Need & Importance of Partnership Firms

Author - Advocate Divyam Agarwal

The Indian Partnership Act, 1932 defines partnership as “the relation between persons who have agreed to share the profit of the business carried on by all or any one of them acting for all.”

The inherent disadvantage of the sole proprietorship in financing and managing an expanding business paved the way for partnership as a viable option. Partnership serves as an answer to the needs of greater capital investment, varied skills and sharing of risks. The persons who own the partnership business are individually called ‘partners’ and collectively they are called ‘firm’ or ‘partnership firm’. The name under which partnership business is carried on is called ‘Firm Name’. In a way, the firm is nothing but an abbreviation for partners.

The proprietorship form of ownership suffers from certain limitations such as limited resources, limited skill and unlimited liability. Expansion in business requires more capital and managerial skills and also involves more risk. A proprietor finds him unable to fulfill these requirements. This calls for more people to come together, with different edges and start a business. For example, a person may lack managerial skills but may have capital. Another person may be a good manager but may not have capital. When these persons come together, pool their capital and skills and organize a business, it is called partnership. Partnership grows essentially because of the limitations or disadvantages of proprietorship.

A business is a combination of a lot of functions like planning, production, finance, marketing, HR etc. The success of a business depends a great deal on how efficiently these functions are performed. It is very rare, almost impossible for a single human being to manage and excel in all the functions at the same time, which in turn, hampers the success as well as the growth of a business. This is the primary reason why partnerships are important.

One partner might see the opportunity to create a new product. Another partner might know a better way to distribute it. A third partner might provide the logistics expertise or industry connections to get the business producing revenues in half the time. Businesses started by teams tend to have more unique product offerings and the ability to execute faster.

Many companies started by individuals plod along. They neither grow as such, nor do they quite fail. However, partners will be less likely to entertain business limbo. When more people come together, they will be quicker to try to fix things and the encouragement and resources needed to start something new or expand the business further will be readily available.

Before any partners have invested significant time or money, it is important to have a partnership agreement (partnership deed) that sets out expectations and responsibilities. Each partner should have independent legal advice before signing. Decide who will do what, how these inputs will be measured, who has the right to make what decisions, how profits and losses will be shared, and what happens when partners disagree.

Also, it is optional for a partnership firm to get registered. In case a firm gets registered, it has much benefit:

(a) A partner of a registered firm can file a suit against the firm or other partners,

(b) The firm can file a suit against third parties, and

(c) The firm can file a case against the partners.

Importance of partnership in Business

The following characteristics exhibits need for partnership business establish the importance of partnership act 1932 and prove how it is better than other forms of business:-

• Risk bearing: The partners bear the risks involved in running a business as a team. The reward comes in the form of profits which are shared by the partners in an agreed ratio. However, they also share losses in the same ratio in the event of the firm incurring losses.

• Decision making and control: The partners share amongst themselves the responsibility of decision making and control of day to day activities. Decisions are generally taken with mutual consent. Thus, the activities of a partnership firm are managed through the joint efforts of all the partners.

• Continuity: Partnership is characterized by lack of continuity of business since the death, retirement, insolvency or insanity of any partner can bring an end to the business. However, the remaining partners may if they so desire continue the business on the basis of a new agreement.

• Mutual agency: The business is carried on by all the partners or any (one or more) of them acting on behalf of the others. Thus, every partner is both an agent as well as a principal for himself and the other partners, i.e. he can bind by his acts the other persons and can be bound by the acts of the other partners. The importance of this element of mutual agency lies in the fact that it enables every partner to carry on the business on behalf of others.