A partnership is a group of two or more individuals who agree to split the profits from a legal business. It is administered and carried out by all of them, or by some acting on their behalf.
The formation of a partnership is simple and straightforward. Each member of such a group is referred to as a ‘partner’. And the entire group is referred to as a “partnership firm”. A partnership can include individuals, businesses, interest-based organizations, schools, governments, and combinations. Organizations may form alliances in order to increase their chances of achieving their goals and expanding their influence. A partnership can be governed solely by a contract, or it can result in the issuance and ownership of shares. There are numerous characteristics of partnerships and partnership firms. Let us delve deeper into the characteristics of partnerships.
Partnership Characteristics
The following are the key characteristics of collaboration:
- Mutual Agency: Each partner must act as both an agent and a principal on behalf of his fellow partners. It specifies that any or all of the partners must do business.
- Risk and reward sharing: The risks and rewards are shared by everyone in the company.
- Earnings: Each partner receives a percentage of the company’s net profits. A contract does not require equal shares. It could be determined by the partner’s financial investment.
- There is no restriction: Partners are jointly and severally liable for all debts and obligations of the firm, including loss and damages resulting from their fellow partners’ wrongful acts or omissions, as well as potential liability to third parties.
- Making decisions: Partners can make decisions that affect the firm or its assets.
- Ownership sharing: While they may have agreed that the firm will use an asset owned by one of the partners individually, all partners share ownership of the firm’s assets.
- Flexibility: Because the partnership structure is flexible, members can agree on how the company is run and financed.
- Privacy: The financial and constitutional affairs of the partnership are strictly confidential. The disclosure is determined by the partners’ interests.
- Taxation: There is no employer’s National Insurance Contribution on the profits of partners. Because partners are assumed to be self-employed, there is no mismatch between corporation tax and dividend tax credits.
- Changes in Membership: There’s no need to go through complicated procedures to transfer shares without incurring unavoidable tax consequences.
Benefits of Collaboration
- Bridging the Knowledge and Skills Gap: Collaborating with someone can give you access to a broader range of expertise for many aspects of your business. A good business partner may also bring expertise and experience that you lack, as well as complementary skills that will help your organization grow.
- More capital: A potential partner may inject capital into the company. It’s also possible that someone else appears to have more strategic relationships. It may assist the company in attracting potential investors and raising additional funding for expansion.
- Savings: Having a business partner may help to share the financial burden of running the company’s expenses and capital expenditures, which may result in significant savings.
- Increased Business Opportunities: Sharing the workload is one of the benefits of having a business partner. Having a partner can help you increase your productivity while also allowing you to easily and quickly explore new business opportunities.
- Improved Work/Life Balance: Sharing the workload with a partner can help lighten the load. It may allow you to take time off when you need it, knowing that someone you can rely on will keep it running.
- Moral support: Everyone should bounce ideas off one another and debrief on major events. We may seek moral support when dealing with setbacks, jobs, and everyday disappointments.
- New Perspectives: A collaboration can bring in a fresh set of eyes to help us see what we may have missed. It may assist in gaining a fresh perspective or outlook on what we do, who we work with, the markets we pursue, and even how we price our products and services.
- Possible Tax Advantages: One of the advantages of forming a general partnership could be a tax advantage. Income taxes can be avoided by forming a general partnership.
Partnership Disadvantages
- Transfer of Ownership Difficulties: Transferring ownership is complicated because when ownership changes, a partnership dissolves. When a new partner is brought on board or a partnership interest is sold, a complex procedure is required, which includes asset appraisal and renegotiating previously agreed-upon partnership operating terms.
- Regulation is lacking: An informal partnership agreement is not required to be in writing. This, however, could lead to legal disputes between partners, exposing them to unlimited liability.
- Individual tax rates apply: Because individual partners frequently have income sources outside of the partnership, their allotted partnership income is taxed at a higher rate than if the partnership were responsible for the income taxes.
- Average life expectancy: When a new partner is admitted, a partner leaves, a partner dies, or the partnership dissolves, the partnership comes to an end. As a result, the vast majority of collaborations have a time limit.
- Liability is unlimited: Unlimited liability refers to the legal obligation of all general partners to pay the partnership’s debts, regardless of who incurred them. This responsibility may extend to the assets of the partners.
- Disagreements on mutual agency: Mutual agency exists whether or not all parties agree on the contract or agreement. The joint agency may cause conflict because many partners may bind the partnership and hold everyone accountable as long as the action to build the partnership is carried out.
- Fundraising capacity is limited: The ability of a partnership to raise money or new funds, whether from individual members or a financial institution offering a loan, is frequently limited.
Conclusion
A partnership firm brings together people from all industries who have the managerial ability and expertise to run a business. These partnership characteristics strengthen the organization’s administrative strength, financial resources, talent and expertise, and reduce risk. Retail and wholesale commerce, professional services, medium-sized mercantile houses, and small manufacturing units are the best fit for such firms. Many businesses begin as partnership firms and are later transformed into corporations after demonstrating commercial viability and financial attractiveness to investors.
