Characteristics and Types of Partnership

The article 'Characteristics and Types of Partnership' provides a comprehensive overview of the characteristics and diverse types of partnerships, offering valuable insights to the readers.

Introduction

A partnership is built by a contractual agreement and is controlled under the Partnership Act, 1932. The general provisions of the Indian Contract Act apply to instances where the Partnership Act does not expressly address certain matters. It is explicitly stated that any section of the Indian Contract Act which is not repealed will apply to partnerships unless it conflicts with the Partnership Act of 1932. The essential principles of contract law i.e., capacity to contract, offer, acceptance, and similar aspects are also applicable to partnerships.

The legal status of a minor is also ensured under the Partnership Act of 1932, as enshrined in Section 30 of the Act, which addresses the position of a minor in a partnership.

Meaning of Partnership

According to the Indian Partnership Act, a partnership is a relation among people who have agreed to share the profits of a business carried on by all or any one of them acting for all. (Section 4 of Indian Partnership Act,1932).

In a partnership firm, two or more people carry out a business to earn profits and then share those profits. They combine their capital resources and work mutually to carry out the business. The Indian Partnership Act states that the partnership must be legal and bonafide and further the Co-ownership of a property shall not be considered as a partnership(Section 12 of Indian Partnership Act,1932).

Characteristics

Among various key features of Indian Partnership Act of 1932, some of the key features are stated below:

1. Two or More than Two Persons - Under this act, to constitute a firm and its coming into existence, it shall comprise two or more than two partners, having a vested interest in a common goal. However, the central government has prescribed a cap on the maximum number of partners i.e., a firm can hold up to 50 partners (Section 464 of the Companies Act of 2013).

2. Legal Agreement - In the partnership, it is a common understanding that the Partners who form a firm will be sharing both profits and losses of the firm equally. Oral Agreements are valid but if they get these agreements written in a legal form, it will help them to avoid disputes in the future.

3. Partners in Business - The provisions of Indian Partnership Act,1932 will only be applicable if the partners are qualified to be called as business partners and for the same, there should be some business going on in the firm & only then they can be called Business partners.

4. Mutual Agreements - For a partnership to take place, mutual agreement on mutual agency is an important factor. Partners possess the authority to set rules for fellow partners and they will be obligated to follow them. Each partner has the power to make decisions and conduct business affairs according to their will.

Types of Partnership

A partnership is categorized depending on the state and where the business operates. The following are the main types of Partnership:

1. General Partnership

Here two or more owners together runs a business and each partner represents the firm with equal right. All partners contribute to management activities, and decision-making, and possess the right to control the business. Likewise, profits, debts, and liabilities are similarly shared and divided equally. The suing of one partner makes all the other partners simultaneously accountable. Meanwhile, the creditor or court will keep the partner’s personal assets and for that reason, most of the partners do not choose this type of partnership.

2. Limited Partnership

This partnership includes both the general as well as limited partners where the general partner partakes in unlimited liability, and controls the business & the other limited partners. In contrast to this Limited partner has limited control over the business precisely limited to his investment and is not engaged with the everyday operations of the firm such as management or decision-making. In general circumstances, the limited partners only invest and collect a profit share. Therefore, this non-involvement infers that they do not possess the right to compensate the partnership losses from their income tax returns.

3. Partnership at Will

When there is no clause stated about the expiration of a partnership firm, that is when the Partnership at Will can be defined. Section 7 of the Indian Partnership Act 1932, outlines two conditions that a firm must satisfy to be recognized as a Partnership at Will:

• The partnership agreement should not have any fixed period of expiration
• Specific determination of the partnership should not be stated in any clause

So, the indulgence of both duration & determination in the agreement invalidates the constitution of partnership at will.

Partnership for a fixed period –

Initially, if the firm had fixed an expiration date, but the process of the firm continues even after the expiration date then it will be considered as a partnership at will.

Advantages:

1. Easy Creation – The Partnership Act enables the partners to enter into an agreement that can be executed verbally or registered and establish a firm.
2. Large extent of resources – Contrasting to sole proprietor (one person makes every contribution), in partnership, partners of the firm can invest more capital and other resources as per the requirement.
3. Flexibility for changes required – The partners can make any changes which they think are required to meet the desired result.
4. Sharing Risk – All loss incurred is carried out by each partner of the firm.
5. Mixture of different skills – The partnership firm has the benefit of the knowledge, skills & experience of different partners.

Conclusion

Partnerships represent a wide prevalent form of business occurring in the country which offers numerous advantages for companies to grow and shine. The Indian Partnership Act of 1932 is comprehensive legislation which addresses all aspects concerning partnerships, making it a complete & wide-ranging legislation which governs this common business structure.

Reference

[1] Indian Partnership Act, 1932, Available Here

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