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Partnership

Reviewed by Anjaneyulu | Updated on Sep 30, 2020

Catalogue

Introduction

A partnership is an agreement in which parties, called business partners, agree to collaborate in pursuing their mutual interests. Individuals, companies, interest-based groups, colleges, states, or combinations can be partners in a partnership.

Organizations may partner to increase the probability of each task being achieved and to expand its scope. A relationship can result in the raising of capital or maybe controlled only by a contract.

Partnership in India

The Indian Partnership Act, 1932, governs the setup and workflow of partnership firms in India. According to Section 4 of the Indian Partnership Act, there are five elements which constitute a partnership, namely:

  1. There must be a contract;
  2. Between two or more persons;
  3. Who agree to carry on business;
  4. With the objective of sharing profits; and
  5. The business must be operated by all or any of the partners, acting for all.

All of the five elements mentioned above must coexist to constitute a partnership. If any of these is not present, there cannot be a partnership.

Advantages

  • Partnerships do not have to pay income tax on the profits shared by the partners, as each partner report the business gains or losses in their personal income tax return.

  • Simple to establish.

  • There is an improved opportunity to raise funds, as there are more than one owners.

  • A larger pool of expertise, skills, and connections is available.

  • Leads to improved management, as there will be more than one owner present.

Disadvantages

  • Partners are collectively responsible for all relationship commitments, including contracts and breach of trust.

  • Every partner is personally responsible for the company's debts and obligations. If the business does not have enough assets to pay back business debts, the creditors can seize the partners' personal assets.

  • Without the mutual consent of the partners, a partner does not pass an interest in the partnership.

  • Partnerships can potentially be unstable due to the possibility of dissolution if one partner dies or decides to withdraw from the partnership.

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