A Partnership is an association of two or more persons (maximum of 10 in case of banking and 20 in case of other businesses) for carrying out a business as co-owners for a profit. In India, Partnerships are governed by the provisions of The Indian Partnership Act, 1932 which defines partnership as “the relation between two or more persons who have agreed to share profits of a business, carried on by all or any of them acting for all.” The term business includes all trades, occupation and professions.
The owners of a partnership business are individually called partners and collectively called as firm. The name of the business is called ‘firm name’ which has no legal status though it might accumulate reputation or build image resulting in goodwill.
Usually a partnership is formed to combine capital, labour and varied specialised skills and abilities through an agreement or deed called partnership agreement or deed which might set out various terms including sharing of profit.
Partners can be sued individually and jointly in respect of the business and the liability is unlimited. So each partner is a principal for the outside world and each partner is an agent to other partners.
1. Increased Capital Raising Power and Managerial & Technical expertise compared to sole proprietorship.
2. Easy formation compared to joint stock companies & easy dissolution as agreed by all the partners or 14 days notice to other partners in case of partnership at will.
3. Business Secrecy can be maintained since there is no requirement by law for publication of final accounts
1. Partnership has a less capital raising power and Managerial or Technical expertise as compared to joint stock companies.
2. Unlimited liability renders the partnership unsuitable to take up large scale operations.
3. Absence of separate legal status for the business and continuity
4. The partnership is not transferable unless all the partners agree for the same
In Europe and America, there is a system of Limited Partnership wherein two types of partners – General and Limited / Special Partners – will be there. The liability of the Limited / Special Partners are limited to the extent of their investment only whereas the liability of General partners is unlimited whose personal assets are also liable for the actions of the business.
Joint Stock Companies
If you are wondering how to have limited liability, let me tell you that the answer is Joint Stock Companies.
A company is an artificial person (an association of minimum 7 natural persons) created by incorporation under law, having common seal and perpetual succession. Once it is created by law, a company gets separate identity and it can enter into legal contracts under its common seal. An incorporated company enjoys perpetual (continuous) life until the law itself winds up the company in accordance with law.
The capital is raised in the form of shares and called share capital. Share means a portion of capital raised by issue of shares. The liability is limited to the amount invested in shares. The shares are generally transferable except under certain circumstances when the transfer may be restricted. In view of limited liability and transferability of shares, large number of persons may come forward to invest, enabling raising of enormous capital. Since a company is an artificial person, operating powers get vested with the elected board of directors
and gets delegated mainly to the managing director and the company secretary. In this way most of the shareholders are kept away from the day-to-day operations of the organization.
Ultimately, functional experts are employed to manage and carry out the activities. This results in experts doing the respective job and performance gets enhanced.
1. Huge capital mobilization
2. Facility of Transfer of ownership through transfer of shares
3. Wide distribution of risk of loss with large membership and limited liability
4. Comparatively lower tax liability
1. Excessive legal requirements at all stages from the time of formation.
2. In practice fraudulent management and concentration of economic power & wealth are found
3. Slow Decision making
4. Double Taxation – once on the profit of the company and another in the hands of the share holder
If you further want to know how to have limited liability and still have advantages of partnership firm, the answer is in the form of Private Limited Companies.