Partnership is one of the forms of business entity which is formed and managed by its partners. A partnership firm does not enjoy a separate legal status in the eyes of law. Like all other forms of business entities, partnership firm should perform only legal activities. Any kind of illegal activity performed by a partnership firm may harm the reputation of the firm and may also result in closure of the partnership firm. Presence of mutual trust between the partners is must for a partnership firm for its long term survival.
Each partner is required to work in the best interest of the firm. Partners should focus on the achievement of overall business objectives rather than focusing on their own individual objectives.
Seven Main Features Of Partnership
A partnership firm requires at least two members who will be treated as partners in the firm.
Entry And Exit
A new partner can be admitted or an old partner can retire from a partnership firm with the mutual consent of all the remaining partners. Specific provisions in relation to admission and retirement of a partner may be included in the partnership deed.
Oral Or Written Agreement
Partnership firm can be created by an oral agreement or by a written agreement between persons intending to become partners. This agreement is known as “Partnership Deed”.
This deed contains all the terms and conditions which have been agreed by the partners including important information such as name of the partnership firm, registered office address, profit distribution ratio, remuneration of partners, amount of capital contributed by each partner and so on.
An important motive of forming a partnership firm is to earn profits. Profit sharing ratio is agreed between partners at the time of formation of partnership firm. Information on this ratio should be included in the partnership deed. In case there is no agreement between the partners, it may be assumed that partners will equally share the profits/losses at the end of the year.
For Instance, a firm has earned a profit of $ 50,000 in a particular year. In case a profit sharing ratio of 60:40 is mentioned in the partnership deed, one partner will be entitled to receive $ 30,000 (50,000*.60) and other partner will be entitled to receive $ 20,000 (50,000*.40) as profit on the basis of their agreement. However, in case partnership deed is silent on the profit sharing ratio, both the partners may receive $ 25,000 as their share in profits on the assumption of equal profit sharing.
The liability of partners is unlimited in case of a partnership firm. This means that the liability of partners may extend to personal property/assets of the partners in case any third party files a lawsuit against the partnership firm.
The creditworthiness of a partnership firm is dependent on the goodwill (reputation) of the partnership firm as well as on the creditworthiness of all partners.
Partnership firm can be formed and terminated any time with mutual consent of all the partners. However, partnership may come to an end in case of insolvency, death or lunacy of any partner.