Concept and Characteristics of Partnership Firms

Subject: Business Studies

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Overview

partnership is business is an agreement between two or more than partners to do a legal business.They agreed to provide all the resource required for business for the purpose of earning profit.Those people who invest money in the partnership are called partner.A partner may be directly involved in the business are called the active partner or a partner only invest in the business is called sleeping partner.Before establishing a partnership business, a partner sits together to discuss the different matter related to business.

Concept and Characteristics of Partnership Firms

Concept of Partnership Firm

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A partnership business is an agreement between two or more than two partners to do a legal business. They agree to provide all the resources required for business for the purpose of earning the profit. Those people who invest money in the partnership are called partner. A partner may be directly involved in the business or a partner can only invest in the business. A partner who is directly involved in business is called the active partner and the partner who only invests the capital is called sleeping partner. Before establishing a partnership business, the partners sit together to discuss the different matter related to business. After discussion, they agree in certain term and condition of the business. The agreement between them can be drafted in written form. The agreement between partners in written form is called a partnership deed.

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According to L.H Haney, “Partnership is the relation existing between persons competent to make a contract, who agree to carry on a lawful business in common with a view to private gain."

According to J.L Hansen, “A partnership is a form of business organization in which two or more persons join together to undertake some type of business activity."

In conclusion, the partnership is a form of the business organization established by two competent people to make legal business. A partnership firm in Nepal is guided and regulated by Nepal Partnership Act, 2020.

Characteristics of partnership

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  1. Formation
    A partnership firm can be established by minimum two people by jointly investing capital. A partnership firm can start its business by registering in concern department of Nepal government. According to partnership act 2020, to form a partnership business minimum two men are required and the maximum is not defined.

  2. Mutual Agreement
    A partnership firm is established after making the mutual agreement between the partners. The agreement can be in written or oral as well as in both forms. The agreement between partners in written form is called a partnership deed.

  3. Transfer of shares
    The shares of a partnership firm cannot be transferred from one name to another name without consent (agreement of other partners). All the partners of the business must agree to transfer the share of one to another. Therefore, transfer of the share in partnership is difficult.

  4. Sharing of profit/Loss
    The profit or loss of partnership business is shared among the partners on the basis of the ratio of their investment. All the partners in business are able to bear the loss of business as well as has a right to claim over a profit of a business.

  5. Unlimited liability
    The partnership business has unlimited liability. It means all the partner are required to pay a debt of business by selling their personal property as well. In this business, liability is not limited to the property of the business.

  6. No Separate legal entity
    Partnership firm does not have its separate legal existence. In partnership firms, its partners are taken as one share. A partnership firm cannot make an agreement contract or perform business in its name independently.

  7. Management
    The management of the partnership firm may be handled by all the partners. The work and responsibility of this business are to share among the partners equally. All the partners will give experience and skills.

  8. Mutual Agency
    In partnership business, partners can play the role of both agents principle. Active partners work in a business for benefits of all other partners. At this time, he/she is playing the role of the agency. On the other hand, when partner represents outside, they are playing as principal.

  9. Utmost good faith
    In partnership business, there is utmost good faith among partners. Active partner work for the betterment of the organization and other partners invest money in the good faith of partners.

  10. Individuality of partners
    Partners in partnership firm have their own personal identity and respect in their society. Their identity will not be affected while being outside the business. Partners have to provide all their skills in social responsibility for the betterment of the organization.

 

Differences between Sole trading concern and Partnership Firm

Basis of difference

Sole trading concern

Partnership firm

No.of members

A sole trading concern is established and managed by a single person.

A partnership firm is established and managed by two or more person.

Investment

A single person invests capital for the operation of the business.

Two or more partners invest capital for the operation of the business.

Agreement

Due to only one sole trader, sole trading concern doesn't need an agreement.

An agreement among the partners is compulsory for the operation of the business.

Decision Making

Decisions of business are taken quickly by a single person. There is a high chance of making a wrong decision.

Decision making is delayed but decisions become matured and rational.

Secrecy

The sole trader can maintain the full secrecy of the business matter.

Tight business secrecy cannot be maintained. Chances of leaking business secrecy are comparatively higher in partnership.

Management

The business is managed and control by a single person.

The business is managed and controlled by two or more than two persons.

Risk Bearing

The sole trader himself bears all risk and responsibilities of the business.

All partners share the risk and responsibility.

Registration

The sole trading concern should be registered under the Private Firm Registration Act 2014.

The partnership should be registered under the Partnership Act, 2020.

 

 

 

References:

 

Khanal, Soma Raj, Surendra Thapa Aslami and Sitaram Dhakal. Business Studies. Kathmandu: Taleju Prakashan, 2067.

Pant, Prem R., et al. Business Studies. Kathmandu: Buddha Academic Publishers and Distributors Pvt. Ltd., 2010.

 

 

 

 

 

 

 

Things to remember
  1. A partnership is business is an agreement between two or more than partners to do a legal business.
  2. The partnership is a form of the business organization established by two competent people to make legal business.
  3. A partner may be directly involved in the business are called the active partner.
  4.  A partner only invests in the business is called sleeping partner.

Characteristics of partnership

  1. Formation
  2. Mutual agreement
  3. Transfer of shares
  4. Sharing of profit or loss
  5. Unlimited liability
  6. No separate legal entity
  7. Management
  8. Mutual agency
  9. Utmost good faith
  10. Individuality of partners
  • 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.
Questions and Answers

The differences between a sole trading concern and a sole trading concern are given below:


Basis of difference

Sole trading concern

Partnership firm

No.of members

A sole trading concern is established and managed by a single person.

A partnership firm is established and managed by two or more person.

Investment

A single person invests capital for the operation of the business.

Two or more partners invest capital for the operation of the business.

Agreement

Due to only one sole trader, sole trading concern doesn't need any agreement.

An agreement among the partners is compulsory for the operation of the business.

Decision Making

Decision of business is taken quickly by a single person. There is a high chance of making a wrong decision.

Decisions of a partnership are taken by all partners through their mutual consent. Decision making is delayed but decisions become matured and rational.

Secrecy

The sole trader can maintain the full secrecy of the business matter.

Tight business secrecy cannot be maintained. Chances of leaking business secrecy are comparatively higher in partnership.

Management

The business is managed and control by a single person.

The business is managed and controlled by two or more than two persons.

Risk Bearing

The sole trader himself bears all risk and responsibilities of the business.

All partners share the risk and responsibility.

Registration The sole trading concern should be registered under the Private Firm Registration Act 2014. The partnership should be registered under the Partnership Act, 2020.

 

 

 

 

 

 

Patnership is a form of business which as evolves a form of organization in which overcome the shortcomings of sole probetween prietor. It is an agreement between two or more than two persons for carrying on a lawful business for earning profit. Hemce, partnership is an extension of sole trading concern. An individual who make an agreemennt or invest money callled patners. A partner may be directly involved in the business are called the active partner or a partner only invest in the business is called sleeping partner. 

According to L.H Haney, “partnership is the relation existing between persons competent to make a contract, who agree to carry on a lawful business in common with a view to private gain."

According to J.L Hansen, “A partnership is a form of business organization in which two or more persons join together to undertake some form of business activity."

From the above definition, it is clear that, A partnership is a form organisation in which two or more persons make an agreement to make legal business.

Characteristics of Partnership organization are

  • Formation
  • Mutual agreement
  • Transfer of shares
  • Sharing of profit or loss
  • Unlimited liability
  • No separate legal entity
  • Management
  • Mutual agency
  • Utmost good faith
  • Individuality of partners

The partnership is defined as in Partnership Act, 1932, the relationship between two or more persons to do legal business.  The main characteristics of partnership firm are:

  • Agreement
    An agreement is a basis for forming the partnership. The partnership is a result of a contract or an agreement that is done between the partners. It is a written form signed by all the partners to carry on business for earning and sharing the profit or loss. It does not arise from birth, status or inheritance or succession.

  • Joint Ownership
    Partnership has two or more partners. The amount of capital of the partners may, differ from one another as per their agreement. Partnership has no separate existence apart from the partners composing it.

  • Joint Management
    The partnership business can be carried on by all the partners or by any one or more acting for all.For the smooth operation of the firm, the partners divide the duties and responsibilities as per the partnership agreement. the partners have to trust on another partner in managing the daily activities.

  • Sharing of profit
    At an agreed ratio, the profit or loss is shared between or among partners. In the absence of an agreement for sharing profit, all partners should share pofit equally.

  • No separate legal entity
    According to law, the partners and partnership firm are treated as one and same. The death, lunacy, insolvency disability, etc. of partners or partners easily affect the life of partnership firm. Partnership firm cannot make agreement contract or perform business in its name independently.

  • Unlimited Liability
    Every partner has unlimited liability. If the firm fails to satisfy its debt, each partner is liable to repay all the debts of business even from his personal property.  In this business, liability is not limited to the property of the business.

  • Restriction in transferring method
     Partner or none of the partners are not allowed to transfer his interest or share to outsiders without the consent of all the partners. Thus there is a restriction of interest of a partner.

  • Role of principal and agent
    Each partner  plays the role of a principal for outsiders and an agent for the other partners. Partnership is managed by all partners  with equal responsibilities.
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