Definition:

The proprietorship form of ownership suffers from certain limitations such as limited resources,
limited skill and unlimited liability. Expansion in business requires more capital and managerial
skills and also involves more risk. A proprietor finds him unable to fulfill these requirements.
This call for more persons come together, with different edges and start business. For example, a
person who lacks managerial skills but may have capital.
Another person who is a good manager but may not have capital. When these persons come
together, pool their capital and skills and organise a business, it is called partnership. Partnership
grows essentially because of the limitations or disadvantages of proprietorship.
Let us consider a few definitions on partnership:

The Indian Partnership Act, 1932, Section 4, defined partnership as the relation between persons
who have agreed to share the profits of business carried on by all or any of them acting for all.
The Uniform Partnership Act of the USA defined a partnership as an association of two or more
persons to carry on as co-owners a business for profit.
According to J. L. Hanson, a partnership is a form of business organisation in which two or
more persons up to a maximum of twenty join together to undertake some form of business
activity. Now, we can define partnership as an association of two or more persons who have
agreed to share the profits of a business which they run together. This business may be carried on
by all or anyone of them acting for all.
The persons who own the partnership business are individually called partners and collectively
they are called as firm or partnership firm. The name under which partnership business is
carried on is called Firm Name. In a way, the firm is nothing but an abbreviation for partners.
Introduction

A partnership is an arrangement where parties, known as partners, agree to cooperate to

advance their mutual interests. The partners in a partnership may be individuals, businesses,
interest-based organizations, schools, governments or combinations organizations may partner
together to increase the likelihood of each achieving their mission and to amplify their reach. In
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what is usually called an alliance, governments may partner to achieve their national interests,
sometimes against allied governments holding contrary interests, as occurred during World War
II and the Cold War. In education, accrediting agencies increasingly evaluate schools by the level
and quality of their partnerships with other schools and a variety of other entities across societal
sectors. Some partnerships occur at personal levels, such as when two or more individuals agree
to domicile together, while other partnerships are not only personal, but private, known only to
the involved parties.
Partnerships present the involved parties with special challenges that must be navigated unto
agreement. Overarching goals, levels of give-and-take, areas of responsibility, lines of authority
and succession, how success is evaluated and distributed, and often a variety of other factors
must all be negotiated. Once agreement is reached, the partnership is typically enforceable by
civil law, especially if well documented. Partners who wish to make their agreement
affirmatively explicit and enforceable typically draw up Articles of Partnership. It is common for
information about formally partnered entities to be made public, such as through a press release,
a newspaper ad, or public records laws.
While partnerships stand to amplify mutual interests and success, some are considered ethically
problematic. When a politician, for example, partners with a corporation to advance the latter's
interest in exchange for some benefit, a conflict of interest results; consequentially, the public
good may suffer. While technically legal in some jurisdictions, such practice is broadly viewed
negatively or as corruption.
Governmentally recognized partnerships may enjoy special benefits in tax policies. Among
developed countries, for example, business partnerships are often favored over corporations in
taxation policy, since dividend taxes only occur on profits before they are distributed to the
partners. However, depending on the partnership structure and the jurisdiction in which it
operates, owners of a partnership may be exposed to greater personal liability than they would as
shareholders of a corporation. In such countries, partnerships are often regulated via anti-trust
laws, so as to inhibit monopolistic practices and foster free market competition. Enforcement of
the laws, however, varies considerably. Domestic partnerships recognized by governments
typically enjoy tax benefits, as well.
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Main Features:

Based on the above definitions, we can now list the main features of partnership form of
business ownership/organisation in a more orderly manner as follows:
1. More Persons:
As against proprietorship, there should be at least two persons subject to a maximum of ten
persons for banking business and twenty for non-banking business to form a partnership firm.
2. Profit and Loss Sharing:
There is an agreement among the partners to share the profits earned and losses incurred in
partnership business.
3. Contractual Relationship:
Partnership is formed by an agreement-oral or written-among the partners.
4. Existence of Lawful Business:
Partnership is formed to carry on some lawful business and share its profits or losses. If the
purpose is to carry some charitable works, for example, it is not regarded as partnership.
5. Utmost Good Faith and Honesty:
A partnership business solely rests on utmost good faith and trust among the partners.
6. Unlimited Liability:
Like proprietorship, each partner has unlimited liability in the firm. This means that if the assets
of the partnership firm fall short to meet the firms obligations, the partners private assets will
also be used for the purpose.
7. Restrictions on Transfer of Share:

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No partner can transfer his share to any outside person without seeking the consent of all other
partners.
8. Principal-Agent Relationship:
The partnership firm may be carried on by all partners or any of them acting for all. While
dealing with firms 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.
Procedure

Partnership firms in India are governed by the Indian Partnership Act, 1932. While it is not
compulsory to register your partnership firm as there are no penalties for non-registration, it is
advisable since the following rights are denied to an unregistered firm:
A partner cannot file a suit in any court against the firm or other partners for the enforcement of
any right arising from a contract or right conferred by the Partnership Act
A right arising from a contract cannot be enforced in any Court by or on behalf of your firm
against any third party
Further, the firm or any of its partners cannot claim a set off (i.e. mutual adjustment of debts
owned by the disputant parties to one another) or other proceedings in a dispute with a third
party.

Registration Procedure: A partnership firm can be registered whether at the time of its
formation or even subsequently. You need to file an application with the Registrar of Firms of the
area in which your business is located.

Application for partnership registration should include the following information:

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 Name of your firm

Name of the place where business is carried on
Names of any other place where business is carried on
Date of partners joining the firm
Full name and permanent address of partners.
Duration of the firm
Every partner needs to verify and sign the application
Ensure that the following documents and prescribed fees are enclosed with the registration
application :
Application for Registration in the prescribed Form I
Duly filled Specimen of Affidavit
Certified copy of the Partnership deed
Proof of ownership of the place of business or the rental/lease agreement thereof
It may be noted here that the name of your partnership firm should not contain any words which
may express or imply the approval or patronage of the government except where the government
has given its written consent for the use of such words as part of the firms name.
Once the Registrar of Firms is satisfied that the application procedure has been duly complied
with, he shall record an entry of the statement in the Register of Firms and issue a Certificate of
Registration.

Benefits of Registering a Partnership Firm

The benefits of registering a partnership firm are mentioned in Sec 69 of the Indian Partnership
Act and they have been explained below:1. Power to file case in a Court by a partner against the firm or other co-partners
If any dispute arises among the partners or between a partner and the firm or between a partner
and ex-partners, and the dispute is based upon the rights arising from contract (i.e. partnership

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deed) or upon the rights conferred by the Partnership Act, then a partner of a registered firm can
always file a case in the court. This power is not available to the partner of an unregistered firm.
However, a criminal proceeding can be brought by a partner of an unregistered firm against the
other partner(s).
Thus, if a partner steals the property of the firm or puts fire to the buildings of the firm, any
partner can prosecute him for the same.
2. Power to file case in Court by firm against 3rd parties
The partners of a registered firm can always file a case in the court (if required), to enforce any
right arising from contract e.g. for the recovery of the price of goods supplied. This power is not
available to the partners of an unregistered firm (except in case of criminal proceeding). It should
however be noted that although an unregistered firm cannot file case against 3rd party, the 3rd
party always has the power to file a case against both registered as well as unregistered firm.
3. Power to claim set-off
If a 3rd party sues the firm to recover a sum of money the registered firm can always claim a setoff i.e. the registered firm can say that the 3rd party also owes some money to the firm and the
same should be adjusted against the claim in question. This power is not available to an
unregistered firm.
The above are some of the major benefits of registering a partnership firm and all partnership
firms are advised to register themselves with the registrar of firms. It should however be noted
that registration for Income Tax purposes is different from registration with the Registrar of
Firms. Registration with Income Tax Department is mandatory for all Partnership Firms.
Importance of Partnership Firm

By Smriti Chand Partnership Firms

Advertisements:
The important merits of a Partnership Firm are as follows:
(i) Easy formation:
A partnership is very easy to form and no cumbersome legal formalities are to be observed to
establish it.
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Even the registration of a partnership is not compulsory. All that is required is an agreement
among the partners, stating the terms and conditions of business. It is not even compulsory to
have this agreement in writing.
(ii) Greater capital and credit resources:
As there are a number of partners, and each one of them contributes some amount, the total
amount of capital collected is much greater than what a sole-proprietor can do.
Further, as the partners are jointly and severally liable for business debts and obligations, the
borrowing capacity of the partnership firm extends to the personal property of all partners and is
not limited to the assets of the partnership firm. As a result, the amount of credit it can secure is
many times the amount of its capital.
(iii) Diversification of management:
Each partner can perform those functions for which he or she is best qualified. Division of labor
and specialization promote efficiency, and if partners work as a team, executive leadership is
both diversified and balanced.
(iv) Collective wisdom-better decisions:
Usually, the number of partners in a firm is not very large and they also meet frequently, hence
they can discuss and take prompt decisions. Also, the decisions of a partnership firm are taken
after issues have been discussed by all partners. This ensures that all aspects of every question
are discussed and implications of every question are discussed and implications of every
alternative considered.
(v) Larger democratic participation and avoidance of oppression of minority:
The management of partnership is democratic because every partner is entitled to participate in
the decision-making process. In partnership, there is a general rule of unanimity that is
followed on matters of fundamental importance. Thus, in the event of disagreement on
fundamental policy matters the minority may even veto the decisions.
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(vi) Greater personal supervision:

Partners usually take a lot of personal interest in the supervision of partnership business. This is
because of two reasons: (a) they have participated in the formulation of decisions, and therefore,
they feel committed to their proper implementation; (b) they will have to bear the economic
consequences of business management greater the profits or losses, larger they proportionate
share in them.
(vii) Shouldering of risks:
Unlike sole-proprietary organization, the risks of partnership business are shared by partners on a
predetermined basis. This encourages partners to undertake risky ventures also.
Advantages:

As an ownership form of business, partnership offers the following advantages:

1. Easy Formation:

Partnership is a contractual agreement between the partners to run an enterprise. Hence, it is

relatively ease to form. Legal formalities associated with formation are minimal. Though, the
registration of a partnership is desirable, but not obligatory.
2. More Capital Available:

We have just seen that sole proprietorship suffers from the limitation of limited funds.
Partnership overcomes this problem, to a great extent, because now there are more than one
person who provide funds to the enterprise. It also increases the borrowing capacity of the firm.
Moreover, the lending institutions also perceive less risk in granting credit to a partnership than
to a proprietorship because the risk of loss is spread over a number of partners rather than only
one. .
3. Combined Talent, Judgement and Skill:

As there are more than one owners in partnership, all the partners are involved in decision
making. Usually, partners are pooled from different specialised areas to complement each other.
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For example, if there are three partners, one partner might be a specialist in production, another
in finance and the third in marketing. This gives the firm an advantage of collective expertise for
taking better decisions. Thus, the old maxim of two heads being better than one aptly applies
to partnership.
4. Diffusion of Risk:

You have just seen that the entire losses are borne by the sole proprietor only but in case of
partnership, the losses of the firm are shared by all the partners as per their agreed profit-sharing
ratios. Thus, the share of loss in case of each partner will be less than that in case of
proprietorship.
5. Flexibility:

Like proprietorship, the partnership business is also flexible. The partners can easily appreciate
and quickly react to the changing conditions. No giant business organisation can stifle so quick
and creative responses to new opportunities.
6. Tax Advantage:

Taxation rates applicable to partnership are lower than proprietorship and company forms of
business ownership.
Disadvantages:

In spite of above advantages, there are certain drawbacks also associated with the partnership
form of business organisation.
Descriptions of these drawbacks/ disadvantages are as follows:
1. Unlimited Liability:

In partnership firm, the liability of partners is unlimited. Just as in proprietorship, the partners
personal assets may be at risk if the business cannot pay its debts.
2. Divided Authority:

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Sometimes the earlier stated maxim of two heads better than one may turn into too many cooks
spoil the broth. Each partner can discharge his responsibilities in his concerned individual area.
But, in case of areas like policy formulation for the whole enterprise, there are chances for
conflicts between the partners. Disagreements between the partners over enterprise matters have
destroyed many a partnership.
3. Lack of Continuity:

Death or withdrawal of one partner causes the partnership to come to an end. So, there remains
uncertainty in continuity of partnership.
4. Risk of Implied Authority:

Each partner is an agent for the partnership business. Hence, the decisions made by him bind all
the partners. At times, an incompetent partner may lend the firm into difficulties by taking wrong
decisions. Risk involved in decisions taken by one partner is to be borne by other partners also.
Choosing a business partner is, therefore, much like choosing a marriage mate life partner.

Conclusion
It is best to say that a limited liability partnership not only renders protection to the partners but also
retains all the benefits of a partnership. Although the traditional partnership holds one advantage that it is
not compulsory for a partnership to get registered before any statutory authority while on the other hand a
Limited Liability Partnership has to get registered under the Limited Liability Act, 2008, the process of
which may be cumbersome. Still in my opinion the balance is tilted in the favour of the latte. Further,
although the partnership form has been in use for a long time, and the law applying to partnerships was
codified into statues more than one hundred years ago, features of the law on partnership can present
serious drawback to their use today. In the eye of law, Partnership is merely a way of describing the
individual partner who makes up their partnership, Today the world is in the grip of unprecedented
financial crisis, which is adversely affecting economies of most of the countries, including our own. In
such a situation availability of LLP as an alternative business vehicle to our trade and industry will be an
important step. Service industry has grown considerably in India and it accounts for nearly half of our
GDP. We believe that the LLPs would further contribute to the growth of the service industries in the
future.
The LLP form would enable entrepreneur, professional, and enterprises providing services of any kind
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engaged in scientific and technical disciplines, to form commercially efficient vehicle situated to their
requirement. Owing to the flexibility in its structure and operation, the LLP would also be suitable vehicle
for small enterprises and for investment by venture capital. The LLP structure would bring India at par
with business practices followed in developed nations of the world.

Conclusion & Suggestion

In my opinion Partnership is very important because in day to day activities we enter into partnership
agreements and by making partners big goals are achieved with the help of joint and more number of
people. The joint efforts of all the member results in successful accomplishment of tasks and that task or
job can be easily afforded. Division of work leads to increase in efficiency at work among different
partners.
When some job is done by consent of all the members and if some profit is earned then it is shared among
the different partners. And similar is the case when some loss occurs then that is also beard among all the
members and its not that only one has to take responsibility or give compensation. So in my view
Partnership is a good form of doing business than a company which is owned by a single person.
Partnership is one of the oldest forms of business relationships. Though limited liability companies have
replaced partnership firms in complex businesses, partnerships are still preferred by professionals and
small trading and business enterprises in India and abroad.
The Indian partnership act of 1932 provides for a general form of partnership which is the most prevalent
form in India, but, over time the general form of partnership has lost its charm because of the inherent
disadvantages in it, the most important is the unlimited liability of all partners for business debts and legal
consequences, regardless of their holding, as the firm is not a legal entity.
General partners are also jointly and severally liable for tortuous acts of co-partners. Each partner has the
exposure of their personal assets being appropriated and liquidated to meet partnership dues. These are
statutory position, which cannot be altered by contract inter-se, though at times subterfuges are resorted to
by unscrupulous partners to avoid personal liability.
General partnership holdings are not easy to transfer; typically all other partners have to agree. Yet
partnership is preferred in India, because of the ease of formation and lack of compliances involved.

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The need for LLP:

The government has woken up from it slumber has acknowledged the disadvantages posed the general
partnership and recognised the need for introducing LLP in India. To this end the government set up a
Committee headed by Mr. Naresh Chandra which has come up with a framework for introducing LLP in
India. The broad areas of analysis made by the Committee relate to:
1. Application of the LLP Regime;
;3. Limited Liability;

2. Incorporation, Registration and Number of Partners

4. Financial Safeguards; and

5. Tax Treatment of LLPs.

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