6 Characteristics of Partnership

The word ‘Partnership’ in the layman sense implies an agreement between two people to work together or jointly. In accountancy, the meaning of partnership is similar to that in the general sense but with a greater depth. In our context, partnership implies the agreement between two or more people who have decided to carry out a business jointly. The main motive to form a partnership is to earn profit arising out of the business activities. The following are the important characteristics of a partnership.

Characteristics of Partnership

The following are the important characteristics of a partnership.

Two or More Persons: Partnership is an agreement between two or more persons coming together for a common goal. There should be at least two persons to form a partnership. Although as per the Partnership Act of 1932, there is no maximum limit on the number of partners in a partnership firm, but as per Rule (10) of Companies (Miscellaneous) Rules Act 2014, the maximum number of partners permissible is 50.

Therefore, in case the number of partners exceeds the aforesaid limit, then the concerned partnership is considered to be illegal. In this regard, it must be noted that Section 464 of the Companies Act, 2013 provides that a number of persons in any association/partnership shall not exceed one hundred subjects to the limit prescribed in rules.

In this regard, it must be noted that the maximum number of partners is not limited in case an association or partnership is formed by professionals such as chartered accountants, lawyers, company secretaries, etc. These professionals are governed by the special laws as formed by their respective professional institutions.

Prior to the enforcement of the Companies Act of 2013, the earlier act of 1956, imposed restrictions on the maximum number of partners to 10 in case of banking business and 20 in case of any other kind of business. However, with effect from April 01, 2014, the Companies Act of 1956 has been replaced by Companies Act of 2013.

Partnership Deed: An agreement between the partners of a partnership firm to carry out the business activities under a common banner of a partnership firm is termed as Partnership Deed. To form a partnership business, a partnership agreement is required.

Business: A partnership is formed to carry out a legal business. Any partnership formed for carrying out an illegal business is treated as an illegal partnership. For example, a partnership for smuggling is treated as illegal. In other words, the business activities should be lawful to form a partnership.

Sharing of Profits or Losses: The profits earned or losses incurred by a partnership firm must be distributed among the partners as per the partnership deed. It is one of the important features of a partnership. In short, the partners must share all the profits or losses of the business in the agreed ratio. However; it is not always necessary that all the partners in a partnership firm will bear the loss. It is as per the terms and conditions of the partnership deed.

Liability: In a partnership business, the liability of the partners is unlimited. They are liable for all the debts of the partnership firm. Each partner is liable jointly with all the other partners and also individually to the third party for all the acts of the firm. If the assets of the firm are not sufficient to meet its obligations, then the partners may be compelled to bring their personal assets to pay the firm’s debt.

Mutual Agency: The partnership may be carried on by all the partners or by any one of them on behalf of all. All the partners have equal rights to participate in the activities of the business. There exists a principal and agent relationship among the partners of a firm. As an agent, a partner may bind the other partners by his/her acts and as a principal, a partner is himself/herself bound by the acts done by the other partners. Thus, it can be concluded that mutual agency is a very important feature of a partnership firm without which it cannot be considered as a partnership.

Note: In case of any question regarding the permissible limit on the maximum number of partners in a partnership firm, the students shall take the limit as 50.

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Profit and Loss Account

A profit and Loss Account is the second financial statement prepared by an organization. This account is prepared to ascertain the net results of a firm in form of net profit earned or net loss incurred during an accounting period.

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