A partnership is a business structure where two or more individuals come together to carry out
a business and share its profits, losses, and responsibilities with a common objective.
There are various types of partnership arrangements. In a general partnership, all partners share
profits, losses, and liabilities equally, unless otherwise agreed. In other forms, profit sharing and
liability distribution can differ based on the terms of the agreement. For example, some
partnerships may include a "silent partner"—an investor who contributes capital but does not
participate in day-to-day business operations.
The type of partnership selected depends on several factors, including: how the partners want to
manage daily operations, who is willing to assume financial liability, how the firm intends to
handle taxation and compliance.
In India, partnership firms are governed by the Indian Partnership Act of 1932. Individuals who
come together to form a partnership are known as partners, and the business they operate is called
a partnership firm. The partnership is established through a contractual agreement among the
partners, commonly documented in writing as a partnership deed. This deed outlines key details
such as capital contributions, profit-sharing ratios, roles, responsibilities, and terms of dissolution.
1. Structure: In a partnership, each partner contributes money, property, labor, or skills to
the business. The individuals involved are referred to as partners, and collectively, they
form a partnership firm.
2. Types: There are different types of partnerships, including general partnerships,
limited partnerships, and incorporated limited partnerships, each offering varying
levels of liability, management structure, and legal recognition.
3. Liability: In a general partnership, partners have unlimited liability for the debts and
obligations of the business. This means that if the business cannot meet its financial
obligations, the personal assets of the partners can be seized to cover the debts.
4. Dispute: Disputes among partners can be challenging to resolve and, if not addressed
effectively, can lead to significant or even catastrophic consequences for the business.
Advantage and Disadvantage of Partnership
| SR. No | Advantage of Partnership | Disadvantage of Partnership |
|---|---|---|
| 1 | Easy to Establish: Fewer formalities and lower startup costs compared to corporations. | Unlimited Liability: Each partner is personally liable for business debts and obligations. |
| 2 | Shared Responsibility: Partners can divide tasks based on skills, improving efficiency. | Potential for Conflict: Disagreements may arise if roles and expectations are unclear. |
| 3 | More Capital Available: Combining partner resources increases business funding. | Profit Sharing: Profits must be shared regardless of individual contribution. |
| 4 | Combined Knowledge & Skills: Broader range of ideas, perspectives, and experience. | Lack of Continuity: Partnership may dissolve if a partner leaves, dies, or is incapacitated. |
| 5 | Tax Benefits: “Pass-through” taxation avoids corporate taxes. | Decision-Making Issues: Consensus may be required, slowing operations. |
| 6 | Flexibility: Fewer regulations and more freedom in structuring and decision-making. | Limited Capital Raising Options: Harder to attract investors than corporations. |
