Concept and Characteristics of Partnership firm
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.