Business Organization

Partnership organization BBA Easy Notes-22

MDU BBA NOTES

SEMESTER-1

Business Organisation

Forms of Business Organization- Partnership Organization

Forms of Business Organization

Partnership Organization

The inherent disadvantage of the sole proprietorship in financing and managing an expanding business paved the way for partnership as a viable option. The partnership serves as an answer to the need for greater capital investment, varied skills, and sharing of risks.

The Indian Partnership Act, of 1932 defines partnership as “the relation between persons who have agreed to share the profit of the business carried on by all or any one of them acting for all.”
Partnership Organization – partnership is the relation between persons competent to make contracts who have agreed to carry on a lawful business in common with a view to private gain.

Features of Partnership Organization

Features of Partnership Organization – Definitions given above point to the following major characteristics of the partnership form of business organization.

1. Formation

In the partnership form of business, an organization is governed by the Indian Partnership Act, of 1932.

It comes into existence through a legal agreement wherein the terms and conditions governing the relationship among the partners, sharing of profits and losses and the manner of conducting the business is specified.

2. Liability

The partners of a firm have unlimited liability. Personal assets may be used for repaying debts in case the business assets are insufficient. Further, the partners are jointly and individually liable for the payment of debts.

3. Risk Bearing

The partners bear the risks involved in running a business as a team. The reward comes in the form of profits which are shared by the partners in an agreed ratio.

However, they also share losses in the same ratio in the event of the firm incurring losses.

4. Decision-Making and Control

The partners share amongst themselves the responsibility of decision-making and control of day-to-day activities.

Decisions are generally taken with mutual consent. Thus, the activities of a partnership firm are managed through the joint efforts of all the partners.

5. Continuity

The partnership is characterized by a lack of continuity of business since the death, retirement, insolvency, or insanity of any partner can bring an end to the business.

However, the remaining partners may if they so desire continue the business based on a new agreement.

6. Number of Partners

The minimum number of partners needed to start a partnership organization firm is two:-

According to section 464 of the Companies Act 2013, the maximum number of partners in a partnership firm can be 100, subject to the number prescribed by the government.

As per Rule 10 of The Companies (Miscellaneous) Rules 2014, at present, the maximum number of members can be 50.

Advantages of Partnership Organization

The following points describe the advantages of partnership organization OR firm:-

1. Ease of Formation and Closure

A partnership firm can be formed easily by putting an agreement between the prospective partners into place
whereby they agree to carry out the business of the firm and share risks. There is no compulsion concerning the registration of the firm. Closure of the firm is an easy task.

2. Balanced Decision Making

The partners can oversee different functions according to their areas of expertise. Because an individual is not forced to handle different activities, this not only reduces the burden of work but also leads to fewer errors in judgments. As a consequence, decisions are likely to be more balanced.

3. More Funds

In a partnership, the capital is contributed by several partners. This makes it possible to raise a larger amount of funds as compared to a sole proprietor and undertake additional operations when needed.

4. Sharing of Risks

The risks involved in running a partnership firm are shared by all the partners. This reduces the anxiety, burden, and stress on individual partners.

5. Secrecy

A partnership firm is not legally required to publish its accounts and submit its reports. Hence it can maintain the confidentiality of information relating to its operations.

Disadvantage of Partnership Organization

A partnership firm of the business organization suffers from the following Disadvantage of Partnership Organization:-

1. Unlimited Liability

Partners are liable to repay debts even from their resources in case the business assets are not sufficient to meet its debts.

The liability of partners is both joint and several which may prove to be a drawback for those partners who have greater personal wealth.

2. Limited Resources

There is a restriction on the number of partners, and hence contribution in terms of capital investment is usually not sufficient to support large-scale business operations. As a result, partnership firms face problems in expansion beyond a certain size.

3. Possibility of Conflicts

The partnership is run by a group of persons wherein decision-making authority is shared. The difference in opinion on some issues may lead to disputes between partners.

4. Lack of Continuity

The partnership comes to an end with the death, retirement, insolvency, or lunacy of any partner. It may result in a lack of continuity.

5. Lack of Public Confidence

A partnership firm is not legally required to publish its financial reports or make other related information public. It is, therefore, difficult for any member of the public to ascertain the true financial status of a partnership firm.