Nature of Partnership

Nature of partnerships : A partnership is a distinctive form of business organisation where two or more individuals come together with a common goal: to operate a business and share in its profits. Unlike companies, partnerships are grounded in mutual trust and cooperation among the partners, who contribute their resources, skills, and efforts to achieve collective success. Understanding the nature of partnerships involves exploring their formation, characteristics, and the legal framework that governs them.

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What is a Partnership?

Nature of Partnership

• Formation : A partnership is based on an agreement between two or more individuals who agree to pool their resources (capital, labour, skills, etc.) to operate a business together. The Indian Partnership Act of 1932 does not impose an upper limit on the number of individuals in a partnership business. However, the Companies Act of 2013 specifies the following maximum number of partners allowed in a business:
  • Banking businesses can have a maximum of 10 partners.
  • Other types of businesses are limited to a maximum of 20 partners.
  • Exceeding these limits renders the firm illegal.
• Number of Members : A partnership must have at least two members, with a maximum limit often set by law or agreement. However, certain types of partnerships, like limited partnerships, may have different rules regarding the number of partners and their roles, depending on the jurisdiction.
• Mutual Agency : Each partner in a partnership acts as an agent for the other partners and the partnership itself. This means each partner has the authority to bind the partnership to contracts and agreements made within the scope of the partnership's business.
• Profit Sharing : Partnerships operate on the principle of profit sharing, where the business's profits and losses are distributed among the partners according to the terms of the partnership agreement. Typically, profit sharing is based on the partners' capital contributions, but it can also be based on other factors agreed upon by the partners.
• Unlimited Liability : In a general partnership, partners have unlimited liability for the partnership's debts and obligations. This means each partner is personally liable for the partnership's debts and liabilities, and their assets can be used to satisfy its obligations.
• Joint and Several Liability : Partners in a general partnership have joint and several liability, meaning each partner is individually and collectively responsible for the partnership's debts and obligations. Creditors can pursue any partner for the full amount of the debt, regardless of each partner's share of ownership.

Scope of Partnership Firm

Partnership Deed

• Names and addresses of the firm and its main business
• Names and addresses of all partners
• Contribution of capital by each partner
• The accounting period of the firm
• The date of commencement of the partnership
• Rules regarding the operation of bank accounts
• Profit and loss sharing ratio
• The rate of interest on capital, loans, drawings, etc.
• Mode of auditor’s appointment, if any
• Salaries, commissions, etc., if payable to any partner
• The rights, duties, and liabilities of each partner
• Treatment of losses arising from the insolvency of one or more partners
• Settlement of accounts upon the dissolution of the firm
• Methods for settling disputes among the partners
• Rules to be followed in the case of admission, retirement, or death of a partner
• Any other matters related to the conduct of business
• Typically, all matters affecting the relationships among the partners are covered in the Partnership Deed.

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