Lesson 7 Partnership Suppose you want to open a restaurant in your locality. You will need to gather together a lot of things. You may find that it is not possible to arrange the money required to start and run the business alone. You may then talk to your friends and all of you agree to run the restaurant by contributing a certain amount of money and the other things required. So all of you join hands together to become the owners and share the profits and losses. This is another form of business organisation. It is different from what you have learnt in the previous lesson. In this lesson let us learn more about it. 7.1 Objectives After studying this lesson, you will be able to : ! define partnership; ! identify the features of partnership form of business organisation; ! state the advantages and disadvantages of partnership form of business organisation; ! recognise the different types of partners; ! distinguish between partnership and sole proprietorship form of business organisation; and ! suggest the suitability of partnership form of business organisation. 7.2 Meaning of Partnership You have studied that sole proprietorship form of business organisation has certain limitations. Its financial and managerial resources are limited. It is also not possible to expand the business activities beyond a certain limit. In order to overcome these drawbacks, another form, i.e., partnership form of business has come into existence. Let us
Business Studies first find out what is 'partnership'. It is basically a relation between two or more persons who join hands to form a business organisation with the objective of earning profit. The persons who join hands are individually known as ‘Partner’ and collectively a ‘Firm’. The name under which the business is carried on is called ‘firm name’. Sultan Chand & Co, Ram Lal & Co, Gupta & Co are the names of some partnership firms. The partners provide the necessary capital, run the business jointly and share the responsibility. You must be thinking how much capital each partner contributes? Do all the partners jointly manage the business or can any of them manage the business on behalf of others? Who will take the profits? If there is any loss then who will suffer the loss? Yes, these are the few questions that might be coming to your mind. Actually, when you invite your friends to start such a business, it should be the duty of all of you to decide (i) the amount of capital to be contributed by each one of you; (ii) who will manage; (iii) how will the profits and losses be shared. Thus, there must be some agreement between the partners before they actually start the business. This agreement is termed as ‘Partnership Deed’, which lays down certain terms and conditions for starting and running the partnership firm. This agreement may be oral or written. Actually, it is always better to insist on a written agreement among partners in order to avoid future controversies. A partnership firm is governed by the provisions of the Indian Partnership Act, 1932. Section 4 of the Indian Partnership Act, 1932, defines partnership as “a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”. 72
Partnership Intext Questions 7.1 Fill in the blanks with the appropriate word. i. Partnership is basically a ________ between persons. ii. The name under which the business of partnership is carried on is called ________. iii. The agreement which lays down terms and conditions of partnership is termed as _________. iv. Section 4 of the _________ Act 1932 defines partnership. v. Partners agree to share ____________ of business. 7.3 Features of Partnership form of business organisation After having a brief idea about partnership, let us identify the various features of this form of business organisation. i. Two or more Members - You know that the members of the partnership firm are called partners. But do you know how many persons are required to form a partnership firm? At least two members are required to start a partnership business. But the number of members should not exceed 10 in case of banking business and 20 in case of other business. If the number of members exceeds this maximum limit then that business cannot be termed as partnership business. A new form of business will be formed, the details of which you will learn in your next lesson. ii. Agreement: Whenever you think of joining hands with others to start a partnership business, first of all, there must be an agreement between all of you. This agreement containso the amount of capital contributed by each partner; o profit or loss sharing ratio; o salary or commission payable to the partner, if any; o duration of business, if any ; o name and address of the partners and the firm; o duties and powers of each partner; o nature and place of business; and o any other terms and conditions to run the business. iii. Lawful Business - The partners should always join hands to carry on any kind of lawful business. To indulge in smuggling, black marketing, etc., cannot be called partnership business in the eye of the law. Again, doing social or philanthropic work is not termed as partnership business. iv. Competence of Partners - Since individuals join hands to become the partners, it is necessary that they must be competent to enter into a partnership contract. Thus, minors, lunatics and insolvent persons are not eligible to become the partners. However, a minor can be admitted to the benefits of partnership i.e., he can have a share in the profits only. 73
Business Studies v. Sharing of Profit - The main objective of every partnership firm is sharing of profits of the business amongst the partners in the agreed proportion. In the absence of any agreement for the profit sharing, it should be shared equally among the partners. Suppose, there are two partners in the business and they earn a profit of Rs. 20,000. They may share the profits equally i.e., Rs. 10,000 each or in any other agreed proportion, say one forth and three fourth i.e. Rs 5,000/- and Rs. 15000/-. vi. Unlimited Liability - Just like the sole proprietor the liability of partners is also unlimited. That means, if the assets of the firm are insufficient to meet the liabilities, the personal properties of the partners, if any, can also be utilised to meet the business liabilities. Suppose, the firm has to make payment of Rs. 25,000/- to the suppliers of goods. The partners are able to arrange only Rs. 19,000/- from the business. The balance amount of Rs. 6,000/- will have to be arranged from the personal properties of the partners. vii. Voluntary Registration - It is not compulsory that you register your partnership firm. However, if you don’t get your firm registered, you will be deprived of certain benefits, therefore it is desirable. The effects of non-registration are: o Your firm cannot take any action in a court of law against any other parties for settlement of claims. o In case there is any dispute among partners, it is not possible to settle the disputes through a court of law. o Your firm cannot claim adjustments for amount payable to or receivable from any other parties. viii. No Separate Legal Existence - Just like sole proprietorship, partnership firm also has no separate legal existence from that of it owners. Partnership firm is just a name for the business as a whole. The firm means the partners and the partners collectively mean the firm. 74 ix. Principal Agent Relationship - All the partners of the firm are the joint owners of the business. They all have an equal right to actively participate in its management. Every partner has a right to act on behalf of the firm. When a partner deals with other parties in business transactions, he/she acts as an agent of the others and at the same time the others become the principal. So there always exists a principal agent relationship in every partnership firm. x. Restriction on Transfer of Interest - No partner can sell or transfer his interest to any one without the constent of other partners. For example - A, B, and C are three partners. A wants to sell his share to D as his health does not permit him to work any more. He can not do so until B and C both agree. xi. Continuity of Business - A partnership firm comes to an end in the event of death, lunacy or bankruptcy of any partner. Even otherwise, it can discontinue its business at the will of the partners. At any time, they may take a decision to end their relationship.