The article discusses the salient features of different partnership models. Read this to know more about them in detail.
When it comes to business partnerships, there are several different types of partnership firm in India that you can choose from. Each type of partnership has its own set of advantages and disadvantages, so it’s important to choose the right one for your business. In this blog, we’ll give you an overview of the different types of partnership firm in India, so you can make an informed decision about which is right for your business.
What is Partnership?
A partnership is a type of business structure where two or more individuals manage and operate a business according to the terms and objectives set out in a Partnership Deed. Each partner shares the organization’s profits and losses and contributes to the day-to-day decision-making process.
Features of Partnership:
Mutual Agreement: A partnership is formed through a mutually binding consensual agreement among partners.
Profit Sharing: Partners share the business profits or losses based on the agreed-upon terms.
Joint Ownership: All partners jointly own and manage the business.
Unlimited Liability: Partners are personally liable for the debts and obligations of the business.
No Separate Legal Entity: Unlike a corporation, a partnership is not a separate legal entity.
Advantages of Partnership:
Ease of Formation: Partnerships are relatively easy to form and involve minimal formalities.
More Resources: Partnerships allow for the pooling of resources and expertise.
Tax Benefits: Profits are taxed as the personal income of the partners, avoiding corporate taxation.
Flexibility: Partnerships offer flexibility in decision-making and operations.
Shared Responsibility: The burden of business management and decision-making is shared among partners.
Types of Partnership Firm
Below given are the 4 Types of Partnership Firm :
- General partnership
- Limited partnership
- Limited liability partnership
- LLC partnership
In India, all partnership firms are governed following the Indian Partnership Act, of 1932. A partnership firm can be formed based on a deed or contract, which needs to categorically mention the business’s terms and conditions and provide details regarding the sharing of profits, risks, etc., among the partners. The signing of such deeds between the partners officiates the establishment of the firm. It can then register itself with the Registrar of Firms. Such registration enables the partners of the partnership firm to enjoy certain rights mentioned in the partnership deed. Any violation of terms and conditions gives the partners the right to sue each other, or they may jointly decide to fight a legal battle against a third party that may appear to harm their firm’s interests.
Like most relationships, a partnership firm has multiple advantages and disadvantages; basically, the nature of the partnership dictates whether or not the benefits will outweigh the disadvantages. Thus, understanding different forms of partnership is the stepping stone for conducting a comparative analysis among them. By evaluating various pros and cons, the partners can decide which form of the partnership will serve their purpose and fetch the maximum return.
General Partnership
In a General Partnership firm, two or more individuals may decide to run their business as co-owners. They may or may not have an equal share of the company. The ownership and profit sharing will be based on a partnership agreement signed before commencing such a partnership. The profits are counted as individual income; thereby, in the case of a General Partnership, businesses are not taxed separately for their profits. Instead, the partners pay the tax if they earn any profit income.
This type of partnership firm can be easily formed or dissolved. It is a low-cost and flexible form of partnership. In this form of partnership, the partners possess independent power for a business tie-up. However, each partner will have the total liability to bear the business debts and/or legal obligations. Thus, this can be a risky affair, mainly because the partners are liable for their actions and others’ actions. In short, this type of partnership model involves a lot of power and a great deal of mutual responsibility.
Limited Partnership
Limited Partnership is a more formal and organized form of a partnership model than the General Partnership model. There has to be at least one general partner who will be responsible for managing the overall business for this partnership. They bear the liabilities of the business as well. On the other hand, these general partners are supported by one or more limited partners, who give the money to run the business but are not actively engaged in managing the day-to-day business.
Limited partners do not take part in the decision-making. They do not need to bear the risk or share the responsibilities of running the business. Especially the silent limited partners can enjoy the profits, and/or just in case the business runs into trouble; they risk losing the amount they have invested, but not more than that. Thus, the Limited Partnership model offers legal protection to the limited partners to safeguard themselves from the liability of General Partners. On the other hand, the General Partners can enjoy overall control over the business. Entrusted by investors, they have the total responsibility to run the partnership firm and have the freedom of independent decision-making. However, they have the entire liability to bear the risks and debts.
Limited Liability Partnership (LLP)
A limited liability partnership (LLP) can be explained as a concoction of a General Partnership and a Limited Partnership. In this form of the partnership model, all the partners can actively manage the business. Still, they can safeguard themselves from taking responsibility and liability for the actions of other partners. They are only liable to take responsibility for their actions. Thus, one’s asset is not at risk even if the business runs the risk of loss or debts. In such a case, each business partner will lose the money they have invested in the partnership firm. Therefore, the risk is more distributed among the partners in this form of partnership, but the business can leverage individual skills and expertise.
This type of partnership firm is prevalent among professionals, like doctors, lawyers, or accountants, who put together their expertise and resources to run a partnership business. This typically reduces the individual cost of running the business while unleashing the possibility of sharing profits without taking too much individual risk. Another significant advantage of this type of partnership firm is that the partners of the LLP form business can quickly leave or join the partnership.
LLC Partnership
This type of Partnership Firm operates as a business entity where owners are protected from taking any personal responsibility for the debts or liabilities of that partnership firm. LLC partnerships can be between two or more owners known as members. It operates as a hybrid model, comprising the characteristics of a corporation and a partnership and/or sole proprietorship model of business. The rules and regulations for LLCs vary from country to country. However, the salient feature of this type of corporate structure is that individual partners are exempted from the liabilities of bearing the company’s debt or other forms of legal obligations. LLC, as a partnership firm, LLC is not required to pay direct taxes on its profits. Instead, the partners sharing those profits are liable to pay taxes on their income.
Conclusion –
When it comes to business partnerships, there are different types of partnership firms in India, which are as follows:
1. General Partnership Firm: This is a partnership firm between two or more partners, where all the partners are jointly and individually liable for the debts and liabilities of the firm.
2. Limited Partnership Firm: This is a partnership firm in which only some of the partners are liable for the debts and liabilities of the firm. The limited partners have limited liability up to the amount they have invested in the firm.
3. LLP or Limited Liability Partnership: This is a type of partnership firm in which all the partners have limited liability. LLP is a relatively new concept in India and has many advantages over traditional partnership firms.
4. Joint Venture: A joint venture is a type of partnership between two or more companies, where each company agrees to share the risks and rewards of the venture. Joint ventures are often formed to undertake specific projects or to enter into new markets.
Hope this blog related to Types of Partnership Firm was helpful.
FAQs
What are the 3 types of partnership?
The three types of partnerships are general partnership, limited partnership and limited liability partnership (LLP).
What are 5 characteristics of a partnership?
Mutual agreement, profit sharing, joint ownership, unlimited liability, and non-separate entity are five characteristics of a partnership.
What are 3 disadvantages of a partnership?
Unlimited liability, the potential for conflict among partners and the lack of perpetual continuity are three disadvantages of a partnership.
What is the most important element of a partnership?
Mutual agreement, outlining the terms of the partnership, is often considered the most important element of a partnership.
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