Meaning of Partnership and its Characteristics

Meaning of partnership, there are two or more persons who manage and run the business also share the profit or losses of the business.

Meaning of Partnership?

The meaning of partnership is an association of two or more persons who are jointly run the business with the aim to earn a profit. In partnership, partners agree to share the profit as well as loss in the business. This type of business removes the problem of a sole proprietorship. The partnership firm of business is governed by the Indian Partnership Act 1932.

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Definitions of partnership:

The partnership is the relation between two or more persons who have agreed to share the profits of the business carried on by all or any of them acting for all.

– The Indian Partnership Act, 1932

Characteristics of Partnership:

To understand the meaning of partnership you have to read the characteristics of a partnership. The various characteristics of the partnership type of business are shown as follows: 

1. Governed by:
2. Nature Liability
3. Decision Making 
4. Profit-Sharing
5. Risk Sharing 
6. End of Business 
7. Number of Partners:
8. Agency Relationship
9. Registration of firm

1. Governed by:

The partnership business is governed by The Indian Partnership Act, 1932 in India. The partnership gets in existence by the agreement between the partners.  

2. Nature Liability: 

The liability of all partners is unlimited in the type of partnership business except one type of partnership i.e. the limited liability Partnership. The unlimited liability means in the worse condition when a firm has more amount of liability than the total assets of the firm then the balance amount of liabilities will be paid by selling personal assets of the partners. 

3. Decision Making:

The decision can be taken by any one of the partners as per the requirement of the business because all partners allowed to manage the business activities. 

4. Profit-Sharing: 

The profit earned by the firm will be shared among all partners as per the profit-sharing ratio of the partners. If the profit sharing ratio is not mentioned in the partnership deed then the profit will be shared equally among the partners. 

5. Risk Sharing: 

The risk involved in the nature of business is also shared and bore by all partners like the profit in the profit-sharing ratio of the partners.

6. End of Business: 

On the event of the death of the partner(s) there will not need to close the business because the remaining partners will continue the business operational activities.

7. Number of Partners:

In the partnership, there can be a minimum of two partners, and the maximum as per Section 464 of Companies Act 2013 is 100 subject to the number prescribed by the government. 

8. Agency Relationship:

Agency Relationship means all partners act as an agent of the partnership firm as well as other partners 

9. Registration of the firm: 

According to the Indian Partnership Act, 1932 the partnership firm can register as a separate identity under the income tax for tax liabilities. Also for all terms and conditions about the partnership firm among the partners. Like: Profit Sharing ratio, Interest on capital or drawing, interest on the loan, remuneration to the partners, etc.

Types of Partnerships:-

There are mainly three types of partnership business. these are shown as follows: –

1. General partnerships
2. Limited partnerships
3. Limited Liabilities partnerships
4. Joint Venture

1. General partnerships: –

In this type of partnership, two or more persons have equal ownership of the business. All the partners have equal rights to decision making. They will be shared all profits and losses on an equal basis. All the partners are equally involved in the day-to-day operational activities of the business. 

All partners are equally responsible for an activity which is done by any partner, It means if any partner makes fraud to another person or business, then the case will be logged to all the partners and they will be responsible of it.   

In this type, the court or creditors will hold the personal assets of all the partners. That’s why most of the partners did not prefer this type. 

2. Limited partnerships: –

This type of partnership, allowed the old partner to get a new investor for business with the condition of limited involvement in all business activities. The rights of decision making are issued on the basis of his contribution amount in the business. He/she is not associated with day to day business activities. 

In most cases, This type of partners have only invested their money into the business for the share of profit and they do not want to involve in the day to day business activities or decision making, etc. 

3. Limited Liabilities partnerships: –

This type is clear from the name of the type of partnerships. It means in this type there will be the liabilities of all partners are limited to the extent to their investment. This type of court can not hold the personal assets of the partners. That why most persons or businesses chose this type of partnership. 

4. Joint Venture: –

In this type of Partnership, Two or more persons are getting in agreement for doing a specific work or venture. When this work or venture gets complete then the partnership can be ended or can be converted into other types of partnership. 

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