Structure of Partnership Firm

WHAT IS A PARTNERSHIP FIRM ?

A partnership is a formal arrangement by two or more parties to manage and operate a business and share its profits. In a partnership firm 2 or more people operate a business as co-owners and share the income. All co-owners (i.e. partners) act on behalf of each other in the business. Like the sole trader structure, a partnership entity is not separate from its operators.

Such firms are most suitable for comparatively small businesses such as retail and wholesale trade, professional services, medium-sized mercantile houses and small manufacturing units.

FEATURES OF A PARTNERSHIP FIRM 

The main features and structure of a partnership firm is –

  • A minimum of two persons are required to start a partnership business. 
  • The maximum number of partners is 10, in the case of a banking business and 20 in any other case.
  • The relation between the partners of a partnership firm is created by contract which may be verbal, written or implied and it is known as the “Partnership Deed”.
  • The partners can share profits in any ratio as agreed.
  • The partners have unlimited liability.
  • The business in a partnership firm may be carried on by all the partners or any of them acting for all. There is a Principal – Agent relationship between all the partners. There should be mutual trust and faith.
  • The law does not recognise the firm as a separate entity distinct from the partners
  • The registration of a partnership firm is not compulsory.

TYPES OF PARTNERSHIPS :-

The 3 main categories of partnerships are –

  • GENERAL PARTNERSHIP In a general partnership, all parties share legal and financial liability equally. The individuals are personally responsible for the debts the partnership takes on. Profits are also shared equally. The specifics of profit sharing are mentioned in writing in a partnership agreement.
  • LIMITED PARTNERSHIP Limited partnerships (LPs) are formal business entities authorized by the state. They have at least one general partner who is fully responsible for the business and one or more limited partners who provide money but do not actively manage the business.
  • LIMITED LIABILITY PARTNERSHIP A limited liability partnership (LLP) is a common structure for professionals, such as accountants, lawyers, and architects . It operates like a general partnership, with all partners actively managing the business, but it limits their liability for one another’s actions. The partners still bear full responsibility for the debts and legal liabilities of the business, but they’re not responsible for errors and omissions of their fellow partners.

 

Thus, in simple words A Partnership is one of the most important forms of a business organization, where two or more people come together to form a business and divide the profits thereof in an agreed ratio.

Accounting & Finance for Banking

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