Features of a Partnership Firm
A comprehensive look at the key characteristics that define a business partnership, from legal structure to operational dynamics.
Meaning and Definition
A partnership firm is a voluntary association of two or more people who contribute their capital and services, and share the profits and losses in an agreed proportion. It represents a collective effort to run and grow a business.
"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."
Key Features Explained
1Agreement
A partnership is formed through an agreement (oral or written) between persons to conduct business and share profits. A written agreement, or 'Partnership Deed', is highly advisable to prevent future disputes.
2Number of Partners
A partnership requires a minimum of two persons. The maximum number is typically limited by law (e.g., 50 under the Indian Companies Act, 2013, which overrides the old 1932 act limits).
3Lawful Business
The firm must be established to conduct a business that is legal within the country of operation. Activities like smuggling or selling illegal goods cannot form a valid partnership.
4Profit & Loss Sharing
The core purpose is to earn and share profits. The partners must agree on a ratio for sharing both profits and losses, which is usually based on their capital contribution.
5Unlimited Liability
Each partner has unlimited liability. This means personal assets of partners can be used to pay off the firm's debts if the business assets are insufficient. Liability is both joint and several.
6Joint Ownership
All partners are joint owners of the business and its property. The firm's assets must be used exclusively for business purposes and cannot be used for any partner's personal benefit.
7Business Secrecy
Compared to a public company, a partnership offers more secrecy as it is not required to publish its accounts. However, with multiple partners, maintaining complete secrecy can be a challenge.