Partnership Organization

Meaning and Definition

As long as the sole trading concern remains small in size, the owner does not face growing pressure for its capital and management. When it becomes large in size or when it requires to be expanded, the owner faces strong pressure for the larger amount of capital, expert management, and technical skills. The owner may not have this entire requirement himself. Hence, he requires associating with another person or persons to meet their requirements in order to operate the firm competitively. Such requirements give birth to the partnership organization.Partnership organization has been developed to overcome the major limitation of a sole trading concern. When the business grows, the capital, managerial and technical skills of the owner in a sole trading concern are too limited to fulfill the growing needs of the business.

The partnership is an agreement between two or more than two persons for carrying on a lawful business for earning the profit. It is a form of business in which two or more than two persons make an agreement to contribute capital, manage the business and share the profit or loss. It is the business carried on by two or more than two persons for their mutual benefits.

The following are the main definitions of a partnership organization:

"Partnership means any business registered in the books of Government of Nepal, which is carried on by some persons under one or name for sharing the profits and with the agreement of participation in the transactions by all partners or a single partner acting for all." - Nepal Partnership Act, 2020

"A partnership is the relation between persons who agree to carry on a lawful business in common with a view to private gain."- L.H. Haney

Characteristics

The following are the main characteristics of a partnership organization:

1. Agreement: An agreement is a basis for forming a partnership. An agreement is made in a written form signed by all the partners to carry on a business for earning and sharing the profit or loss. Such agreement contains all the matters relating to business necessary for its smooth operation. It includes the matters relating to capital, profit sharing ratio, duties and responsibilities of the partners, accounting system, etc.
2. Joint ownership: A partnership has two or more than two owners. It is established with the joint investment of all the partners. The amount of capital of the partners may differ from one another depending upon the agreement.
3. The role of principal and agent: A partnership is managed by all the partners or anyone of them acting for all. Each partner can play, simultaneously, the role of a principal as well as an agent of the firm. Hence, every partner plays the role of principal for outside and an agent for other partners.
4. Unlimited liability: Every partner has unlimited liability. A partner is jointly as well as individually liable to pay all the debts of the business even by selling his private properties if the assets of the business are insufficient to meet all its debts.
5. Joint ownership: A partnership has two or more than two owners. It is established with the joint investment of all partners. The amount of capital of the partners may differ from the one another depending upon the agreement.
6. Joint management: A partnership is generally managed by all the partners jointly. However, a particular partner can also be entrusted with the responsibility of managing the daily activities on behalf of other partners. The partners divide the duties and responsibilities as per the partnership agreement for the smooth share the profit equally.
7. Restriction in transferring interest: The interest of a partner in a partnership is nontransferable. No partner is permitted to sell or transfer his interest or share to an outsider without the consent of all the partners. Hence, there is a restriction in transferring the interest of a partner freely.

Types of Partnership:

1. Unlimited Partnership: An unlimited partnership is also known as a general partnership. It is that type of partnership in which the liability of all the partners is unlimited. If the firm's properties are not sufficient to meet all its debts, the partners are liable, individually and jointly, to pay all the debts out of their private properties. Hence, the liability of a partner is not limited to his invested amount in the partnership. The liability of each partner is not definite or predictable. In a general partnership, all the partners have an equal right to participate. A partner for an uncertain period is also called as a partnership at will it is that type of partnership firm in which the time duration of the firm is not specified. A partnership for a certain period is also known as a particular partnership it is that type of partnership firm, which is established for a particular period of time. It can also be established for performing and completing a particular venture or job.
2. Limited Partnership: A limited partnership is that type of partnership in which there are one or more partners having limited liability. The liability of the limited partners is limited to their invested capital in the partnership. The liability of the firm cannot be met out of their private properties. A limited partner is like a passive partner who cannot actively participate in the management and day to day activities of the firm. The death, insolvency, lunacy, disability or imprisonment of such partner does not affect the activities and life of the firm. He has no right to make decisions and close the firm. In a limited partnership, there must be at least one unlimited partner who controls the whole activities of the firm. A general partner is also known as an unlimited partner. He is the most common type of partner whose liability is unlimited. Such a partner is liable to clear the debts of the firm even by selling his private property in case the firm's property is insufficient. He plays an active role in the decision-making process.A limited partner is one whose liability is limited up to the invested amount of the capital in the business. The private property of such a partner cannot be used to pay the debts of the firm. At least the firm must have one unlimited partner. An active partner is one who actively participates in the management and daily operation of the firm. He is also known as a working partner who actively takes part in all the matters of the business. He makes all the decisions actively on behalf of all the other partners.A passive partner is one who does not take an active part in the management and daily operation of the firm. He is also known as a sleeping or dormant partner. Such partner contributes the capital, shares the profit or loss, bears the liabilities, but does not look after the activities of the business actively.An incoming partner is one who is newly admitted to an existing firm. Such a partner brings his shares of capital and agrees to share the profit or loss of the firm after his admission. He cannot be made responsible for the activities and liabilities of the firm before the admission.

Advantages

The following are the advantages of a partnership organization:

1. Easy to start and dissolve: A partnership organization is easy to dissolve and establish a sole trading concern. Only a written agreement is necessary for getting the partnership registered. A written application and partnership agreement should be a field in the concerned office for dissolving the firm. Due to the limited legal procedures, the partnership can be started and dissolved with least time and cost.
2. Scattered risk: A partnership organization is less risky than a sole trading concern. The risk of loss in the firm is scattered among the partners. If the firm suffers from a loss, each partner has to bear a nominal share of the loss.
3. Larger capital: The capital of a partnership firm is larger than the capital of a sole trading concern. All the partners contribute capital as per their agreement. Due to the contribution of all the partners, the firm accumulates a larger amount of a capital. Such larger amount of capital helps for large-scale production and distribution of goods and services.
4. Better management: A partnership is a combination of partners with varying managerial skill and technical skills. Due to such combination of managerial and technical skills, its management is better than the management of a sole trading concern. The partners divide and perform work as per their ability and experience. All the important decisions are made after making discussion and getting the consent of all the partners. Such collective participation in the management helps to know and correct the mistakes committed by any partner.
5. Secrecy: A partnership organization is not required to publish financial statements like profit and loss account and balance sheet. The partners do not leak out the weakness of the firm and other business secrets. Such secrecy maintains the competitive strength of the firm. It also supports to maintain the goodwill of the firm.
6. Flexibility: A partnership organization has the benefit of flexibility like a sole trading concern. The objective, size and capital can be changed easily with the consent of all the partners. Such flexibility helps to exploit business opportunities and to avoid possible loss.
7. Incentive: In a partnership organization, there is a direct relationship between efforts and rewards. The greater the profit of the firm, the greater the share of partners. Hence, all partners are always encouraged to work hard for maximizing the profit of the firm.

Disadvantages

The following are the disadvantages of a partnership organization:

1. Chances of conflict: In a partnership organization, there is always a chance of misunderstanding among the partners. Such misunderstanding arises in matters relating to decisions, incomes, expenses, accounts, credit- transactions, withdrawal, rights, duties, responsibilities, etc. such conflict may lead to the organization to the end.
2. Uncertain life: A partnership organization is not a permanent organization. Due to frequent misunderstanding among the partners, death, insolvency, lunacy and imprisonment of any partner or partners, the partnership organization may come to the end. Such uncertain life brings negative impact in the society.
3. Unlimited liability: In a partnership organization, the liability of all the partners is unlimited. The liability of each partner towards the debts of the firm is not limited to his invested capital. All the partners, individually and jointly, are responsible for clearing the debts of the firm even by selling their private property.
4. The absence of legal status: A partnership organization has no separate legal status. The life of a partnership is connected with the life of the partners. Due to the lack of corporate status, its life is uncertain and the liability of the partners is unlimited.
5. Delay in decisions: In a partnership organization, decisions cannot be made quickly as in sole trading concern. In order to arrive at a decision, consent of all the partners must be obtained. Due to the different views and options on a subject, the decision cannot be often be made in time. Such delay in making decisions hampers in exploiting business opportunities.
6. Lack of public confidence: A partnership organization does not publish its information, accounts and financial statements. The outsiders do not know what is going on in the partnership. Due to frequent misunderstanding, lack of separate legal existence and uncertain life, the public has no faith on partnership firm.

Things to remember

• A partnership firm is a form of business in which two or more than two persons make an agreement to contribute capital, manage the business and share the profit or loss.
• Agreement, joint ownership, Role of principal and agent, unlimited liability, joint management and restriction in transferring interest are the characteristics of partnership organization.

• It includes every relationship which established among the people.
• There can be more than one community in a society. Community smaller than society.
• It is a network of social relationships which cannot see or touched.
• common interests and common objectives are not necessary for society.

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