Documents Required from Proprietor, Partners
What is a Sole Partnership?
The Indian Partnership Act 1932 defines a partnership as a relation between two or more persons who agree to share the profits of a business run by them all or by one or more persons acting for them all.
Elements of a Partnership
1] Contract for Partnership
A partnership is contractual in nature. As the definition states a partnership is an association of two or more persons. So a partnership results from a contract or an agreement between two or more persons. A partnership does not arise from the operation of law. Neither can it be inherited. It has to be a voluntary agreement between partners.
A partnership agreement can be written or oral. Sometimes such an agreement is even implied by the continued actions and mutual understanding of the partners.
2] Association of Two or More Persons
A partnership is an association between two or more persons. And persons by law only includes individuals, not other firms. The law also prohibits minors from being partners. But minors can be admitted to the benefits of a partnership.
The Act is actually silent on the maximum number of partners. But this has been covered under the Companies Act 2013. So a partnership can only have a maximum of 10 partners in a banking firm and 20 partners in all other kinds of firms.
3] Carrying on of Business
There are two aspects of this element. Firstly the firm must be carrying on some business. Here the business will include any trade, profession or occupation. Only that some business must exist and the partners must participate in the running of such business.
Also, the business must be run on a profit motive. The ultimate aim of the business should be to make gains, which are then distributed among the partners. So a firm carrying on charitable work will not be a partnership. If there is no intention to earn profits, there is no partnership.
4] Profit Sharing
The sharing of profits is one of the essential elements of a partnership. The profit sharing ratio or the manner of sharing profits is not important. But one partner cannot be entitled to the entire profits of the firm.
However, the sharing of losses is not of any essence. It is up to the partners whether the losses will be shared by all the partners. If nothing is said then the losses are also split in the profit sharing ratio.
Say for example two individuals are operating out of the same warehouse. So they agree to divide the rent amongst themselves. This is not a partnership since there is no profit sharing between the two.
5] Mutual Agency
The definition states that the business must be carried out by the partners, or any partner/s acting for all of them. This is a contract of mutual agency another one of the five elements of a partnership.
This means that every partner is both a principle as well as an agent for all the other partners of the firm. An act done by any of the partners is binding on all the other partners and the firm as well. And so every partner is bound by the acts of all the other partners. This is one of the most important aspects of a partnership. It is, in fact, the truest test of a partnership.
Benefits of a Partnership Firm?
Easy to Start
Partnership firms are one of the easiest to start. The only requirement for starting a partnership firm in most cases is a partnership deed. Hence, a partnership can be started on the same day. On the other hand, an LLP registration would take about 5 to 10 working days, as the digital signatures, DIN, Name Approval and Incorporation must be obtained from the MCA.
Decision making is the crux of any organization. Decision making in a partnership firm could be faster as there is no concept of the passing of resolutions. The partners in a partnership firm enjoy a wide range of powers and in most cases can undertake any transaction on behalf of the partnership firm without the consent of other partners.
Raising of Funds
When compared to a proprietorship firm, a partnership firm can easily raise funds. Multiple partners make for more feasible contribution among the partners. Moreover, banks also view a partnership more favourably while sanctioning credit facilities instead of a proprietorship firm.
Sense of Ownership
Every partner owns and manages the activities of their firm. Their tasks might be varied in nature but people in a partnership firm are united for a common cause. Ownership creates a higher sense of accountability, which paves the way for a diligent workforce.
Disadvantages of Partnership Firm
Every partner is liable personally for the losses of a partnership firm. The liability created by a partner in the partnership firm will also make each of the partner personally liable. To limit the liability of partners in a partnership firm, the LLP structure was created by the Government.
Number of Members
The maximum number of members a partnership firm can have is restricted to 20. In case of an LLP, there is no restriction on the maximum number of partners.
Lack of a Central Figure
Leadership can both uplift and derail a firm. Combined ownership takes away the possibility of leadership and lack of leadership leads to directionless operations. On the other hand, in a partnership firm, certain partners can be given the position of designated partner with more powers and responsibilities.
Trust of the General Public
A partnership firm is easy to start and does require any registration. A partnership firm can also operates without much of a structure or regulations. Hence, it often leads to distrust amongst the general public.
A partnership firm would be dissolved due to the death or insolvency of a partner. Such an abrupt dissolution will hamper a business. On the other hand, the death of a partner will not automatically dissolve an LLP. Hence, continuity of business is maintained in a LLP.
Source : https://www.indiafilings.com/learn/advantages-disadvantages-partnership-firm/
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