Introduction: What is Partnership?

The Partnership Act, 1932 governs the law relating to Partnership. As per Section 4 of the Act, the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all is called Partnership. Persons who have entered into a partnership with one another are called individually, “partners” and collectively “a firm”, and the name under which their business is carried on is called the “firm-name”.

Characteristics and Features of Partnership Firm

1. Minimum of two Persons

In a partnership firm, a minimum of two persons is required. As per the Act, the maximum limit is not prescribed. However, the Companies Act, 1956 lays down that any partnership or association of more than 10 persons in case of banking business and 20 persons in other types of business is illegal unless registered as a joint-stock company.

2. Agreement

The agreement between the parties who are competent to contract can be written, oral, or implied. But it is beneficial to have a written agreement to avoid any issues in the future.

3. Lawful Business

The business taken up by the firm must be legal. Any unlawful act will not be permitted.

4. Registration

The registration of the partnership firm is necessary. There are certain advantages and disadvantages of registering and non-registration of the partnership firms respectively.

5. Profit-Sharing

Profit-sharing is one of the foremost aspects of the partnership. The partners should have a fixed profit sharing ratio. Any partners working in a charitable, non-profit organization will not be treated as partners.

6. Agency Relationship

Every partner is considered to be an agent of the firm. Moreover, every partner is the agent to other partners as well. Partners have an agency relationship among themselves. The business can be carried out jointly run by one nominated partner on behalf of all. Any acts done by a nominated partner in good faith and on behalf of the firm are binding on other partners as well as the firm.

7. Unlimited Liability

The partners in a partnership firm have unlimited liability. This is one of the basic disadvantages of a partnership firm. In the scenarios, where the firm is in a situation where the liabilities of the firm are to be met, then the partners are personally liable.

8. Not a separate legal entity

The partnership firm has not a separate legal entity. The firm cannot sue or be sued.

9. Transfer of Interest

There is no transfer of an interest in a partnership firm.

10. Mutual trust and confidence

Mutual trust and confidence are vital components of any firm.

Also Read: Registration of Partnership Firm 

Advantages of Registration:

1. The major advantage of registration is that a partner of registered partnership can sue the co-partners and as well as the firm in case of a dispute.
2. The registered firm can also sue third parties as well as any of its partners in its name to enforce its claim.
3. The third parties who have dealings with the firm can sue the firm to enforce their claim against the firm.
4. The incoming partner can enforce his right against the remaining partners rather than relying on the honesty of co-partners.
5. A partner is entitled to sue for the dissolution of the firm or for the accounts of a dissolved firm or to enforce any right or power to realize the property of a dissolved firm.
6. The registered firm is entitled to claim tax benefits under the provisions of Income Tax Acts.

Effect of Non-Registration:

Section 69 of the Partnership Act, 1932 provides for the effect of the non-registration of the firm.

1. Unlimited Liability

The liability of each partner is joint and several. This will impact the business activity of the firm because, if the assets of partners are insufficient to pay off the debts, then the personal property of partners is taken over by the creditors.

2. Restriction of transferability of Interests

There is a restriction on the transfer of an interest in the firm. A partner cannot transfer is his interest to an outsider without the consent of the other partners.

3. Absence of Separate Legal Entity 

The firm is not recognized by the law as a person. The existence of the firm is related to the partners. The insolvency of the partner is the insolvency of the partnership.

4. Lack of Continuity

A firm can be dissolved because of the death of the partner, insolvency, insanity, or retirement of a partner. Other reasons for the ending of the firm can be as the period expires or the purpose for which it was formed is completed and if the court orders the firm to dissolve its business.

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