Features of Partnership

1. Existence of business:

The objective of partnership must be to do some type of business. Business here means any activity leading to earn profit persons joining together and agreed to do charitable work or for formation of any club for entertainment would not be treated as partnership due to absence of the business.

2. Numbers of persons:

There must be at least two or more persons to form a partnership firm. As per Indian partnership Act, the minimum number of person required is to buy it does not prescribe the maximum limit for the purpose.

3. Contractual relationship:

There should be a contractual relationship between the persons forming partnership. Persons

competent to contract can be partners.

They have to mutually agree and jointly decide to go for any business activity as per agreed terms and conditions. This may be either written or oral form among the partners.

4. Sharing of Profits:

Business is carried on to share profit and not to incur losses. The profits generated by the firm are to bestaned among the partners on an agreeable proportion. Loss it any has also to be borne by them on that ratio.

5. Agency:

Partnership contract is based on principle of agency. Each partner is an agent of other partners. The business is carried on by all or any one of them acting on behalf of all other partners.

6. Utmost good faith:

The partners should have utmost good faith in each other. They should be just and honest. They should present true accounts and must disclose true information to one another.

7. Unlimited liability:

Like sole proprietorship, every partner has an unlimited liability in respect of debts of the firm. If the property or the assets of the firm are insufficient to meet the claims of the creditors, the private property of the partners can be attached to meet the claims of the creditors.

8. Restriction on transfer of ownership:

A partner cannot transfer his share in business to an outsider without the consent of all other partners. This is because the partnership agreement is based on contract among individuals.

9. Capital contribution:

Each partner contributes his share in the capital of the partnership firm. The capital contribution need not be equal or in any particular proportion. It must be as per the agreement each partner is behind to contribute that amount. A partner may be admitted to partnership without any capital contribution.

10. Duration of the partnership:

The existence of the partnership firm continues at the pleasure of the partners. Legally of partnership comes to an end, if any partner dies or becomes insolvent or retries.

The remaining partners may agree to continue the business under the original firm’s name after settling the claims of the outgoing partner.

Advantages of Partnership

Capital – Due to the nature of the business, the partners will fund the business with start up capital. This means that the more partners there are, the more money they can put into the business, which will allow better flexibility and more potential for growth. It also means more potential profit, which will be equally shared between the partners.

Flexibility – A partnership is generally easier to form, manage and run. They are less strictly regulated than companies, in terms of the laws governing the formation and because the partners have the only say in the way the business is run (without interference by shareholders) they are far more flexible in terms of management, as long as all the partners can agree.

Shared Responsibility – Partners can share the

responsibility of the running of the business. This will allow them to make the most of their abilities. Rather than splitting the management and taking an equal share of each business task, they might well split the work according to their skills. So if one partner is good with figures, they might deal with the book keeping and accounts, while the other partner might have a flare for sales and therefore be the main sales person for the business.

Decision Making – Partners share the decision making and can help each other out when they need to. More partners means more brains that can be picked for business ideas and for the solving of problems that the business encounters.Disadvantages of Partnership

Disagreements – One of the most obvious disadvantages of partnership is the danger of

disagreements between the partners. Obviously people are likely to have different ideas on how the business should be run, who should be doing what and what the best interests of the business are. This can lead to disagreements and disputes which might not only harm the business, but also the relationship of those involved. This is why it is always advisable to draft a deed of partnership during the formation period to ensure that everyone is aware of what procedures will be in place in case of disagreement and what will happen if the partnership is dissolved.

Agreement – Because the partnership is jointly run, it is necessary that all the partners agree with things that are being done. This means that in some circumstances there are less freedoms with regards to the management of the business. Especially compared to sole traders.

However, there is still more flexibility than with limited companies where the directors must bow to the will of the members (shareholders).

Liability – Ordinary Partnerships are subject to unlimited liability, which means that each of the partners shares the liability and financial risks of the business. Which can be off putting for some people. This can be countered by the formation of a limited liability partnership, which benefits from the advantages of limited liability granted to limited companies, while still taking advantage of the flexibility of the partnership model.

Taxation – One of the major disadvantages of partnership, taxation laws mean that partners must pay tax in the same way as sole traders, each submitting a Self Assessment   tax return each year. They are also required to register as

self employed with HM Revenue & Customs. The current laws mean that if the partnership (and the partners) bring in more than a certain level, then they are subject to greater levels of personal taxation than they would be in a limited company. This means that in most cases setting up a limited company would be more beneficial as the taxation laws are more favourable (see our article on the Advantages and Disadvantages of a Limited Company).

Profit Sharing – Partners share the profits equally. This can lead to inconsistency where one or more partners aren’t putting a fair share of effort into the running or management of the business, but still reaping the rewards.

KINDS OF PARTNER

1.     Active Partner (Managing or Working Partner)A person who takes active part, in the affairs and management of the business is called active partner. He contributes his shares in the capital and is also liable to pay the obligations of firm.2.     Nominal PartnerHe is not in reality a partner of firm but his name is used as if he is a member of the firm. He is not entitled in the profit or loss of the business but he is liable to all the acts of the firm. The person who has good prestige and status is given, the position of nominal partner. 3.     Sub-PartnerThe person who receives a share of profit from one of the regular partners is called the Sub-Partner. He is not liable to pay the debt is of the firm. He has no rights and privileges against the firm.

4.     Silent Partner (Silent form managing point of view)He is that kind of partner who does not participate in the affairs of the business but is known to outsiders as a partner of the firm. He is liable to pay the debts of the firm like other partner.5.     Secret Partner (Secret from public point of view)He is active in the running life of the firm but public does not know him as partner of the firm. He pays his share in the capital and is liable to settle the creditors of the firm.6.     Sleeping Partner or Dormant

Partner (Sleeping From Both Points of View i.e. public and managing)

A person who (a) does not conduct the management of the firm personally (b) is not known to the outsiders as a partner of the firm, is called sleeping partner. But he invests his amount in the business and is liable to clear the

debts of the firm. He is also called dormant partner.7.     Minor PartnerThere is no restriction to join the minor in the partnership by law. Although he may become partner but with the consent of all existing partners. In this case, he can be admitted to the profits of the firm only but not losses. He is not personally liable for the obligations of the firm. But minor has the right to inspect and copy .the accounts of the firm. Within six months of his attaining maturity, he has to give public notice whether he wants to remain partner or not. After his decision, he will deemed as full fledged partner.8.     Quasi PartnerA person who has retired from the running management life of the firm but he does not withdraw his capital from the business is know as quasi-partner. So his capital is considered as a loan and he receives interest at the

rate varying with the profit. Really he is not a partner but he is a Deferred Creditor. 9.     Senior PartnerA person who brings large portion of capital in the business is called senior partner. He has prominent position in the firm due to his experience, skill, energy, age and other abilities.10.   Junior PartnerHe invests minor portion of capital in the business and so he has small share in the profits. He is junior to an other partner in the firm due to his age, experience and other factors.11.   Holding Out Partner (Estoppels partner)A person who declares by word of mouth as partner of the firm is called holding out partner. In reality he is not a regular partner so he is not entitled to receive share of profit. Such persons are liable to those parties who

have given credit on the faith of such representation.12.   Salaried PartnerAn individual who does not bring anything i.e. amount or goods in the firm but has right to receive salary or share in the profit or both is named as salaried partner. He is known to the outside world as a partner and is liable for all the acts of the firm like other partners.13.   partners in Profit OnlyHe is an individual who gets a share of the profits only without being liable for the losses. He does not participate in the management of the business. He will be liable to outsiders for all acts of the firm.

MEANING AND CONTENTS OF PARTNERSHIP DEEDPartnership firm can be established with an agreement between the partners. This agreement may be written or oral. An oral agreement may be the cause of dispute in future. So, it is better to have a written agreement in order to avoid future conflicts. The written agreement duly signed by the partners is known as partnership deed or agreement or Articles of Partnership. It is the written contract between partners. It contains the term and conditions of thepartnership.

Partnership deed forms the basis of partnership. Partnership deed is adocument containing all the matters according to which mutual rights, duties and liabilities of the partners in the conduct and management of the affairs of the firm are determined. Hence, it contains the terms and conditions of thepartnership. It is helpful in preventing and resolving disputes among the partners. A partnership deed can be altered at any time with the consent of all the partners.

The past experiences of partnership firms show that there are disputes among partners over many things and these results in the closure of the firm. If the areas of dispute or conflict are spotted earlier and a clear understanding is reached, then the business can run smoothly. So, partnership deed or agreement is a document which is prepared to explain important points so that the chances of conflict are minimized. Even if there is a dispute it helps in easier settlement. So, written deed should be preferred.

Main Content of Partnership Deed

Some of the important clauses to be included in a partnership deed are as follows:

(1) Name of the firm and Its Address : The deed should contain of the firm and place of its business.

(2) Name and Address of Partners : The deed should also contains the names and address of

all partners.

(3) Nature of Firm’s Business : The nature of business proposed to be carried and its limitation should be included in it.

(4) Duration of Partnership : It the partnership is established for a fixed duration or for a fixed work, it should be stated in it.

(5) Partners’ Capitals : The deed should contain the total amount of capital and contributions by each partner.

(6) Interest on Capital : If the partners decide to change interest on their capitals, the rate should be mentioned in the deed.

(7) Drawing and Interest on Them : The deed should contain the limit of drawings by every partner and the rate of interest to be charged.

(8) Division of Profit : Profit and loss sharing ratio should be stated in the deed. If it is not mentioned partners are authorized to

share equally according to Partnership Act.

(9) Partners’ Salary and Commission : If the partners decide to pay salary and commission to the partners, the deed should contain the amount of salary or commission payable to any partner for the services rendered to the business.

(10) Rights and Duties of Partners : If any partner has some special rights and duties regarding to conducts of business or if the liability of any partner is limited to the capital invested by him, these facts should also be mentioned in it.

(11) Admission and Retirement of Partners ; After the establishment ofpartnership some new partners may be admitted and some may retire from the business. If any definite procedure is to be adopted at the time of admission or retirement of partner, it should be stated in it.

(12) Death of a Partner : The procedure of calculating the amount due to a deceased partner

and the method of its payment to his successors, should also be decided and stated in the deed.

(13) Valuation of Goodwill ; The method of valuation of goodwill at the time ofadmission, retirement or death of a partner should be also be clearly stated in it.

(14) Revaluation of Assets and Liabilities ; The method of revaluation of assets and liabilities on admission, retirement or death of a partner should also be clearly stated in it.

(15) Accounts and Audit : The procedure of keeping accounts and their audit should also be stated in it.

(16) Dissolution of Partnership ; The deed should contain the firm and the method of the final settlement of accounts.

(17) Arbitration Clause ; In case of disputes the method of appointing arbitrators and their rights should be clearly mentioned.