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Dear Students, You can post your problems and questions about lecture no. 4 in reply of this discussion, we will try to give you answers of your queries and solve your problems. Important points of Lecture no. 4 can also be shared so that other students can also get help. But please don’t share topics and queries other than lecture no. 4. It causes deviation from the main topics.

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Partnership

A partnership is an unincorporated association of two or more individuals to carry on a business for profit. Many small businesses, including retail, service, and professional practitioners, are organized as partnerships. A partnership agreement may be oral or written. However, to avoid misunderstandings, the partnership agreement should be in writing. The agreement should identify the partners; their respective business‐related duties and responsibilities; how income will be shared; the criteria for additional investments and withdrawals; and the guidelines for adding partners, the withdrawal of a partner, and liquidation of the partnership. For income tax purposes, the partnership files an information return only. Each partner shares in the net income or loss of the partnership and includes this amount on his/her own tax return.

Limited life

The life of a partnership may be established as a certain number of years by the agreement. If no such agreement is made, the death, inability to carry out specific responsibilities, bankruptcy, or the desire of a partner to withdraw automatically terminates the partnership. Every time a partner withdraws or is added, a new partnership agreement is required if the business will continue to operate as a partnership. With proper provisions, the partnership's business may continue and the termination or withdrawal of the partnership will be a documentation issue that does not impact ongoing operations of the partnership.

Mutual agency

In a partnership, the partners are agents for the partnership. As such, one partner may legally bind the partnership to a contract or agreement that appears to be in line with the partnership's operations. As most partnerships create unlimited liability for its partners, it is important to know something about potential partners before beginning a partnership. Although partners may limit a partner's ability to enter into contracts on the company's behalf, this limit only applies if the third party entering into the contract is aware of the limitation. It is the partners' responsibility to notify third parties that a particular partner is limited in his or her ability to enter into contracts.

Unlimited liability

Partners may be called on to use their personal assets to satisfy partnership debts when the partnership cannot meet its obligations. If one partner does not have sufficient assets to meet his/her share of the partnership's debt, the other partners can be held individually liable by the creditor requiring payment. A partnership in which all partners are individually liable is called a general partnership. A limited partnership has two classes of partners and is often used when investors will not be actively involved in the business and do not want to risk their personal assets. A limited partnership must include at least one general partner who maintains unlimited liability. The liability of other partners is limited to the amount of their investments. Therefore, they are called limited partners. A limited partnership usually has LLP in its name. 

Ease of formation

Other than registration of the business, a partnership has few requirements to be formed.

Transfer of ownership 

Although it is relatively easy to dissolve a partnership, the transfer of ownership, whether to a new or existing partner, requires approval of the remaining partners.

Management structure and operations 


In most partnerships, the partners are involved in operating the business. Their regular involvement makes critical decisions easier as formal meetings are not required to get approval before action can be taken. If the partners agree on a change in strategy or structure, or approve a purchase of needed equipment, no additional approvals are needed.

Relative Lack of regulation 

Most governmental regulations and reporting requirements are written for corporations. Although the number of sole proprietors and partnerships exceeds the number of corporations, the level of sales and profits generated by corporations are much greater.


Number of partners


The informality of decision making in a partnership tends to work well with a small number of partners. Having a large number of partners, particularly if all are involved in operating the business, can make decisions much more difficult.

CHARACTERISTICS OF PARTNERSHIP

 

The main features of partnership are given below:

1.     Agreement

There must be agreement between the parties concerned. This is the most important characteristics of partnership. Without agreement partnership cannot be formed. "No agreement no partnership." But only competent persons are entitled to make a contract. 

There are some provisions contained in the partnership agreement. These are determined clearly before the commencement of business. But it differs from business to business. This documents may be written or oral. But it must be written so that disputes may be settled according to the provisions of agreement.

2.     Number of Partnership 

There should be more than one person to form a partnership. But there is restriction for the maximum number of partners. In case of ordinary business, the partners must not exceed 20 and in case of banking must not exceed 10 (before nationalization).

3.     Business 

The object of the formation of partnership is to carryon any type of business. It may be manufacturing or merchandise type small or large scale business. But it should not be illegal business in the country concerned.

4.     Profit motive 

The basic motive of the formation of partnership is to earn profit. This profit is distributed among the partners according to agreed proportion. If there is loss it will be sustained by all partners except the minor.

5.     Conduct of Business 

The business of partnership is conducated by all the partners or any or them acting for all. But each partner is allowed to participate in the management by law.

6.     Entity 

It has no separate entity apart from its members. It is not independent of the partners. Law has not granted it any legal entity.

7.     Unlimited liability

This is the prominent feature of partnership that the liability of each partner is not limited to the amount invested but his private property is also liable to pay the business obligations.

8.     Investment

Each partner contributes his share in the capital according to the agreement. Some persons become partners without investing any capital to the business. But they devote their time, energy and ability to their business instead of capital and receive profit. 

9.     Transferability of share

There is restriction to transfer the share from one partner to another person without the consent of existing partners. So the investment in the partnership remains confined into few hands.

10.   Position 

One partner is an agent as well as principal to other partner. He can bind the other person by his act. In the position of an agent he can make contract with another person or parties on behalf of his concerned firm.

11.    Mutual Confidence

The business of the partnership cannot be conducted successfully without the element of mutual confidence and cooperation of partners. So the members must have trust and confidence in each other.

12.   Free Operation 

There are no strict rules and regulations to control the partnership activities in our country i.e. no restriction for the audit of accounts, submission of various reports and other copies to any government authority. So this organization may operate freely without any interference.

Audit:

  • an official inspection of an individual's or organization's accounts, typically by an independent body.
  •  a systematic review or assessment of something

Audit of partnership firm:

A firm is a partnership run by several partners. An audit of the accounts of such a firm is always in the interests of the partners, although it is done by the auditor appointed by the partners under mutual agreement. His rights, duties and liabilities are also defined by mutual agreement and can be subjected to modification.

If partnership is not registered, it has no legal entity. So there is no restriction for the audit of accounts. 

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