Partnership is the relation between persons competent to make contract who agreed to carry on a lawful business in common with a view of private gain
Partnership Firm – Content
- Concept of partnership firm and partners
- Characteristics of the partnership firm
- Difference between sole trading and partnership
- Merits and demerits of partnership firm
- Types of partners and partnership
- Rights and duties of partners
- Partnerhip deed: Meaning and contents
- Registration and renewal of partnership firm in Nepal
- Dissolution of partnership firm in Nepal
Concept of Partnership
Partnership is a form of business organization which has evolved to overcome the shortcomings of sole proprietor. As the size of business expands, one person is unable to provide the necessary capital and managerial skills. Therefore, two or more than two persons form a partnership to carry on business by pooling their financial resources and managerial skills. Thus, partnership is an extension of sole trading concern.
According to Lewis H. Haney,“Partnership is the relation between persons competent to make contract who agreed to carry on a lawful business in common with a view of private gain”
According to Nepal Partnership Act 2020 B.S. Clause3(1),“partnership is any business registered in the book of Government, which is carried by some person in one name sharing the profits with mutual agreement to participate all the partners for each partner or a partner for all the partner in business transaction.”
Characteristics of partnership firm
- Unlimited liability: General Proprietor (Partner) is liable for all the debts of the business. In case the assets are insufficient to meet the debts, the personal property of the proprietor can be attached.
- Difficulty in transfer of shares: Partners cannot transfer their share without the consent of other partners. There may be conflict when done otherwise.
- Higher capital: Many partners invest capitals and there is higher flexibility in capital because a new partner can be agreed to be associated and investing can be increased.
- Reduced risk: Since, this company established by two or more partners. Every partner have right to take part in management. They have the duty to bear risk with proportion too.
- Association of two or more persons: It must be two or more person to enter into contract. Association of two or more persons can only create partnership. In association of two or more persons, maximum and minimum number of persons is not mentioned.
- Agreement:It is set up by agreement between partners. It must be written and legal agreement so that it will reduce dispute.
- Formation: There are different provision to register partnership in different country. In Nepal, this company registered under the Partnership Act 2020 BS by two or more than two people by investing their money. There is not mentioned about the exact number of partners in partnership business.
- Mutual agreement: Mutual Agreement between the partner is known as the partnership deed. This agreement specifies almost all business activities that carried out by partner and partnership business. And all the business activities inside partnership form run according to it. Agreement can be a crucial role player (key evidence) in future when the misunderstanding or dispute arise among partners.
- Profit and loss sharing: All the partner of the business can enjoy the proportion of the profit and have to bear the loss. Profit and loss of the business shared among the partner in the proportion of their investment or agreement. But, in the absence of agreement, they have to follow the partnership act 2020.
- Lack of separate entity: Partnership Business is not regarded as a legally separate entity from its investors (Proprietor). This business cant involves in any activity in its own independently.
- Management and control: The Management and control of the business might be controlled by all the members or someone specific person as per the mutual consent (partnership deed). Each partner have right to take part in management as well as duty to perform for betterment of organisation.
- Utmost good faith: Partnership Business become success on the basis of partners knowledge and trust. Every partner bound to each other and a partner is taken as an agency of partnership firm in regular business dealing. Every activity must be transparent to each other and there must be fair and clear up to date account.
- Individuality of partners: All the partners involved in partnership business can have their own separate identity than the partnership business as well. They may involve in other business as well as per their skills knowledge or other concern component but they are not allowed to establish similar business in the same market.
Difference Between Sole Trading and Partnership
Advantages of Partnership
- Easy to start and dissolve: A partnership firm can be set up easily and quickly. There are not many legal formalities and expenditures are involved in the establishment of a partnership. Similarly, a partnership firm can be closed down very easily and quickly.
- Higher capital: Many partners invest capital and there is higher flexibility in the capital because new partners can be agreed to be associated and investing can be increased.
- Higher innovation: Many partners use their own ideas and innovation capacity. So there is the unlimited managerial ability
- Reduction of workload: Partners mustn’t work more to earn more profit. Higher profit generation is important. So, there is no dull and monotonous work. In the case of monotony, health problems to any partner then other partners can help and reduce absenteeism.
- Better decision: There is specialization in decision making. So there can be fewer chances of taking wrong decisions
- Harmonization of different ability: There are many partners in this firm and many partners have different skills, knowledge, and capacity
- Credit facility: In this liability of partners becomes unlimited. It will help to arrange more capital. And that’s why it has more credibility. It improves more financial function
- Close supervision: There are effective management and effective supervision. They look at the business themselves.
- Flexible: There can be a change in management, capital, and production. This change can be made by mutual agreement of partners
- Reduced risk: Partners have the right to take part in management. They have the duty to bear the risk with proportion too.
- Incentive to work:
- Secrecy: though there is less secrecy than sole trading concern, the partnership business doesnt bound to publish its financial /business information publicly so there are more chances of business secrecy if the partners keep with themselves.
- Effective Management:
- Facility of Loan:
- Prompt Decision:
- Equal Rights of Partners:
Demerit of Partnership firm
- No Business secrets: The partner can keep the secrets to himself but these secrets can be known to competitors or others when there is conflict among the partners
- Uncertain existence: Death of any partner can sometimes cause the death of the entire firm. Dishonesty, conflict, and lack of resource also can collapse the firm
- No Personal contact: A partner can’t be in a position to maintain intimate contacts with his customers and employees. He cannot be able to enter to the requirements of each and every customer. Then there is no close personal touch which decreases the competitive strength of the business.
- Unlimited liability: The proprietor is liable for all the debts of the business. In case the assets are insufficient to meet the debts, the personal property of the proprietor can be attached.
- Delay in decisions: The partnership firm is completely not free to make all decisions and to implement them. The partners need to consult or seek others’ approval. Delay in decisions reduces the efficiency of the business.
- Danger of conflict: Many persons are the owners of the partnership firm. There can be misunderstanding and jealousy among them and these cause problems in the operation of business and profit-making
- Difficulty in the transfer of shares: Partners cannot transfer their share without the consent of other partners. There may be conflict when done otherwise.
- Limited resources: There is a low investment, which may be higher than in sole trading but not sufficient for large-scale production resulting in limited areas of operation.
- Lack of Public Faiths: There are mainly two reasons why people don’t trust this business.
- This business doesn’t publish any financial and other business information
- These businesses are uncertain
- Risk of Implied Authority: An active partner may misuse his implied authority. He/she might use it for personal benefit rather than an organizational benefit. The unexpected decision of the partner may create excess liability of the firm than capital investment which will be an extra burden for both organizations as well as partners.
Types of Partners
- Active partners: They provide capital and play an active part in business. These partners have unlimited liability.
- Inactive/Sleeping partner: They provide capital to business and share profit and loss to firm but do not take part in management and day to day activities.
- Nominal partners: They act only as a partner and give their name to the firm. They do not take part in management and day to day activities also don’t share profit and loss. The Nominal partner is liable for the debt/liability if the partners or firm couldn’t repay the credit taken with the nominal name.
- Secret partner: These partners are similar to general partner. They have involvement in every aspect of business. Their membership is kept secret to the outside world. They can take part in the management
- Partner in profit only: They share profit only but no loss is shared. They are generally inactive but have relation in money and goodwill.
- Minor partners: They do not enter into contract and can’t be made partner in real sense but if there is consent of all partners then their partnership can be taken into consideration. They have right to inspect book of account and share the proportion of profit. They are limited partner as they don’t need to bear any additional loss.
- Retrieval partners: Even if this partner leaves the firm other partners continue to operate business. They are liable for all debtor and share profit too. But they do not take part in management and day to day activities.
- Incoming partners:
- Outgoing Partners:
- Quasi Partners:
- Active Partners:
- Limited Partners:
- Sub Partners:
If there is consent of all partners then their partnership can be taken into consideration. They aren’t held liable for debt before approval of all partners.
Types of partnership
A. General partnership: Partners have equal rights and all of them participate in management. It is jointly involved to operate the business. There are two types of general partnership.
i. Partnership at will: It continues up to the time of partner. It is dissolved when all partners want dissolution. They can leave the firm at will. There is no fixation of duration of firm
ii. Particular partnership: It is established for definite workers at definite period. When task is finished partnership is dissolved in particular partnership.
- For Particular time period.
- For Particular Purpose.
B. Limited partnership: A limited partnership is that type of partnership in which there is one or more partners having limited liability. The liability of limited partners is limited to their capital invested. They can’t participate in the managerial activities but they can advice. They also don’t have right to make decision and close the firm
C. Partnership in Profit:
Rights of Partners
- Every partner has right to take part in planning, implementation and control activities of the firm
- Every partner has right to express his opinion, give advice and view on any subject
- Every partner has right to inspect and inquire about the account and ask for the duplicate copy
- Every partner has right to share the profit according to the agreement
- Every partner has right to get interest on loan and advances
- Every partner has right to use the properties of the firm but only for the benefit of the firm not or personal use
- Every partner has right to leave the firm with consent of remaining partner
- Every partner has right to have interest on the property but should not sell the property to anyone without the consent of other partners
- Every partner has right to dissolve the firm with the consent of other partner
Duties of Partners
- It is the duty of every partners to share the loss occurred in a firm
- It is the duty of every partners to work honestly and faithfully and work for common benefit of all partners and firm
- It is the duty of every partners to work and make decisions within the authority
- It is the duty of every partner to maintain the financial status of the firm.
- It is the duty of every partner to stop the leakage in firm. There should not make any secret profit.
- It is the duty of every partner to compensate on the loss and damage of firm.
The written agreement duly signed by the partners is known as partnership deed. It is also known as agreement or article of partnership. It is the document, which mentions the rules and regulations, way o operation of management and way of control of activities of the firm. It is also required at the time of registration. It helps to minimize conflict and misunderstanding among the partners.
Content of Partnership Deed:
- Name and address of the firm
- Name and address o the partners
- Nature of the business
- Duration of partnership
- Amount of capital invested by the partners.
- Interest on capital
- Division of profit and Loss
- Drwaing of Partners and Interest thereon.
- Name of Bank and Authority for signing in the cheque.
- Salary and commission
- Right and duties of partner
- Admission and removal of partnership
- The effect of the death of Partner
- Valuation of capital and goodwill at the time of admission, death and retirement of partners
- Accounts and audits
- Revaluation of assets and liabilities
- Settlement of business in case of dissolution.
- Provision for Arbitration in case of a dispute.
Procedures of registration
Apply for Registration: Application form is needed to be filled up and apply for registration. The application must include the following things
- Name of firm
- Address of the firm
- Objective of the firm
- Name and address of partners and address of the partners
- Type of partnership
- Amount of capital invested by each partner
- Method of sharing profit and loss
- Duration of business.
- Other particular things.: necessary documents, registration fees, copy of citizenship
Deposit of Registration Fee: Registration fee should be deposited in the Nepal Rastra Bank. Voucher is needed for the deposit of registration fee. It should be enclosed in application form. If the firm is commercial then recommendation letter from Nepal chamber of commerce is required.
|Capital||Registration fee||Renewal fee||Registration fee|
|Up to 1,00,000||Rs 700||Rs 100||Rs 700|
|From 1,00,001 to 3,00,000||Rs 2100||Rs 125||Rs 2100|
|From 3,00,001 to 5,00,000||Rs 4100||Rs 150||Rs 4100|
|From 5,00,001 to 10,00,000||Rs 7600||Rs 200||Registration fee|
|Up to 10.00,001 to 50,00,000||Rs 10100||Rs 250||Rs 700|
|Above 50,00.000||Rs 15100||Rs 300||Rs 2100|
Receiving the Certificate of Registration:
Concerned department receive the application. Than an authorized officer will examine. It satisfied then the form is approved and “certificate of registration” is issued and then legal business can be operated.
Procedure of renewal
The entire registered firm should be renewed each year within 35 days of time period. He should fill application for renewal with renewal fee to the concerned department. This amount is dependent upon the capital invested.
Effects of Non-Registration and Non-Renewal
If the partnership firm is operated without registration and renewal then it is considered illegal. It can’t get loan from any financial institution. This department will charge from rs 5 to rs 50 as fee. The effect of non-registration and non renewal is if the is not registered and renewed then fee is charged. If same crime is done for 3 times, additional rs 10 are to be paid. If it is committed gain then partnership firm is closed and no any concern can be established under any partners’ name.
Dissolution of a Partnership
There are various Point/Reason and time for dissolution of a partnership Business.
- Dissolution by Agreement: Dissolution as per the agreement between partners.
- Dissolution by written notice: Partners can dissolve the partnership business by giving the written notice.
- Dissolution at any time: If something unexpected or beyond the agreement comes up and partners or concern department thinks betterment to close the business rather than continuing it.
- Dissolution after the expiry of time: If the partnership was formed for a certain time duration.
- Dissolution at once: On the death or insolvency of partners.
- Dissolution by Concern Department: If the concerned department found any such things (illegal or inappropriate activity by firm)
Some other point to be specified:
- Existing partners can dissolve the firm by another agreement
- Dissolution by notice, any partner can dissolve the firm by giving notice to all the partners
- If any partner is unable to take responsibility of partnership deed.
- If partner do not pay the amount payable to the firm
- If shares are transferred without consent of other partners
- If right of partners is taken over by the court of compensation
- Liable for negligence
- Death of partner
- Dissolved by concerned department
- Commits illegal work or violate the rules of the firm
- If not renewed in given time.