What are the Advantages and disadvantages of a partnership

Advantages

(i) The business being free from legal restrictions on its activities is elastic and mobile. The formation or dissolution does not entail the legal expenditure and formalities as in the case of joint-stock companies.

(ii) Two or more individuals with experience or ability can easily join hands.

(iii) As each partner is personally interested in the profits, there is the incentive to work hard and produce satisfactory results for the common good of himself and his partners.

(iv) The department of the business can be conveniently and advantageously divided and taken over by partners according to their ability and experience leading to best organisation results.

(v) Combination of persons with experience with those less experienced who make up for their lack of experience by contributing larger capital and may receive smaller share in the profits.

(vi) As against a sole trader-

(a) It may enable the sole trader to slacken his exertions during his later years and to inject new blood into his business.

(b) It is in a better position to raise capital and operate on a larger scale.

(c) There is opportunity for discussion among partners before a decision is arrived at.

Partners as Agents

Generally speaking, the partners of a firm have a right to enter into contracts in the name of the firm, to engage and dismiss servants and to take a managing part in the business of the firm.

In so doing they are entitled to sign the relative contracts, and the firm bound by their signatures as if all the partners had signed, provided that the said contract is made in the regular course of the business of the firm.

Partnership agreements, however, frequently limit the rights of various partners by mutual arrangement, which agreement would be binding on partners-although outsiders who are not aware of these mutual arrangements and in ignorance deal with partner assuming that he has the usual powers are protected.

In short, outsiders are not bound by clauses in the agreement between partners of which they are not aware, because they are supposed to assume that the usual that the usual powers of partners are still vested in the party with whom they deal.

Partnership Agreement

A partnership maybe entered into without reducing the

agreement into writing, but such a course is hardly satisfactory and the usual practice is to get a partnership agreement drawn up in writing, in which all details as to the amount of capital to be contributed by each, the proportion in which they should share profits, the limit of the amount of their monthly drawings for home expenses, the rate of interest, if any, to be charged or allowed on drawings and capital as agreed upon between partners. The periodical closing of accounts and adjustments of capital of partners, the basis of calculation of goodwill in case of retirement or death of the partner, etc., are all provided for so may be avoided as far as possible.

Sharing of Profits

According to the Indian Partnership Act, 1932, Sharing of profits is only a prima facie evidence of partnership, and not conclusive evidence, because there are occasions where a person though he shares profits may not be a partner.

However, there cannot be a partner in a partnership who does not share the profits, but shares losses. The cases in which though a person shares profits he or she may not be a partner or liable as partners are:-

(i) Where servants or agents of a business are remunerated by a share of profits in lieu of or in addition to their salary.

(ii) Where a widow or child of a deceased partner is paid a share of profits for a certain number of years or for life, in consideration of the sale by him of the goodwill of a business.

(iii) When he shares profits or gross returns arising from property, by holding a joint or common interest in that property with others.

(iv) When a widow or child of a deceased partner is paid an annuity by the surviving partners.

(v) Where a share of profits is received by a person lending money to the partners in a business and in lieu of interest receive a share of profits.

Disadvantages

(i) Public confidence is reduced owing to the absence of legal formalities and want of publicity as to partnership affairs.

(ii) The unlimited liability of the partners for payment of debts of the firm restricts enterprise.

(iii) The partnership has no independent existence apart from the persons who compose it, i.e. it is not a legal entity as a joint stock company is.

(iv) The fact that the partnership is dissolved in law on the death, insanity, incapacity or retirement of a partner though of course there is no objection to the surviving partner carrying on the business under the same name and style, and without having to go through any legal formality which entails expenditure or inconvenience.

(v) The limitation on the number of partners.

(vi) The limited amount of capital partners can bring in and the difficulties of procuring fresh capital when compared with joint stock company enterprise.

The company combination has, on the other hand, a number of advantages of its own viz.-

(i) The privilege of limited liability is open to the proprietors or shareholders.

(ii) The company enjoys a perpetual succession, which means that the death or retirement of a shareholder does not bring about the dissolution of the company.

(iii) A larger amount by way of capital can be raised through the issues of shares.

A partnership on the other hand one greater disadvantage viz, That every partner is liable to his last paisa to the creditors of the firm and that the death or retirement of a partner amounts in law to a dissolution of the partnership, because even where the surviving partners decide to carry on the business, that will constitute in law a new partnership.

Type of Partners

A partner who takes an active part in the business is called an ‘Active Partner.’ One who is by mutual agreement authorized to act as a manager and is paid an extra salary is called the managing Parting Partner.’ One who, though he does not take an active part, has invested his money in the firm is called the “Dormant’ or ‘Sleeping’ or ‘Financial Partner’

One who has only lent his name and credit to the firm, but has neither contributed capital nor takes any active part in the business of the firm is called a ‘Normal Partner.’ It may be further added that if a person who is not a partner behaves in such a way as to mislead outsiders into the belief that he a partner, and on that assumption outsiders give credit to the firm which the firm is unable to meet, the Court would compel the person so folding himself out’ as a partner to make good this loss.

Power of partners

The Partnership Act gives certain implied powers to persons who are partners which powers are liable to be altered or varied by agreement between the partners. These powers are:-

(i) A partner shall identify the firm for any loss caused to it by his willful neglect in the conduct of the business of the firms.

(ii) Every partner has a right to have access to inspect and copy of the books of the firm.

(iii) A partner making for the purpose of the business any payment or advance beyond the amount of capital he has agreed to subscribe, is entitled to interest thereon at the rate of six percent per annum.

(iv) Every partner has a right to take part in the conduct of the business.

(v) Every partner is bound to attend diligently to his duties in the conduct of the business.

(vi) Any difference arising as to ordinary matters connected with the business may be decided by a majority of the partners and every partner shall have the right to express his opinion before the matter is decided, but no change may be made in the nature of the business without the consent of all the partners.

(vii) Where a partner is entitled to interest on the capital subscribed by him, such interest shall be payable only out of profits.

(viii) A partner is not entitled to receive remuneration for taking part in the conduct of the business.

(ix) The partner is entitled to interest on the capital subscribed by him, such interest shall be payable only out of profits.

(x) The firm shall indemnify a partner in respect of payments made and liabilities incurred by him-

(a) In doing such act, in an emergency for the purpose of saving the firm from loss, as would be done by a person of ordinary prudence, in his own case, in similar circumstances.

(b) In the ordinary course and proper conduct of business.

Accounts on Winding up

The Indian Partnership Act of 1932 lays down in this connection as follows: In setting the accounts of a firm after dissolution, the following rules shall, subject to agreement by the partners, be observed:-

Losses in cladding deficiencies of capital of capital shall be paid first out of profits, next out of capital, and lastly, if necessary by the partners individually in the proportions in which they were entitled to share profits.

The assets of the firms including any sums contributed by the partners to make up deficiencies of capital shall be applied in the following manner and order:-

(a) The residue if any shall be divided among the partners in proportions in which they were entitled to share profits.

(b) In paying the debts of the firm to third parties;

(c) In paying to each partner rate ably what is due to him on account of capital; and

(d) In paying to each partner rate ably what is due to him from the firm for advances as distinguished from capital.