A step up from the sole proprietorship business is the partnership business. The owner of this business is not one, but many. Usually two to four people start a mile partnership business. Each of the owners of the business is called a partner.
Suppose a person starts a sole proprietorship of refrigerator and air-conditioner repair business but is unable to expand the business due to lack of capital even though the demand for his services keeps increasing. He then agreed to partner the business with another person who would provide the necessary capital to expand the business. As per the new constitution both Mr. X and Mr. Y become partners in the business and the business is then treated as a partnership rather than a sole proprietorship. As soon as the business is converted into a partnership, all formation and management of the business comes under the purview of the Indian Partnership Act, 1932. The Act prescribes the inclusion of minimum 2 and maximum 20 partners in any partnership business. In the present example we will discuss only two partners Mr. X and Mr. Y ...
The two started a partnership business, but the initial task of solving such questions as how much of the profit will go to who will get what share of the business property when the business is wound up should be done at the beginning. This requires the agreement of the partners. Therefore, an agreement is prepared at the beginning of the partnership business. Once the draft MoU is legalized, it is considered as a treaty. Henceforth all business is conducted in accordance with the written description of this contract so that none of the partners can express dissatisfaction with each other.
Some common examples of partnership businesses are -
Manufacturing Businesses
- Machine Shop - Business that can be started with lathe, milling, grinding and other machines.
- Timber Machine etc.
Service Businesses
- Chartered accountancy - Chartered accountants run a partnership business and check the details of the accounts of various companies.
- Nursing home!
The specialty of partnership business is that each partner has a special skill and skill. In many cases one or two partners out of multiple partners provide the bulk of the capital. Partnership business is very suitable for capital, expertise and above all medium size business.
Let us suppose that some doctors want to establish a nursing home together. Each doctor is skilled in a particular subject. Some are orthopedic specialists, some are ophthalmologists, etc. Partnerships are well-suited to start a complete health-care business by combining everyone's special skills.
Advantages of Partnership Business
- Easy to structure. It can be formed with little legislative action.
- As little regulation as possible.
- Compared to sole proprietorships – (a) More capital is available. (b) It is possible to do extensive work. (c) Multi-skilled work is possible.
- Each partner is an expert in one or the other. So overall the business is likely to be successful.
- The total income tax payable by the business is divided so that each partner pays income tax separately.
- The benefit of profit or the benefit of loss is apportionable between the partners. So no single partner faces a huge loss.
- Important decisions are taken by consensus of partners.
Disadvantage of Partnership Business
- Many times the business has to be wound up due to illness or death of one or two partners.
- Misunderstandings, disagreements and disputes between partners often occur, which damages businesses.
