A partnership is a group of two or more people agreeing to divide revenues from a legal business. A partnership is administered and carried out by all or any of them or by some acting on behalf of all.
Partnership formation is basic and transparent. Each member of such a group is known as a ‘partner’. The entire group is known as a ‘partnership firm’. Individuals, businesses, interest-based organisations, schools, governments, and combinations can be partners in a partnership. Organisations may create alliances to increase their chances of achieving their objectives and broaden their influence. A partnership can be governed merely by a contract, or it could result in the issuing and holding of shares. A partnership or a partnership firm can have many features. Let’s understand the features of partnerships.
Table of Contents
Features of partnership
Key features of the partnership include:
- Mutual Agency: Every partner must act as both an agent and a principal on his fellow partners’ behalf. Any or all of the partners must conduct business.
- Risk and reward sharing: Everyone in the company shares the risks and rewards.
- Earnings: Each partner is entitled to a portion of the company’s net profits. There’s no need for equal shares in a contract. It could be determined by the amount of money invested by the partner.
- No limit Liability: Partners are equally liable for all debts and obligations of the firm without limitation, including loss and damages derived from their fellow partners’ wrongful acts or omissions, as well as a potential liability to third parties.
- Making decisions: Partners can make decisions that affect the firm or its assets.
- Ownership sharing: Although partners may have agreed that the firm will use an asset that belongs to one of the partners individually, all partners share ownership of its assets.
- Flexibility: The partnership structure is flexible, allowing members to agree on how the company is handled and financed.
- Privacy: The partnership’s financial and constitutional affairs are kept entirely confidential. The interests of the partners determine disclosure.
- Taxation: Employer’s National Insurance Contribution does not contribute to partners’ profits. There is no mismatch between corporation tax and tax credits on dividends because partners are assumed to be self-employed.
- Changes in Membership: Complicated procedures are not required for shares to change hands without incurring tax effects.
Advantages of Partnership
- Bridging the knowledge and skills gap: Partnering with someone can provide you access to a broader spectrum of expertise for many aspects of your business. A good business partner may also bring expertise and experience that you lack and complementary skills that will aid in the growth of your organisation.
- More Money: A potential partner may inject capital into the business. Another person seems to have more strategic relations. It may help the company attract potential investors and raise further funding for expansion.
- Savings: Having a business partner can help share the financial burden of running the company’s expenses and capital expenditures and save a lot of money.
- Better Business Opportunities: An advantage of having a business partner is the sharing of the workload. Having a partner can enhance your productivity and allow you to explore new business opportunities with ease and flexibility.
- Better Work/Life Balance: Splitting the task with a partner can help lighten the load. Partnership may enable you to take time off when you need it, safe in the knowledge that someone you can trust will keep it functioning.
- Moral Support: Everyone needs to bounce ideas off one another and debrief on major situations. We may want moral support when facing setbacks or dealing with jobs and everyday disappointments.
- New Perspectives: A partnership can bring in a fresh pair of eyes to assist what we may have overlooked. A partnership may help gain a new perspective or outlook on what we do, who we work with, the markets we pursue, and even how we price our products and services.
- Possible Tax Benefits: A tax benefit could be one of the benefits of forming a general partnership. A general partnership can avoid paying income taxes.
Disadvantages of Partnership
- Difficulty in Transfer of Ownership: Transferring ownership is complex because a partnership dissolves on change of ownership. When a new partner is brought onboard, or partnership interest is sold, a complicated procedure necessitates asset appraisal and renegotiating previously agreed-upon partnership operating terms.
- Lack of regulation: An informal partnership agreement does not require writing. However, this could result in legal conflicts between partners, exposing them to unlimited liability.
- Individual tax rates apply: Individual partners frequently have other sources of income outside of the partnership, which results in their allotted partnership income getting taxed at a higher rate than if the partnership were responsible for income taxes.
- Life expectancy: The partnership ends when a new partner gets admitted, a partner leaves, a partner dies, or the partnership dissolves. Therefore, the majority of collaborations have an end date.
- Liability is limitless: The legal obligation of all general partners for the partnership’s debts, regardless of who incurred them, is known as unlimited liability. The partners’ assets may be subject to this responsibility.
- Differences of opinion on mutual agency: Mutual agency applies regardless of whether all parties agree on the contract or agreement. The joint agency may cause conflict because many partners may tie the partnership and hold everyone answerable as long as the action gets conducted to build the partnership.
- Capacity to raise funds is limited: A partnership’s ability to raise money or new funds, whether from the individual members or a financial institution offering a loan, is frequently constrained.
A partnership firm brings together people with managerial talent from different sectors to run a business. These features of partnership improve the organisation’s administrative strength, financial resources, talent and expertise, and decrease risk. Small businesses, such as retail and wholesale commerce, professional services, medium-sized mercantile houses, and small manufacturing units, are best suited for such firms. Many businesses begin as partnership firms and are subsequently changed into corporations when they become commercially sustainable and financially attractive to investors.
FAQs on Features of Partnership
Is it essential to have a partnership deed to start a partnership firm?
No, a deed is not required.
Does a partner's death dissolve the partnership firm?
Yes. When one of the partners dies, the partnership firm is automatically dissolved.
What is the most crucial feature of partnership?
An essential feature of a partnership is mutual agency.
Is the firm accountable for one partner's wrongdoing?
Yes, the firm, as well as all of its partners, are accountable for the wrongdoing.
What is meant by a mutual agency?
Mutual agency is the contractual entity between partners in a partnership. Each partner has authorisation rights and the authority to engage in business deals on behalf of the partnership.