Partnership is the second stage in the evolution of forms of business organization. An individual may not in a position to cope with financial and management demands of the present day business world.
As a result, two or more individual may decide to pool their financial and non-financial resources to carry on a business and share its profit. The relationship which exits between two or more persons carrying on a business to share its profits in an agreed ratio is known as partnership. The Partnership Act, 1932, contains the law related to partnership.
Section 4 of the partnership act 1932 defines partnership as:
The relationship between persons who have agreed to share the profit of a business carried on by all or any one of them acting for all
An analysis of the above definition reveals certain characteristics of a partnership firm as given below:
1. Relation between persons
As partnership refers to relation between persons there must be at least two persons to form a partnership firm. Members are known as Partners and association is called a Partnership Firm.
The relation among persons, called partners, is the result of an agreement (partnership deed), between persons concerned. It doesn’t evolve form status or operation of law.
The purpose of the contract to form an association is to carry on business which includes every trade, occupation and professions. It implies that partnership firm cannot be formed to carry on a charitable work.
The profit of the business adventure carried on by the must be shared by all partners. Profit is shared by partners in the ratio agreed upon by partners. If a member doesn’t share profit of the firm, however, to become a partner, sharing of losses by member is not necessary.
5. Business Carried out
As per agreement between partners, business may be carried on by all or any one of the partners acting for all. In the normal course of business, every partner is liable for the acts of other partners of the firm and other partners, when the binds other partners by his acts and is treated as principal when other partners bind him by their acts. The relation between partners is that of mutual agency.
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A document which contains details of an express written agreement between the partners is called Partnership Deed. An association of persons who join as partners is known as ‘partnership firm’ and a ‘partner’ is a person who is associated with another person(s) to carry on a business and share its profits in an agreed ratio. The relation between partners is created by a contract between them. The contract between the partners (partnership deed) may be either expressed formally (oral or written) or implied by their conduct. But a written agreement, relating to various business matters is preferable as it helps to avoid disputes in future. It generally contains clauses relating to the:
- Contribution of each partners towards the capital of the business
- The share of profit or loss each partners will take or bear
- The name and address of the firm, the names and addresses of the partners, maintenance of accounts, the entitlement of partners to interest on capital
- Interest on loan
- Salary and
- Settlement of amount payable on reconstitution of the firm and so on.
Thus, a comprehensive deed contains which may arise in future; the clauses of the deed can be altered with the consent of all the partners.
Difference between Partnership and Company
In partnership, there is restriction on the maximum number of partners and each partner is jointly and severally liable for the debts of the firm. The cope with the pressure of increased capital investment and the degree of risk involved, the association of persons may be registered as Company under the companies’ ordinance. The main points of distinction between a partnership firm and a company are as follow:
|It is governed by Partnership Act||It is governed by the Companies Ordinance|
|It’s members are called partners||It’s members are called shareholders|
|It has no separate legal existence||It enjoy separate legal entity|
|Liability of partners is unlimited||Liability of shareholders is limited|
|It is managed by partners||It is management by a board of directors|
|A partner cannot transfer his interest with the consent of other partners||Shareholders can freely transfer their shares|
|Registration of firm is not compulsory||Registration of company is compulsory|
|Audit of accounts of a partnership is voluntary||Audit of accounts of company is compulsory|
|Minimum two members are required||At least seven members are needed to from a public limited company|
|Acts of the partners are binding on the firm||Shareholders cannot bind the company their acts|
Mukharji, A., & Hanif, M. (2003). Financial Accounting (Vol. 1). New Delhi: Tata McGraw-Hill Publishing Co.
Narayanswami, R. (2008). Financial Accounting: A Managerial Perspective. (3rd, Ed.) New Delhi: Prentice Hall of India.
Naz, A. M. (2010). Financial Accounting. Lahore: Waheed Publication.