How Many Types of Partnerships

Edited By Team Careers360 | Updated on Jun 01, 2023 10:59 AM IST

Introduction

A partnership is a type of business where two or more people enter into a formal agreement to be co-owners, share in the organization's profits or losses, and divide the responsibilities for managing it.

The "Indian Partnership Act of 1932" governs all facets and activities of partnerships in that country. According to this particular law, a partnership is an organisation made up of two or more people or parties who have agreed to split the profits made by the company while it is managed by all the members or on behalf of other members.

Characteristics of Partnerships

The few characteristics of a partnership are as follows:

1. Partnership Agreement: A partnership is an association of two or more people that results from a contract or agreement. The partnership between the partners is based on the agreement (accord). Such an arrangement is in writing. A verbal contract is legally binding. It is always advisable for the partners to have a copy of the written agreement to prevent disputes.

2. Two or more Individuals: A partnership must consist of at least two people who share a common objective. To put it another way, a business can have a minimum of two partners. But there is a restriction on the maximum number of people.

3. Profit Sharing: The agreement between partners to split profits and losses from a trading concern is another important aspect of a partnership. The Partnership Act's definition, on the other hand, clarifies that a partnership is an organisation between individuals who have agreed to split a business's profits; however, the division of losses is implied. Sharing profits and losses is therefore essential.

4. Business Motive: It's critical for a company to conduct some type of business and to have a profit-making goal.

5. Shared Business: The partners act as both the owner and the agent of their company. Any action taken by one partner may have an impact on the other partners and the company. Conclusion: For all of the partners, this point serves as a litmus test for their level of partnership.

6. Unlimited Liability: Every partner in a partnership is subject to unlimited liability.

Types of Partnerships

Depending on the state and the location of the company, there are various types of partnerships. The three most typical partnership types are described in general terms below.

1. General Partnership

To operate a business, a general partnership consists of two or more owners. Each partner in this partnership has an equal right to represent the company. All partners can participate in management functions, make decisions, and have the power to manage the company. Profits, obligations, and liabilities are distributed and shared equally in a similar manner.

In other words, the definition of a general partnership is a partnership where management and decision-making rights and obligations are equally distributed. The debts and liabilities incurred by the other partner should be fully assumed by each partner. All other partners are held responsible if one partner is sued. The partner's private property will be held by the creditor or the court. As a result, the majority of partners decide against this partnership.

2. Limited Partnership

Includes both the general and the limited partners in this partnership. The general partner oversees both the company and the other limited partners and has unlimited liability, Limited partners have little influence over the company (limited to their investment). They are not involved in the business' routine operations.

The limited partners typically only contribute and receive a profit share. They have no desire to be involved in management or decision-making. Due to their lack of involvement, they are not entitled to deduct partnership losses from their taxable income.

3. Limited Liability Partnership

All partners in a limited liability partnership (LLP) have limited liability. Each partner is protected from the financial and legal errors of the others. A limited liability partnership is distinct from a limited partnership or a general partnership.

4. Partnership at Will

A partnership at will is when there is no mention of a clause regarding the firm's termination. The two requirements for a company to become a Partnership at Will under Section 7 of the Indian Partnership Act of 1932 are:

The partnership contract shouldn't have a set end date.
There should be no mention of any specific partnership decision.

Therefore, it is not a partnership at will if the duration and determination are specified in the agreement. Additionally, if the business initially had a set end date but continued to operate after that date, it would be regarded as a partnership at will.

Indian Partnership act 1932

Since partnerships are the most common type of business in India, it is important to oversee and regulate them. On October 1st, 1932, the Indian Partnership Act was established. According to this partnership act, a contract is made between two or more individuals who concur to run the business together and divide the profits they make from it.

Advantages of Partnership:

Simple Formation – An agreement to join as a partner and found a firm may be made orally or in writing.
Large Resources - Unlike sole proprietorships, where each contribution is made by a single individual, partnerships allow partners to provide the firm with more capital and other resources as needed.
Flexibility - The partners are free to make any changes they feel are necessary to achieve the desired outcome or alter the current situation.
Sharing Risk: Each partner receives an equal share of any losses the company experiences.
Combination of various skills - The partnership firm benefits from the knowledge, talent, experience, and skills of various partners.