Partnership is amongst the most popular forms of business today. In a partnership, two or more number of people come together, pool their resources – which may include money, talents, skills, capabilities or other important assets like buildings, land, machinery, equipment, etc. – and agree to carry out business activities together and share the profits thereof in a predecided proportion.
The partners involved are collectively called “firm” and the organization, as well as the relationship that the partners share with each other, is called the “Partnership”.
How To Know About Partnership In Business
A partnership deed is a written document signed by all the partners, detailing the terms of conditions of the partnership that have been mutually consented to by every partner. Partners are not bound by any law to necessarily create a partnership deed. However, it is always better to have a written record of everything decided rather than a verbal one.
This is because firstly, there is a great risk of forgetfulness and ambiguities in case of oral agreements. Secondly, the option to take legal recourse in the case of any disputes would not be available if one opts for an oral agreement. A partnership deed contains particulars and details like the profit sharing ratio (if it is not specified, it is assumed to be equal), the names and contact information of the partners, the structure of the organization, the finance and revenue model, the procedure to resolve disputes, the risk distribution system, the nature of the business, etc.
In most countries, a partnership can be formed independent of the law. Although most countries have a Partnership Act, one need not compulsorily register with it. The advantages are that filing a suit and making claims with defaulting third parties becomes possible.
The disadvantages are that a registration fee has to be paid, and also, the procedure is quite lengthy. The ills of bureaucracy and red-tapism further delay the time taken for formation.
A partnership firm enjoys many advantages over the other competitive business structures – that is, sole proprietorship and the company form of organization. Firstly, as already stated, a partnership is comparatively easier to form. It does not mandate registration, does not require a large number of people and does not involve any major legal hassles. Hence, it is easier to form as compared to a corporation.
Secondly, a partnership form of business allows the partners, who, on an individual basis, may not be completely adept and equipped to start their own business, to pool in their resources – in terms of time, skill, monetary capital, infrastructure and so on, and collectively venture into entrepreneurship.
Thirdly, partnership form of business fosters a spirit of team work and team building. It enables people to co-ordinate and fine tune with each other and through mutual agreement, conduct the business and its various functions. This is definitely more advantageous as compared to a sole proprietorship, which is a one man army and hence extremely vulnerable.
It is again preferable to a corporation because in the latter, the real owners of the company (the shareholders) have no power over the functioning of the business because of the feature of divorce between ownership and management. Fourthly, a partnership form of business distributes the direct as well as the indirect risk.
The direct risk is in terms of the success-failure ratio of the business. The indirect risk is in terms of the threats posed by single-handed operation of a business. When only one person has to take all the decisions, there is a major fear of autocracy of stagnated and unfruitful thinking becoming accepted because there’s no one to challenge the proprietor.
Most importantly, the probability of taking wrong decisions is very high because one person looks at an issue from only a singularly biased angle and may be wrong about it. Decisions that are taken through mutual ratification are found to be the most effective ones.
Albeit it breeds a lot of merits, a partnership form of business has its own limitations. Firstly, many a times, social pressures lead to creation of partnerships that are inappropriate. For instance, two or more brothers may start a business of their own or two or more friends may – but there is no guarantee as to whether they are capable of working in coordination with each other or not.
This is the most major disadvantage of partnerships – they are highly susceptible to external pressures and may often be formed not on the basis of aptitude and synchronization, but rather, on the basis of the relationship that the partnerhs share with each other.
Secondly, a partnership firm cannot raise much money on its own. This is because unlike company form of business, they cannot raise funds from the public. They cannot issue shares or debentures. They have to rely completely on personal investments and on bank borrowing to meet their expenditures. Hence, there is a ceiling to which partnerships can raise their scale of operation, beyond which they cannot go because they cannot possibly arrange that much of finance.
Thirdly and most importantly, a partnership form of business is plagued by the feature of unlimited liability. In the case of dissolution of the firm, if the creditors’ claims remain unfulfilled, personal property of the partners can be utilized to meet such claims.
This puts the partners in a situation of perpetual risk and uncertainty. This feature has been eliminated in the company form of organization, where the shareholders have only a limited liability. Sometimes the partners even run into bankruptcy on account of this feature. Hence, partnership is riskier and more dangerous than the company form of business.
Partnership firms are suitable in situations when the requisites for a business are distributed among more than one person. One should go for partnership when one has a strong team of dedicated persons who are loyal to each other, when the capital requirement is not very intensive, and when the business structure is not excessively large scale.
Most importantly, partnership firms should be formed when it is required that the business be formed at a relatively short notice and without much legal complexity.