Before you set up a partnership firm, you need to decide upon what kind of partnership firm you would want to incorporate. This article brings you all the details about partnership firms and a detailed view of partnership at will.
What Is a Partnership Firm?
A partnership is a business arrangement between two or more members. Such members are called partners who agree to become co-owners, share income or loss that the business generates, and distribute the responsibilities of handling the business firm. All partnership firms in India are regulated and governed by The Indian Partnership Act of 1932.
What Are the Basic Features of a Partnership Firm?
- The partnership is commenced by the partners based on a prior agreement in a written format
- As the name suggests, the firm comprises two or more partners
- Partners of a partnership firm share profits earned by the business and are also obliged to share the losses incurred to the firm, on a predetermined profit and loss sharing ratio
- Like any other business firm, the motive of a partnership should be to gain profit by performing some kind of business activity
- Partners of a partnership firm act both as agents and owners of the firm. Any action of one partner can affect the firm, and also the other partners.
- Each partner of a partnership firm has unlimited liability. A partnership firm is not treated as a separate business entity, and therefore, the liability of any kind of loss falls on all the partners.
Who Is Eligible to Become a Partner in a Partnership Firm?
An individual who is not a minor is eligible to become a partner in a partnership firm. As already mentioned, the law does not recognise a partnership firm as a separate legal individual, therefore, one partnership firm cannot become a partner in any other partnership firm. Only an individual real person, a trustee, HUF/Karta or a company can become a partner. However, the person must not be of unsound mind and should be competent to become a partner.
What Is Meant by Partnership at Will?
Partnership at will is a form of business partnership arrangement which does not have any predetermined tenure or age. It is upon the discretion of the partners to determine when to cease the existence of the partnership. The life of such a partnership is based upon the will of the partners, hence the name “partnership at will.” Partnership firms are created to conduct a business lawfully for an indefinite period.
One of the basic characteristics of an at-will partnership means that there is no formal agreement in place which delineates the time until which the individuals will remain partners of the firm. Any partner is allowed to move out of the partnership at any time.
Key Characteristics of an At-Will Partnership
1. Equal Ownership of Partnership:
The default rule of a partnership firm is that all the partners of the firm share equal ownership of the business. No matter if the partners contribute at different levels to the partnership, either through assets or labour, they are to share equal ownership.
2. Equal Authority in Management Functions:
Each partner of the firm is authorised to participate in the management of the firm. The partner is not just the owner, but an agent of the partnership firm who has the inherent authority to act on behalf of the firm and bind the firm in agreements.
3. Decision-Making Authority:
Partners of partnership firms are allowed to participate in management decisions. Decisions that are general, routine, or operational can be made by a majority of partners. However, major decisions affecting the business have to obtain the unanimous support of all the partners.
4. Unlimited Personal Liability:
Just like a general partnership, all partners of an at-will partnership have unlimited personal liability for the actions of other partners. Also, the partners are personally liable for the obligations and the debts of the partnership firm.
5. Fiduciary Duty:
All partners of a partnership firm share a common fiduciary duty to act in the best interest of the partnership firm. Sometimes this duty is construed as a duty to act in the best interest of the other partners as well. Fiduciary duty is generally meant to avoid a partner’s self-dealing, and personal benefit or the exclusion of interests of other partners.
The Bottom Line
The general form of partnerships has recently lost its charm due to the inherent advantages it has. One of the major cons is the unlimited liability of all the partners in a partnership firm. Losses and debts of the firm are obliged as a liability for each partner, without considering their respective holdings.
All the general partners are jointly and severally liable for the acts committed by the other partners. Therefore firms now are shifting towards limited liability partnership, which provides better flexibility to the partners.
Why Vakilsearch?
Experts at Vakilsearch can suggest the most compatible form of partnership arrangement for your business. You should contact Vakilsearch to incorporate your partnership firm, and provide your business with a legal existence.
