Partnership business- Advantages, disadvantages and statutory
formalities to start a partnership business
Indian
Partnership Act, 1932 defines partnership as the relationship between persons
who have agreed to share the profits of a business carried on by all or any of
them acting for all. When two or more persons jointly decides to form and run a
business with joint ownership working together with a profit motive, and share
profits or losses arising out of the business, such business is called a
partnership business. Partners contribute towards money, property, labour and
skill in the agreed proportions. The partnership business is collectively
called a firm. A minimum of two persons and a maximum of fifty persons can form
a partnership business. Partners must have attained 18 years age and should not
be a lunatic or insolvent. Business conducted by a firm can be any trade,
occupation or profession. Charitable work is not allowed in a firm. A partnersgip
business is formed with a profit motive. Sharing of profits is mandatory in
partnership business, but sharing of losses is not mandatory. Partners are
considered as mutual agents of the partnership firm.
Partnership
deed is the document that contains the details regarding the rights and
liabilities of the partners. It is a written agreement between the partners
setting out the terms and conditions among the partners for the smooth running
and management of the business. The clauses in the partnership deed includes
name of business, names and addresses of the partners, principal office address
of the business, proposed business activities, investment details, interest on
capital, managing partner, bank account operation, admission, retirement or
death of partners, amendment of any clause in partnership, arbitration and
dissolution of partnership firm. In Kerala, a partnership deed is prepared in a
stamp paper worth Rs.5,000/-. Alteration in any clause of the deed requires an
amendment deed in Rs.1000/- stamp paper. A firm in Kerala can be registered at
the registrar of firms, Trivandrum. Registration of a partnership deed is not
mandatory, but in any legal issues, the registration is required. Indian
partnerships are ruled and governed by the Indian Partnership Act, 1932.
A partnership
firm does not have a separate legal entity. All the partners of the firm are
jointly and severally liable for the acts of the firm. Partnership business has
an unlimited liability. Partners are personally liable for the debts of the
firm. A partnership may be a “partnership at will” or a “particular
partnership”. A partnership at will is a continuing long term partnership which
intends to do a continuing business meanwhile a particular partnership is
generally a short term partnership intended to complete a specific project. Partnership
firm is ideal for small scale and medium scale business.
Advantages of
Partnership business:
- Skills of more persons are available when compared to sole proprietorship.
- Start up costs of the business is low and more capital is available.
- Firm have a greater borrowing capacity than a sole trader.
- Have low external regulation which results in smooth internal management.
- Experts in the field can be added as partners.
Disadvantages of
partnership business:
- Unlimited liability of the partners.
- There is always a risk of disagreement between the partners.
- Joint and several liability of the partners makes the partners liable for their share of debts as well as joint debts of the firm.
- Each partner is liable for the acts of other partners on behalf of the firm.
- Taxation of partnership firm is more complicated than that of a sole trader.
The partnership
business is an ideal business form for small and medium scale business which
requires a medium level investment. It is good for manufacturing units which
are of a medium scale nature. It has the advantage of more freedom and mixing
of managerial capacities of the different partners.
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