The characteristics of a partnership, the nature of the partnership at will

Partnership – what does it mean?

Business partnerships involve two or more people agreeing to be co-owners, share responsibilities for managing the business, and share the income and losses.

‘The Indian Partnership Act 1932’ governs all aspects and functions of partnerships in India. Partnerships are organizations in which two or more individuals or parties agree to share profits generated from the business under the supervision of all members or on behalf of all members.

Partnership features:

Following are the few features of a partnership:

1. Partner Agreement: A partnership is an association between two or more individuals governed by an agreement or contract. Partners form an association based on their agreement (accord). It is a written agreement. Oral agreements are equally valid. It is always good if the partners have a copy of the written agreement in order to avoid controversies.
   2. It is essential that there are two (2) or more people who share a common goal in order to manifest a partnership. In other words, a company can have no fewer than two partners (2). They are limited in terms of how many people can be accommodated.3. Sharing of Profit: It is also important to note that, in a partnership, partners must share gains and losses. The Partnership Act, however, defines partnership as an association between people who agree to share profits and losses of the business. The sharing of gains and losses is therefore crucial.
   4.Motivation for Business: A firm should have a profit-making motive and conduct some kind of business.
   5. As owners as well as agents, partners are jointly responsible for the business.  Acts performed by one partner can affect the firm and other partners. Hence, all partners are tested on this point as a sign of partnership.
2. 6. Unlimited Liability:  Partners in a partnership are liable indefinitely.

The types of partnerships

Partnerships can be classified according to their state of operation and where they are located. The following are some general aspects of the three most common types of partnerships.

• Partnerships in general

To run a business, two or more owners form a general partnership. Each partner has equal rights to represent the firm in this partnership. Each partner has the right to control the business, participate in management, and make decisions. Profits, debts, and liabilities are equally shared and divided.

A general partnership is defined as a partnership in which management and decision-making rights and responsibilities are equally shared.  Neither partner should be liable for the debts or liabilities of the other. In the event of a lawsuit against one partner, all of the other partners are considered liable. Personal assets of the partner will be held by the creditor or court. It is because of this reason that most of the partners do not opt for a partnership like this.

• Partnership limited to one person

Both general and limited partners are included in this partnership. In addition to having unlimited liability, a general partner is responsible for managing the business and its other limited partners. The limited partner has limited control over the business (limited to his investment). It is not their responsibility to manage the firm’s day-to-day operations.

It is common for limited partners to invest and take a profit share in most cases. It is not in their interest to participate in management or decision-making. Because of this non-involvement, they are not entitled to receive income tax compensation for partnership losses.

• A limited liability company

The partners in a Limited Liability Partnership (LLP) are each limited in their liability 0ol.oi/mgfl;/.kjugh./;.l,km’;/;.kmp’;.l,mjnb;/lk gbf] Each partner is guarded against other partners’ legal and financial mistakes. A limited liability partnership is almost similar to a Limited Liability Company (LLC) but different from a limited partnership or a general partnership. 

• Partnership at Will

When there is no clause regarding the expiration of a partnership firm, it’s called a partnership at will. To become a Partnership at Will, a firm must meet the two conditions outlined in section 7 of the Indian Partnership Act 1932:

• The partnership agreement should not have a fixed expiration date.
• There should be no mention of any particular partnership determination.

It is not a partnership at will if the duration and determination are defined in the agreement. Additionally, the firm will be considered a partnership at will if it has a fixed expiration date, but operates beyond that date.

Act of 1932 establishing Indian partnerships

As most Indian businesses are partnerships, the Indian Partnership Act of 1932 was enacted to monitor and govern these partnerships.  An agreement is made between two or more individuals to run a business together and share the profits they make. 

Among the benefits of a partnership are:

• Easy Formation – An agreement to enter as a partner and establish a business can be either oral or written.
• Large Resources – Partners of the firm can contribute more capital and other resources as needed, unlike sole proprietorships where all contributions are made by one person.
• Flexibility – Each partner can initiate changes if they believe they are necessary or if circumstances change.
• Risk Sharing – Each partner shares equally in the loss incurred by the firm.
• Combination of different skills – Partners bring different knowledge, skills, experiences, and talents to the partnership firm.

Examples of partnerships:

Few co-branding partnership examples are listed below:

• RED BULLET and GOPRO
• The Spotify app and Uber
• Pinterest and Levi’s
• The Suzuki Maruti
• Indian Oil Corporation

It is very helpful for Commerce students to understand the concept of ‘Partnership’ in this article. You can learn more about such fascinating concepts at Nemani Classes.

Answers to Frequently Asked Questions about Partnerships

In what three ways can a partnership be formed

The three different types of partnership are:

1. Generally speaking
2. A limited liability company
3. Partnerships limited by liability

What five characteristics define a partnership?

The following are the five characteristics of a partnership:

1. Losses and profits are shared
2. An agency that works together
3. A liability that is unlimited
4. Businesses that are legal
5. Relationships between parties

How does a partnership differ from a sole proprietorship?

The following are the disadvantages of a partnership:

1. A liability that is unlimited
2. There is a risk of disagreement between partners
3. Instability in the partnership

In what ways does partnership matter most?

Partners must be agents and principals of each other and themselves in a partnership, which is the most important element. A partner may carry on business alone or with others.