnership within that law office.
2. Sleeping Partner
A sleeping partner (or silent partner) gives capital to the firm but does not take part in everyday running or operation. They share profits and losses but do not manage the business.
An example could be that of a restaurant where one partner is funding the business and the other manages the whole operation of the restaurant.
3. Nominal Partner
The nominal partner does not provide capital or participate in the management but lends a name to a firm for a better reputation.
For example, a retired business person may provide his name for branding to attract investors and clients, but he has no real partnership with the business.
4. Partner by Estoppel
Partner by estoppel means that the person is not formally a partner but behaves to deceive outsiders with the prospect that he is a partner. If he makes a fool out of the third party in this way, he is responsible for the firm’s debts.
For example, suppose a person comes and sits in business meetings per the modality of signing documents as a partner. In that case, he is made responsible for the company’s financial commitments.
5. Minor Partners
Minor partners are those below 18 years of age; they can join a partnership. However, they come with limitations to rights, such as they share profits but do not suffer losses.
For instance, a minor child of the owner of a family business can be admitted as a partner but would be receiving business profits without any liability for debts incurred by that business.
Features of Partnership FAQs
1. What are the features of a partnership?
The features of partnership are mutual agreement, profit-sharing, unlimited liability, mutual agency, and no separate legal entity.
2. What are the main features of partnership under the Indian Partnership Act?
An agreement, shared profits, mutual responsibility, and unlimited liability are the features that make a partnership, as per the Indian Partnership Act 1932.
3. What is the difference between a partnership and a company?
While a partnership has no separate legal identity, a company is a separate entity. Partnerships usually have unlimited liability; limited liability is in place for companies and owners.
4. Can a partnership exist without a written agreement?
Yes, a partnership can exist without a written agreement; still, it would be better to have a partnership deed to minimise the chances of conflict in future matters.
5. Why do businesses go for partnerships?
Entrepreneurship prefers partnership as it shares investment expertise and makes decision-making easier.
