Lesson 05 PARTNERSHIP AND ITS CHARACTERISTICS

Lesson 05

PARTNERSHIP AND ITS CHARACTERISTICS

PARTNERSHIP

Partnership is the second stage in the evolution of forms of business organization.  It means

the association of two or more persons to carry on as co-owners, i.e. a business for profit.  The

persons who constitute this organization are individually termed as partners and collectively

known as firm; and the name under which their business is conducted is called “The Firm

Name”.

In ordinary business the number of partners should not exceed 20, but in case of banking

business it must nor exceed 10.  This type of business organization is very popular in

Pakistan.

DEFINITION

1.

According to Section 4 of Partnership Act, 1932

“Partnership is the relation between persons who have agreed to share the profits of a

business carried on by all or any of them acting for all.”

2.

According to Mr. Kent

“A contract of two or more competent persons to place their money, efforts, labour and skills,

some or all of them, in a lawful commerce or business and to divide the profits and bear the

losses in certain proportion.”

Structural Diagram:

Association

Profit & Loss  Money, Labour

PARTNERSHIP

And Other Skills

Lawful Business

CHARACTERISTICS

The main characteristics of partnership may be narrated as under:

1. Agreement

Agreement is necessary for partnership.  Partnership agreement may be written or oral.  It is

better that the agreement is in written form to settle the disputes.

2. Audit

If partnership is not registered, it has no legal entity.  So there is no restriction for the audit of

accounts.

3. Agent

In partnership every partner acts as an agent of another partner.

4. Business

Partnership is a business unit and a business is always for profit.  It must not include club or

charitable trusts, set up for welfare.

5. Cooperation

In partnership mutual cooperation and mutual confidence is an important factor.  Partnership

cannot take place with cooperation.

6. Dissolution

Partnership is a temporary form of business.  It is dissolved if a partner leaves, dies or

declared bankrupt.

7. Legal Entity

If partnership is not registered, it has no legal entity.  Moreover, partnership has no separate

legal entity from its members and vice versa.

8. Management

In partnership all the partners can take part or participate in the activities of business

management.  Sometimes, only a few persons are allowed to manage the business affairs.

9. Number of Partners

In partnership there should be at least two partners.  But in ordinary business the partners

must not exceed 20 and in case of banking business it should not exceed 10.

10. Object

Only that business is considered as partnership, which is established to earn profit.

11. Partnership Act

In Pakistan, all partnership businesses are running under Partnership Act, 1932.

12. Payment of Tax

In partnership, every partner pays the tax on his share of profit, personally or individually.

13. Profit and Loss Distribution

The distribution of profit and loss among the partners is done according to their agreement.

14. Registration

Many problems are created in case of unregistered firm.  So, to avoid these problems

partnership firm must be registered.

15. Relationship

Partnership business can be carried on by all partners or any of them can do the business for

all.

16. Share in Capital

According to the agreement, every partner contributes his share of capital.  Some partners

provide only skills and ability to become a partner of business and earn profit.

17. Transfer of Rights

In partnership no partner can transfer his shares or rights to another person, without the

consent of all partners.

18. Unlimited Liability

In partnership the liability of each partner is unlimited.  In case of loss, the private property of

the partners is also used up to pay the business debts.

ADVANTAGES AND DISADVANTAGES OF PARTNERSHIP

ADVANTAGES OF PARTNERSHIP

Following are the advantages of partnership:

1. Simplicity in Formation

This type of business of organization can be formed easily without any complex legal

formalities.  Two or more persons can start the business at any time.  Its registration is also

very easy.

2. Simplicity in Dissolution

Partnership Business can be dissolved at any time because of no legal restrictions.  Its

dissolution is easy as compared to Joint Stock Company.

3. Sufficient Capital

Partnership can collect more capital in the business by the joint efforts of the partners as

compared to sole proprietorship.

4. Skilled Workers

As there is sufficient capital so a firm is in a better position to hire the services of qualified and

skilled workers.

5. Sense of Responsibility

As there is unlimited liability in case of partnership, so every partner performs his duty

honestly.

6. Satisfaction of Partners

In this type of business organization each partner is satisfied with the business because he

can take part in the management of the business.

7. Secrecy

In partnership it is not compulsory to publish the accounts.  So, the business secrecy remains

within partners.  This factor is very helpful for successful operation of the business.

8. Social Benefit

Two or more partners with their resources can build a strong business.  This factor is very

helpful in solving social problems like unemployment.

9. Expansion of Business

In this type of business organization, it is very easy to expand business volume by admitting

new partners and can borrow money easily.

10. Flexibility

It is flexible business and partners can change their business policies with the mutual

consultation at any time.

11. Tax Facility

Every partner pays tax individually.  So, a firm is in a better position as compared to Joint

Stock Company.

12. Public Factor

Public shows more confidence in partnership as compared to sole proprietorship.  If a firm is

registered, people feel no risk in creating relations with such business.

13. Prime Credit Standing

The liabilities of partners are unlimited, so the banks and other financial institutions provide

them credit easily.

14. Minority Protection

In partnership all policy matters are decided with consent of each partner.  This gives

protection to minority partners.

15. Moral Promotion

Partnership is the best business for small investors.  It promotes moral courage of partners.

16. Distribution of Work

There is distribution of work among the partners according to their ability and experience.  This

increases the efficiency of a firm.

17. Combined Abilities

Every partner possesses different ability, which helps in running the business effectively, when

combined together.

18. Absence of Fraud

In partnership each partner can look after the business activities.  He can check the accounts.

So, there is no risk of fraud.

DISADVANTAGES OF PARTNERSHIP

The disadvantages of partnership are enumerated one by one as under:

1. Unlimited Liability

It is the main disadvantage of partnership.  It means in case of loss, personal property of the

partners can be sold to pay off the firm’s debts.

2. Limited Life of Firm

The life of this type of business organization is very limited.  It may come to an end if any

partner dies or new partner enters into business.

3. Limited Capital

No doubt, in partnership, capital, is greater as compared to sole proprietorship, but it is small

as compared to Joint Stock Company.  So, a business cannot be expanded on a large scale.

4. Limited Abilities

As financial resources of partnership are limited as compared to Joint Stock Company, so it is

not possible to engage the services of higher technical and qualified persons.  This causes the

failure of business, sooner or later.

5. Limited number of Partners

In partnership, the number of partners is limited, so the resources are also limited.  That is why

business cannot expand on large scale.

6. Legal Defects

There are no effective rules and regulations to control the partnership activities.  So, it cannot

handle large-scale production.

7. Lack of Interest

Partners do not take interest in the business activities due to limited share in profit and limited

chances of growth of business.

8. Lack of Public Confidence

As there is no need by law to publish accounts in partnership, so people lose confidence and

avoid dealing and entering into contract with such firm.

9. Lack of Prompt Decision

In partnership all decisions are made by mutual consultation.  Sometimes, delay in decisions

becomes the cause of loss.

10. Lack of Secrecy

In case of misunderstandings and disputes among the partners, business secrets can be

revealed.

11. Chances of Dispute among Partners

In partnership there are much chances of dispute among the partners because all the partners

are not of equal mind.

12. Expansion Problem

Partnership business may not be expanded due to limited number of partners, limited capital

and unlimited liability.

13. Frozen Investment

It is easy to invest money in partnership but very difficult to withdraw it.

14. Risk of Loss

There is a risk of loss due to less qualified and less experienced people.

15. Transfer of Rights

In partnership no partner can transfer his share without the consent of all other partners.

CONCLUSION

From the above-mentioned findings, we come to this point that despite the above

disadvantages, partnership is an important from of business organization.  This is because its

formation is very easy and due to unlimited liabilities, partners take great interest in business,

because in case of loss they are personally responsible.