Partnership Definition and Nature

Meaning and Definition of Partnership

• Partnership is a business organization where two or more persons come together to earn profit.
• According to the Indian Partnership Act, 1932, partnership is the relation between persons who have agreed to share the profits of a business.

Nature of Partnership

• Partnership is formed by an agreement between two or more persons.
• The main objective is to share profits and losses among partners.
• The agreement must be to carry on some business.
• Each partner acts as an agent for the firm and other partners.
• Partners have unlimited liability.
• Partnership relies heavily on mutual trust and confidence.

Characteristics of Partnership

• Formed by an agreement, either oral or written.
• Minimum two partners; maximum 50 (as per the Companies Act, 2013).
• Partnership does not have a separate legal entity.
• Each partner acts as both principal and agent.
• Partners share the risks of the business.
• Partnership dissolves with the death or insolvency of a partner unless otherwise agreed.

Rights of Partners

• Every partner has the right to take part in the conduct of the business.
• Partners have the right to be consulted on matters affecting the business.
• Every partner has the right to inspect and copy the books of the firm.
• Partners have the right to share profits in the agreed ratio.
• Partners have the right to be indemnified for expenses incurred in the ordinary course of business.

Partnership Deed

• A partnership deed is a written agreement among partners specifying the terms and conditions of the partnership.
• Specifies the name of the firm, nature of business, capital contribution, profit-sharing ratio, duties and responsibilities of partners, etc.
• Clarifies terms and conditions clearly.
• Minimizes disputes among partners.
• Acts as a legal document in case of disagreements.
• Facilitates smooth functioning of the partnership.

Provisions Affecting Accounting Treatment in the Absence of Partnership Deed

• Profits and losses are shared equally.
• No interest is allowed on the capital.
• No interest is charged on drawings.
• Interest at 6% per annum is allowed on loans given by partners to the firm.
• No partner is entitled to salary or commission.

Liabilities of Partners

• All partners are jointly liable for the debts of the firm.
• Partners are also individually liable to the full extent of the firm's debts.
• A retiring partner remains liable for the debts incurred before retirement.
• A new partner is not liable for debts incurred before joining the firm.

Other Provisions of the Indian Partnership Act, 1932

• Registration of a partnership is not compulsory but beneficial.
• Specifies the rights and duties of partners.
• Provides rules for the dissolution of a partnership.
• A minor can be admitted to the benefits of the partnership with consent of all partners.