PARTNERSHIP BUSINESSES

The partnership form of business organisation was necessitated by the limitations of the sole trader
business to cope with the increased activities. The increase in population and ever widening market
demand more capital, managerial ability and the ability to undertake bigger projects. It was in these
circumstances that the partnership form of business organisation emerged into the business world.

Partnership is defined as ‘the relation, which exists between persons carrying on a business in
common, with a view of profit.’

Membership

The maximum number of members in a partnership is limited to twenty in the case of a non-banking
business and ten for a banking business. Partnership firms of Solicitors, Accountants, Stock
Exchange members and other professions like Patent Agents, Actuaries, Chartered Engineers,
Surveyors, etc., are excepted from the above maximum limit subject to certain restrictions.

The Partnership Deed

As already seen, partnership is the result of an agreement. The partnership agreement may be oral
or in writing. Written partnership agreements will help to avoid future disputes and
misunderstandings among the partners. A written partnership agreement is known as ‘Partnership
Deed.’ It is supposed to contain all relevant and important matters concerning the partnership
business. This is the basis and foundation of the whole partnership enterprise.

Contents of the Partnership Deed

The purpose of having a Partnership Deed will be fully served only if all-important matters are
included in it. But what is important to one partnership may not be that important to another. So it is
difficult to draw a clear cut line as to what should be included and what need not be included. But the
following points are most likely to be included in any Partnership Deed:

 Name of the partnership firm and the nature of business carried on

 Duration of the partnership and its commencement
 Contribution of capital by each partner
 Profits and loss sharing ratios.
 Drawings by partners
 Managerial responsibilities of each partner
 Remuneration of the partners, if any
 Interest chargeable on capital contributions and drawings by the partners
 Matters regarding loans and advances by the partners
 Books of accounts and their custody
 Duties, liabilities and powers of each partner
 Provisions as to admission of new partners as well as retirement and expulsion.
 Provisions regarding revaluation of assets and liabilities of the partnership business on death or
retirement of any of the partners or on dissolution.
 The mode and system of resolving disputes
 Any other matter of importance to the particular type of business.

Rules in the Absence of Partnership Agreement or Partnership Deed

 The rights and duties of the partners are determined by their agreement, or by the Partnership
Deed, if there is one. But if there is no agreement or Partnership Deed, the following rules will
apply according to the Partnership Act of 1890:
 Profits and losses shall be shared equality.
 All partners are to contribute equal amounts of capital to the business.
 Every partner is an agent to all other partners. This means any contract made by one partner on
behalf of the business binds all other partners.
 No partner can claim a salary for working in the partnership business.
 No partner can claim interest on his or her capital invested in business.
 Books of accounts must be kept at a place of business and all partners must have access to the
books.
 It should be realized that the Partnership Act does not apply if there is a Partnership Deed or
Agreement, as long as it is not contradicting the provisions of the law.

NB: The partnership Act of 1890 was meant to guide the first form of partnership known as Ordinary
Partnership where all partners are actively involved in running the business and have unlimited
liability. The introduction of the Limited Partnership where some partners are not involved in the daily
running of the business and have limited liability is guided by the later Partnership Act of 1907.

Sources of capital for partnerships

The sources of capital for a partnership include:

 Contributions made by partners from their individual savings.

 Loans from members, relatives and friends.
 Bank loans and overdrafts.
 Trade credit. i.e. goods and services obtained on credit from suppliers.

Different Kinds of Partnerships

According to the nature and duration, partnerships can be classified as follows:

 General Partnerships – These are partnerships in which all the partners are with unlimited
liability.
 Limited Partnerships – Partnerships having at least one partner with limited liability, is called a
Limited Partnership. There should be two types of partners in a Limited Partnership. They are
partners with limited liability and at least one partner with unlimited liability. Partners with limited
liability are known as ‘Limited Partners’, and partners who are not limited partners are known as
‘General Partners’. The rights of the limited partners are to some extent restricted. They cannot
withdraw any part of the capital contributed by them Limited Partners are not allowed to take an
active part in the management of the partnership business, and as such cannot act as agents of
the firm.

Types of Partners

 Partners can be classified into different groups on the basis of their position, interest taken by
them, their rights, duties and liabilities.
 Active Partners, Working Partners or Managing Partners: - Partners, who take an active part
in the day-to-day working and management of the firm, are called Active Partners or Working
Partners or Managing Partners. All partners, including those who are not active in the
management of the firm, are bound by the actions of the Active Partners in the ordinary course
of the business
 Dormant or Sleeping Partners: - Some partners may not be taking an active part in the
conduct of the partnership business other than contributing the share capital and getting a share
in the profits. Such partners are called Dormant or Sleeping Partners. They are also liable for the
debts and liabilities of the firm as far as outsiders are concerned.
 Nominal Partner: - Partners who are neither contributing to the Share Capital or receiving any
share in the profit, but simply allows their names to be used as partners in the firm, are called
Nominal Partners. They are also liable to the third parties as other partners are.

Advantages of Partnership

 A partnership is easy to set up. It does not involve long and time consuming procedures
 More people are involved in the business so more capital can be raised than it is the case with
sole trader who is alone.
 Division of labour is possible as there are many people. It is possible to find tha6t each partner
has a different skill. This creates greater efficiency as compared to the sole proprietor.
 Expenses and management of the business is shared. As a result, one or two partners can
afford to take a leave and there would still be someone to carry on the business, unlike with the
sole trader proprietor who must be there personally all the time.
 The individuality of each partner is not totally lost as many of the personal advantages of the
sole trader are maintained by the partners.
 There is greater continuity in a partnership than is the case with sole proprietorship. If for one
reason or the other, one partner leaves or even dies, a new partnership is formed. In sole
proprietorship however, if the owner dies the business might die with him/her.
 Decision-making is consultative. As a result, the quality of decisions tends to be better than that
of a sole trader.
 A partnership is not required to publish its accounts annually so there is secrecy in the business
Disadvantages of Partnership

 Decisions may be delayed by disagreements among partners. Because many people are
involved there are naturally bound to be disagreements, which can be very dangerous to the
business
 Partners have unlimited liability and are therefore personally liable for the debts of the business.
This puts their personal assets at risk
 Lack of capital may limit expansion. The capital of a partnership is raised by partners’
contributions. This may not raise enough money to meet all the need of the business
 If one partner leaves or dies a new partnership agreement is required. This can be very irritating.
 Membership in a partnership is limited to twenty (except for professional partnerships) This is a
problem because it restricts the firm’s ability to raise more capital
 One partner’s decision can be binding on the other partners even if it’s a wrong decision. This
makes forming partnerships with someone whose business initiative is suspect a very risky
affair.
 The relationship in a partnership is a delicate one and can be broken up by conflict between
partners sometimes caused by a mere personality clash between partners.
 One or a few partners may be honest and hardworking but because profits are shared by all the
hardworking partners may be discouraged.

Similarities between the sole trader and the partnership

 Both the sole trader and the partnership have unlimited liability.
 Both the sole trader and the partnership have no separate legal identity.
 Both the sole trader and the partnership have no assured continuity of existence.
 Both the sole trader and partnership business are controlled directly by the owners.
 In both the sole trader and the partnership, the business affairs are kept private. Financial
accounts are not made known to members of the public.

Comparisons of Partnership and Sole Proprietorship Businesses

Partnership Sole Proprietor
The capital of the partnership is contributed by The capital of the sole proprietor is from his
the partners saving and provided by entirely the owner of the
business

Have unlimited liabilities Have unlimited liabilities

Continuity depend on the trust and good working Continuity is dependent on the good health of the
relationship developed proprietor. Should he die the business most likely
dies along

Profits are shared between or among the The profit is all for the proprietor
partners