Business is the backbone of any country as business plays a vital role in running the country but running a business is a difficult and challenging task, that is why the governing authority has provided many business forms to make it easier which also includes partnership firms. Anyone who wants to start a business can use any business form according to their convenience, but all the related formalities have to be completed.
Anyone who does not want to start a business alone can start a partnership firm. A partnership firm offers a lot of advantages and the formation of a partnership firm is easy but not as compared to a sole proprietorship business. Partnership firm can be formed in two ways, one by registration and the other by non-registration, both have their own advantages and disadvantages. A partnership firm is the most common form after sole proprietorship.
Table of Contents
What is a Partnership Firm?
Meaning of Partnership Firm
A partnership firm is a business form, and it is a relationship and agreement between two or more persons, but it has a maximum limit of persons. A partnership firm is formed by a partnership deed which contains all the terms and conditions according to which the business is to be run. If the partnership deed does not exist, then the general rules apply.
Partnership firm can be registered and unregistered. If the partnership deed is registered by the registrar, then it is called a registered partnership firm and if not registered then it is called an unregistered partnership firm.
Partnership firms are governed by different laws in different countries like in India it is governed by the Indian Partnership Act, 1932, in the United Kingdom it is governed by the Partnership Act 1890, in the United States it is governed by the Uniform Partnership Act (UPA)*, etc. Due to different laws in different countries, the terms and conditions for a partnership firm may vary but the basic foundation remains the same.
Definition of Partnership Firm
According to Section 4 of the Indian Partnership Act, 1932 – “Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all.”
According to J. L. Hanson – “a partnership is a form of business organization in which two or more persons (up to a maximum of twenty) join together to undertake some form of business activity”.
According to L H Haney – “Partnership is the relation between persons competent to make contracts who have agreed to carry on a lawful business in common with a view to private gain.”
According to the Partnership Act, 1890 (UK) – “Partnership is the relation which subsists between persons carrying on a business in common with a view of profit.”
Features of a Partnership Firm
Following are the features of a partnership firm:
1. Partner:
The members in a partnership firm are called partners and a minimum of two partners are required to form it. There is a limit on the maximum number of partners which determines the governance authority. In a partnership firm, if the partners wish, they can also add a new partner.
2. Agreement:
A partnership firm is an agreement between the partners and in a partnership firm it is called the partnership deed. The partnership deed contains all the terms and conditions according to which the business is to be run. If the partnership deed is absent in the business, then the general rule applies even if one partner has invested more.
3. Sharing:
In this, the profit and loss are divided among the partners according to the ratio determined in the partnership deed. The sharing ratio is also determined while preparing the partnership deed. Usually, the sharing ratio is decided according to the investment of the partners. Note: If there is no partnership deed, then the profit and loss are divided equally among all the partners, even if someone has invested more or less.
4. Registration:
A partnership firm can be established through registration or without registration, it completely depends on the partners. Registering or not registering a partnership firm has its own advantages and disadvantages. If the governing authority has issued any guidelines, it is mandatory to follow them.
5. Unlimited Liability:
The liability of partners in a partnership firm is unlimited. If the assets of the firm are not sufficient to pay the debts, then the personal assets of the partners are used to pay the debts. If the partnership deed is available, then the partners are liable according to their prescribed ratio and if the partnership deed is not available then the liability of all partners becomes equal.
6. Dissolution:
A partnership firm is dissolved when a partner dies or a new partner joins or the existing profit-sharing ratio changes or a partner retires or a partner becomes insolvent or the term of the partnership expires etc. If the partners wish, they can also dissolve the partnership firm by mutual consent.
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QNA/FAQ
Q1. What is Partnership Firm?
Ans: A partnership firm is a business form, and it is a relationship and agreement between two or more persons.
Q2. Is registration of partnership firm compulsory?
Ans: No, registration of partnership firm is optional.
Q3. How is a partnership firm formed?
Ans: A partnership firm is formed by a partnership deed.
Q4. Is partnership deed mandatory to form a partnership firm?
Ans: No, Partnership Deed is not mandatory to form a Partnership firm, but if Partnership Deed is absent then general rule will apply.
Q5. What is the minimum number of members required to form a partnership firm?
Ans: Two
Q6. Is the liability of partners unlimited?
Ans: Yes, the liability of partners is unlimited.
Q7. When is a partnership firm dissolved?
Ans: A partnership firm is dissolved when:
1. A partner dies, or
2. A new partner joins, or
3. The existing profit-sharing ratio changes, or
4. A partner retires, or
5. A partner becomes insolvent, or
6. The term of the partnership expires, or
7. When the partners mutually agree, etc.
Q8. Write the features of a partnership firm.
Ans: Following are the features of a partnership firm:
1. It has two or more partners.
2. It is the result of the relationship of the partners.
3. It is formed by a partnership deed.
4. In this, the partners share the profit and loss among themselves.
5. There is no continuity in it.
6. In this the liability of the partners is unlimited.
7. It is not necessary to get it registered.
8. It should have at least two members.
9. New partners can be included in it.
10. There is a limit on the maximum number of partners.
