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.
Formal Definition of Partnership
According to the Section 4 of the Partnership Act, 1932, a partnership is an agreement between two or more persons who have agreed to share profits or losses of a business that will be carried by all or any one of them acting for all. The persons who joined their hands to set up the partnership business individually are known as ‘Partners’ and all the partners in the partnership business are collectively known as ‘Firm’. The name under which the partners decided to carry out their business is known as ‘Firm Name’.
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 However, with effect from April 01, 2014, the Companies Act of 1956 has been replaced by Companies Act of 2013.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.
Liabilities Of A Partner
When a partnership is formed certain terms governing his relationship with the firm are also decided a prior that makes him liable in the following cases:
Competitive Business by a Partner: In case a partner carries a business that is quite similar to that of the firm and earns profits from it, then he shall be liable to pay such profits to the firm. The reason is that his business being a competition for the firm violates the very basic nature of trust bestowed on him by the firm.
Profit for self from a firm’s transaction: If a partner earns any profit for self through the use of business’s property or connection or through any business transaction then the profit so earned shall be handed over to the firm as it is. The reason is that a partner must not take undue advantage of the firm for his own personal gains. For example, rent from a business property belonging to the firm must not be taken by the partner, etc.
Some other important Provisions of the Indian Partnership Act, 1932
Sec. 30: A minor may be admitted for the benefit of partnership if agreed upon by all the partners.
Sec. 31: If all partners agree or the express agreement among the partners permit, a person can be admitted as a partner to the firm.
Sec. 32: If all partners agree or the express agreement among the partners permit, a person may retire from the firm.
Sec. 69: It is optional to register the firm
Sec. 35: A firm is dissolved on the death of the firm unless otherwise agreed by the partners in the Partnership Deed.
Note: The above provisions will apply when Partnership Deed does not exist or where it exists it does not have a clause to this effect.
Rights of Partners of a Partnership Firm
- Every partner has a right to share profits or losses of the firm equally or in the ratio as agreed among them.
- Every partner has a right to receive interest on loan and advances provided to the firm at the rate of 6% p.a. if the rate is not agreed among the partners.
- Every partner has a right to participate in the conduct or management of the business.
- Every partner has a right to access, inspect and copy the books of accounts and records of the firm.
- Every partner has a right to voice his/her opinion on the matters relating to the business.
- Every partner has a right to be indemnified for all the expenses and liabilities incurred by him/her on behalf of the business.
- Every partner has a right to use the property of the firm exclusively for the partnership business and not for personal use.
- A partner has a right to restrict the admission of a new partner or prevent the expulsion of existing partner from the firm.
- A partner has a right to retire from the firm after giving a proper notice or with the consent of all other co-partners.
- In case of emergency, a partner has a right to act on behalf of the firm in order to prevent it from the losses and posses a right to claim indemnity for the payments made by him/her for such act.
Some Important Facts
It should be noted that usually all the partners are entitled to share firm’s profit or bear the losses. However, there may be a few situations where not all the partners need to bear losses so incurred. The following are the circumstances in which a partner need not to bear loss when:
- a partner is admitted to share profit only (and not to bear any losses).
- the losses are incurred due to willful negligence of the other partners.
Also, Read
Balance Sheet
The balance sheet is the last financial statement that is prepared by any organization. This statement helps to ascertain the true financial position of an enterprise at the end of an accounting period
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.
Accounting Software
Accounting software is an integral part of the computerized accounting system. The accounting software should be selected after considering the level of skill and proficiency of the accounting professionals.
What are Accounting Reports?
Accounting Reports: When the collected data is processed and manipulated in a useful sense that can be understood by the users without any ambiguity, then it becomes information.
Transaction Processing System
Transaction Processing System (TPS) refers to a computerized system that records, processes, validates, and stores routine transactions that occur in various functional areas of a business on daily basis.
Non Profit Organizations (NPOs)
Non Profit Organizations (NPOs) are formed with the basic motive of rendering services and with the welfare-motive. A few examples of Non-Profit Organizations (NPOs) are charitable trusts,