Understanding Partnership and Its Key Features

Categories: Business Corporation Marketing

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Q-1Define Partnership and explain the features of Partnership? Ans. A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business. A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners.

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Each partner includes his or her share of the partnership's income or loss on his or her tax return. Partners are not employees and should not be issued a Form W-2. The partnership must furnish copies of Schedule K-1 (Form 1065) to the partners by the date Form 1065 is required to be filed, including extensions. If you are a partnership or a partner (individual) in a partnership, use the information in the charts below to help you determine some of the forms that you may be required to file.

a)The main features of partnership are given below:

1.Agreement

There must be agreement between the parties concerned. This is the most important characteristics of partnership. Without agreement partnership cannot be formed. "No agreement no partnership." But only competent persons are entitled to make a contract.

There are some provisions contained in the partnership agreement. These are determined clearly before the commencement of business. But it differs from business to business. This documents may be written or oral.

But it must be written so that disputes may be settled according to the provisions of agreement.

2.Number of Partnership

There should be more than one person to form a partnership. But there is restriction for the maximum number of partners. In case of ordinary business, the partners must not exceed 20 and in case of banking must not exceed 10 (before nationalization).

3.Business

The object of the formation of partnership is to carryon any type of business. It may be manufacturing or merchandise type small or large scale business. But it should not be illegal business in the country concerned.

4.Profit motive

The basic motive of the formation of partnership is to earn profit. This profit is distributed among the partners according to agreed proportion. If there is loss it will be sustained by all partners except the minor.

5.Conduct of Business

The business of partnership is conducated by all the partners or any or them acting for all. But each partner is allowed to participate in the management by law.

6.Entity

It has no separate entity apart from its members. It is not independent of the partners. Law has not granted it any legal entity.

7.Unlimited liability

This is the prominent feature of partnership that the liability of each partner is not limited to the amount invested but his private property is also liable to pay the business obligations.

8.Investment

Each partner contributes his share in the capital according to the agreement. Some persons become partners without investing any capital to the business. But they devote their time, energy and ability to their business instead of capital and receive profit.

9.Transferability of share

There is restriction to transfer the share from one partner to another person without the consent of existing partners. So the investment in the partnership remains confined into few hands.

10.Position

One partner is an agent as well as principal to other partner. He can bind the other person by his act. In the position of an agent he can make contract with another person or parties on behalf of his concerned firm.

11.Mutual Confidence

The business of the partnership cannot be conducted successfully without the element of mutual confidence and cooperation of partners. So the members must have trust and confidence in each other.

12.Free Operation

There are no strict rules and regulations to control the partnership activities in our country i.e. no restriction for the audit of accounts, submission of various reports and other copies to any government authority. So this organization may operate freely without any interference.

Q-2Explain the advantages and disadvantages of Partnership?

Ans.The main advantages and disadvantages can be explained as: -

a) Advantages of Partnership

Partnership is preferred to other forms of business due to the following advantageous points.

1.Ease of Organization

Partnership can be organized without any legal formalities. There is no license fee, registration fee, registration fee for the formation of this type of organization. No formal documents are required to be submitted to the Registrar's Office. Two or more persons may start this type of business at any time. But the formation of the Joint Stock Company is needed long complicated process.

2.Sufficient Capital

In the sole proprietorship the capital remains limited but this problem does not arise in the partnership firm due to number of partners i.e. 20 in ordinary business and 10 banking business. As such partner contributes his share in the business so capital volume can be sufficiently increased for business activities.

3.Borrowing Facilities

The partnership firm is considered safe organization for providing credit facilities due to unlimited liability of partners. Thus sufficient funds in terms of credit can be: procured from financial institutions or other sources in time of need.

4.Simplicity in Dissolution

There are no complicated legal requirements for the dissolution of the partnership firm. Partners may dissolve their business very easily at any time. On the other side, Joint Stock Company cannot be dissolved without fulfillment of the long process of the company ordinance 1984.

5.Combined Abilities

A firm may enjoy the combined abilities of several heads. There may be different abilities of partners i.e. purchaser, administrator, accountant and Technician. So the firm is in a position to utilize their services for product1ve purposes.

6.Skilled Workers

As the firm enjoys larger financial sources therefore, it is possible for the organization to hire the services of qualified and competent persons for indefinite period of time. Thus capital and financial sources of firm may be utilized maximum in profitable sector.

7.Minority Protection

Minority protection in a partnership cannot be neglected by law. All the policy matters are decided with the consent of each partner. If any matter is disposed of without the willingness of one partner, the dis-agreement partner may withdraw his share and may dissolve the firm. Thus there is no risk of any conspiracy against the minority partners on behalf of the majority partners.

8.Personal Interest

The partnership firm is in a better position in respect of personal element as compared with Joint Stock Company. As number of members in ordinary business cannot exceed 20, so all the benefit is confined among these partners. This factor creates the effective motivation to efficiency, economy, production and strong financial position.

9.Minimum Legal Restrictions

This form of organization is fee from following restrictions:

(a)Declaration of Profit.

(b)Submission of the Report to the Registrar's office.

(c)To audit the annual accounts.

(d)To call the meeting.

(e)To dispose of the Resolution.

(f)To maintain the statutory books.

(g)To publish certain statements.

On the other hand, public company has to follow strictly the above mentioned restrictions by law. But partnership may operate freely without interference from any legal authority.

10.Public Trust

People show more confidence on partnership firm than sole tradership. If firm is registered they think .these are working under the supervision of the government. So people feel no risk in creating relation with such business. Thus goodwill is established in the market which increases the income earning capacity of the firm.

11.Expansion of Business

There are more chances to expand the business volume due to the following factors:

(a)Large number of partners.

(b)Combine judgment and abilities.

(c)Personal interest of each partner.

(d)Fore-sight element due to unlimited liability.

(e)Administrative and technical abilities.

(f)Borrowing facilities.

But some important factor are not found in sole tradership. So its business cannot be expanded comparatively.

12.Flexible Management

This organization is considered flexible as compared with Joint Stock Company. Partners can change their business policy with mutual consultation. They thus make immediate decision, since there is no necessity of disposing of resolution. The quickness of action is the most important element in the field of management as well as in marketing.

13.Secrecy

As there is no compulsion to publish its accounts for partnership firm so the business secrecy remains confined within the partners. This sector is important for successful operation of the business. But Public Company has to publish all types of accounts by law.

14.Moral Promotion

Partnership is the best organization for small investors and to show themselves the proprietors of the firm. This factor promotes the moral courage of partners.