Explain the partnership firm in detail.

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Que: Explain the partnership firm in detail.



The Indian Partnership Act 1932 defines a partnership as “the relation between two or more persons who have agreed to share the profits from a business carried on by either all of them or any of them on behalf of/acting for all.

A partnership must be a result of an agreement between two or more individuals.

The agreement must be built to share the profits obtained from the business.

The entity is collectively called a “Partnership Firm” and all the individual members are the “Partners”.

Features of Partnership:

Formation/Contract: According to the act, a firm must be formed a legal agreement between all the partners. So, a contract must be entered to form a partnership firm.

Unlimited Liability: The partners are all individually and jointly liable for the firm and the payment of all debts. This means that even personal assets of a partner can be liquidated to meet the debts of the firm.

Continuity: The death or retirement or bankruptcy or insolvency own insanity of a partner will dissolve the partnership. The remaining partners may continue the partnership if they so choose, but a new contract must be drawn up.

Number of Members: As we know that there should be a minimum of two members for a partnership. For a banking business, the number of partners must not exceed ten. For a business of any other nature, the maximum number is twenty.

Principal-Agent Relationship: While dealing with the firm’s transactions, each partner is entitled to represent the firm and other partners. In this way, a partner is an agent of the firm and of the other partners.

Advantages of Partnership:

Easy Formation: It is relatively easy to form. Legal formalities associated with formation are minimal. Though, the registration of a partnership is desirable, but not obligatory.

More Capital Available: Partnership overcomes the problem of funds because there is more than one person who provides funds to the enterprise. It also increases the borrowing capacity of the firm.

Combined Talent, Judgment, and Skill: As there is more than one owner in partnership, all the partners are involved in decision making Usually, partners are pooled from different specialized areas to complement each other.

Diffusion of Risk: In partnership, the losses of the firm are shared by all the partners as per their agreed profit sharing ratios.

Flexibility: The partners can easily appreciate and quickly react to the changing conditions.

Disadvantages of Partnership:

Unlimited Liability: In a partnership firm, the liability of partners is 15 unlimited. The partners, personal assets may be at risk if the business cannot pay its debts.

Divided Authority: Sometimes disagreements between the partner over enterprise matters have destroyed many a partnership.

Lack of Continuity: Death or withdrawal of one partner causes the partnership to come to an end. So, there remains uncertainty in the continuity of partnership.

Risk of Implied Authority: The risk involved in decisions taken by one partner is to be borne by other partners also.

Lack of a Central Figure: Leadership can both uplift and derail a firm. Combined ownership takes away the possibility of leadership and lack of leadership leads to directionless operations.