What are the characteristics of partnership?

Definition: The term partnership, is used to mean a business structure wherein two or more individuals, come together for undertaking a lawful business and have agreed to share the profits and losses arising from it. The management and operation of the business should be performed either by all the partners or any of them, acting for all the partners.

Table of Contents Show

Characteristics of Partnership
Types of Partnership
Characteristics
Who can be partners?
What are the characteristics of a partnership?
Is partnership necessary for carrying on business?
Is it necessary to have a written agreement?
Characteristics
Advantages and Disadvantages
Partnerships vs. Corporations
1. According to Object:
2. According to Liability:
3. According to Duration:
4. According to Purpose:
5. According to Legality of Existence:
Kinds of Partners

The Partnership is the relation which subsists between individuals, who have decided to pool their money, skill and resources in business, to share profits and losses, in an agreed ratio. The members of a partnership, are jointly known as the partnership firm and severally known as partners.

In India, it is governed by the Indian Partnership Act, 1932 and is formed as per the provisions of the act. It is started through a legal agreement between partners, called as partnership deed. It lays down the terms and conditions regulating partnership, such as profit and loss sharing ratio, nature of the business, duration of business, duties and obligations of partners, capital contributed by each partner, manner of conducting business and so on.

Characteristics of Partnership

Membership: At least two persons are required to begin a partnership while the maximum number of members is limited to 100. Further, all the individuals entering into partnership must be legally competent to do so, as they have to enter into a contract to become partners. Thus, minors, insolvent and lunatic persons cannot become members, but a minor can be admitted to partnership, to share profits.
Unlimited liability: The members of a partnership have unlimited liability, i.e. they are collectively and individually liable for the firm’s debts and obligations. So, if in case business assets are not adequate to repay liabilities, personal assets of all or any partner can be claimed by the creditors to realise the outstanding amount.
Sharing of profit and loss: The main purpose of the partnership is to share profit in the agreed ratio. However, in the absence of any agreement between partners, the business profits or losses are divided equally among all the partners.
Mutual Agency: The partnership business is undertaken by all the partners or any of the partner, who acts on behalf of all the partners. So, every partner is a principal as well as an agent. Further, the acts of partners bind each other as well as the firm.
Voluntary Registration: The registration of partnership is not mandatory, but it is recommended, as it offers certain benefits, e.g. in case of any conflict among partners, any partner can file suit against other partner or if there is any dispute between firm and outside party, then also the firm can file a case against that party.
Continuity: There is a lack of continuity in partnership, like death, bankruptcy, retirement or insanity of any partner can lead the partnership to end. Although, if the remaining partners want to continue operations, they can do so by a fresh agreement.
Contractual Relationship: The relation subsisting between partners is due to the contract, which may be oral, written or implied.
Transfer of interest: Mutual consent of all the partners is a must for transferring the interest in the firm to any external party.

In a partnership, the decision making is done with the mutual consent of all the partners. They share among themselves the decision making and control of the regular business operation.

Types of Partnership

By duration:
- Partnership at will: Partnership existing as per the will of the partners.
- Particular partnership: When the partnership is created, to carry on a certain project, for a specified time.
By liability:
- General Partnership: Partnership in which partners have unlimited and joint liabilities. All the partners can take part in the management, and they are bound by the acts of one another as well as of the firm.
- Limited Partnership: The type of partnership in which except one partner all the partners have limited liability.

This form of business organisation is easy to set up because it does not require any fees or process. In addition to this, partners enjoy tax benefit, as in, the profit earned or loss incurred by the business pass through to the partner’s personal income tax return.

A partnership is a relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

Characteristics

The following are the main characteristics of partnerships:

There must be two or more persons to form a partnership
There must be a written or verbal agreement between all the concerned persons
The agreement must have the aim of conducting business
The business may be carried on by all or any of the partners acting for all
The gain or loss must be shared by all

Discussion

The persons who form a partnership are individually called “partners.” The collective name given to them is a “firm.” The maximum number of partners is limited to 10 in banking businesses and 20 in trading concerns.

Sharing the gain is an important element of a partnership. However, it is not conclusive proof of being a partner. There are examples of entities that share in a firm’s gain without being considered partners. For example:

Employees paid on the basis of profit
Lenders who receive a rate of interest that varies with the amount of profit

Partnerships are based on an agreement that may be written or oral. Even oral agreements may not be necessary; partnerships can be implied from the acts of the persons engaged in the enterprise.

It is, however, always better to make a partnership agreement in writing.

A partnership is a relationship that arises when two or more persons carry on a business of common enterprise with a view to making a profit.

Who can be partners?

Any number of persons who are competent to contract can be partners.

What are the characteristics of a partnership?

The following are the main characteristics of a partnership: - There must be two or more persons to form a partnership - There must be a written or verbal agreement between all the concerned persons - The agreement must have the aim of conducting business - The business may be carried on by all or any of the partners acting for all - The gain or loss must be shared by all

Is partnership necessary for carrying on business?

No, a partnership is not necessary for carrying on a business. It may be formed for carrying on business or another lawful purpose.

Is it necessary to have a written agreement?

Yes, it is always better to make a partnership agreement in writing.

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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Characteristics of partnership

Photo by krakenimages on Unsplash

Definition

In a partnership contract, two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profit among themselves. Two or more persons may also form a partnership for the exercise of a profession.

An association of two or more persons to carry on, as co-owners, a business for profit. (Uniform Partnership Act, Section 6).

Partnerships resemble sole proprietorships, except that there are two or more owners of the business. Each owner is called a partner.

Partnerships are often formed to bring together various talents and knowledge or to bring needed capital into a business. They are generally associated with the practice of law, public accounting, medicine and other professions. Partnerships of this nature are called general professional partnerships. On the other hand, service industries, retail trade, and wholesale and manufacturing enterprises may also be organized as partnerships.

Characteristics

The characteristics of partnerships are different from the sole proprietorships already studied in basic accounting. Some of the more important characteristics are as follows:

Mutual Contribution. There cannot be a partnership without the contribution of money, property or industry (i.e. work or services which may either be personal manual efforts or intellectual) to a common fund.

Division of Profits or Losses. The essence of a partnership is that each partner must share in the profits or losses of the venture.

Co-Ownership of Contributed Assets. All assets contributed into the partnership are owned by the partnership by virtue of its separate and distinct juridical personality. If one partner contributes an asset to the business, all partners jointly own it in a special sense.

Mutual Agency. Any partner can bind the other partners to a contract if he is acting within his express or implied authority.

Limited Life. A partnership has a limited life. It may be dissolved by the admission, death, insolvency, incapacity, withdrawal of a partner or expiration of the term specified in the partnership agreement.

Unlimited Liability. All partners (except limited partners), including industrial partners, are personally liable for all debts incurred by the partnership. If the partnership can not settle its obligations, creditors' claims will be satisfied from the personal assets of the partners without prejudice to the rights of the separate creditors of the partners.

Income Taxes. Partnerships, except general professional partnerships, are subject to tax at the rate of 34% (in 1998), 33% (in 1999) and 32% (in 2000 and thereafter) of taxable income.

Partners' Equity Accounts. Accounting for partnerships is much like accounting for sole proprietorships. The difference lies in the number of the partners' equity accounts. Each partner has a capital account and a withdrawal account that serves similar functions as the related accounts for sole proprietorships.

Advantages and Disadvantages

A partnership offers certain advantages over a sole proprietorship and a corporation. It also has a number of disadvantages. They are as follows:

Advantages Over Proprietorships

Brings greater financial capability to the business.
Combines special skills, expertise and experience of the partners.
Offers relative freedom and flexibility of action in decision-making.

Advantages Over Corporations

Easier and less expensive to organize.
More personal and informal.

Disadvantages

Easily dissolvable and thus unstable compared to a corporation.
Mutual agency and unlimited liability may create personal obligations to partners.
Less effective than a corporation in raising large amounts of capital.

Partnerships vs. Corporations

Manner of Creation. A partnership is created by mere agreement of the partners, while a corporation is created by operation of law.

Number of Persons. Two or more persons may form a partnership; in a corporation, at least five (5) persons, not exceeding fifteen (15).

Commencement of Juridical Personality. In a partnership, juridical personality commences from the execution of the articles of partnership; in a corporation, from the issuance of a certificate of incorporation by the Securities and Exchange Commission.

Management. In a partnership, every partner is an agent of the partnership if the partners did not appoint a managing partner; in a corporation, management is vested in the Board of Directors.

Extent of Liability. In a partnership, each of the partners except a limited partner is liable to the extent of his personal assets; in a corporation, stockholders are liable only to the extent of their interest or investment in the corporation.

Right of Succession. In a partnership, there is no right of succession; in a corporation, there is a right of succession. A corporation has the capacity of continued existence regardless of the death, withdrawal, insolvency or incapacity of its directors or stockholders.

Terms of Existence. In a partnership, for any period of time stipulated by the partners; in a corporation, not to exceed fifty (50) years but subject to extension.

Types

1. According to Object:

Universal partnership of all present property. All contributions become part of the partnership fund.
Universal partnership of profits. All that the partners may acquire from their industry or work during the existence of the partnership and the use of whatever the partners contributed at the time of the institution of the contract belong to the partnership.
Particular partnership. The object of the partnership is determinate—its use or fruit, specific undertaking, or the exercise of a profession or vocation.

2. According to Liability:

General. All partners are liable to the extent of their separate properties.
Limited. The limited partners are liable only to the extent of their personal contributions. In a limited partnership, the law states that there shall be at least one general partner.

3. According to Duration:

Partnership with a fixed term or for a particular undertaking.
Partnership at will. One in which no term is specified and is not formed for any particular undertaking.

4. According to Purpose:

Commercial or trading partnership. One formed for the transaction of business.
Professional or non-trading partnership. One formed for the exercise of profession.

5. According to Legality of Existence:

De jure partnership. One which has complied with all the legal requirements for its establishment.
De facto partnership. One which has failed to comply with all the legal requirements for its establishment.

Kinds of Partners

General partner. One who is liable to the extent of his separate property after all the assets of the partnership are exhausted.
Limited partner. One who is liable only to the extent of his capital contribution.
Capitalist partner. One who contributes money or property to the common fund of the partnership.
Industrial partner. One who contributes his knowledge or personal service to the partnership.
Managing partner. One whom the partners has appointed as manager of the partnership.
Liquidating partner. One who is designated to wind up or settle the affairs of the partnership after dissolution.
Dormant partner. One who does not take active part in the business of the partnership and is not known as a partner.
Silent partner. One who does not take active part in the business of the partnership though may be known as a partner.
Secret partner. One who takes active part in the business but is not known to be a partner by outside parties.
Nominal partner or partner by estoppel. One who is actually not a partner but who represents himself as one.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

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