What Is a Partnership

Any organization where in all the partners together pool in their resources, skills, finance and knowledge while also share company profits and losses as per the partnership terms of agreement is called as a partnership firm. Trust and understanding in between the partners forms the very base of any successful partnership. A person can either choose his partner or might even have a partner or partners assigned to him as per the partnership agreement.

Benefits of a Partnership Firm:

  • Capital is pooled together from all the partners and thus makes it easier to establish a partnership firm without any financial constrains
  • Partners are saved from second taxation level as their income tends to flow in to their personal tax returns.
  • At time of the company crisis, all the company losses are shared among the partners as per the agreed terms. This saves a single person from bearing all the losses individually.
  • Every partner in a partnership is known to be both a principal as well as an agent wherein a principal is bound by the other partners act and an agent binds other partners by his operations.

Besides having an advantage of working in a partnership, any sour feeling can also spoil an entire deal of company business. Every partner must have an open mind to accept differences, learn to adapt as per the changing circumstances and exchange their ideas and technical knowledge with each other.

Every partner is also jointly liable to bear the losses of the company too. In case of a default, an aggrieved party can either sue one or number of partners together. The claims are then decided upon the capital investment proportion or earning distribution ratio of all the partners. This further depends upon other conditional factors too. Thus, an aggrieved party can sue all the partners together or even when it is a single partner who is the defaulter.

A partnership agreement is drafted by considering number of issues like:

  • The amount of capital contributions to be shared among the partners
  • An Allocation ratio of company’s profits and losses,
  • An amount of salary and drawing of partners out of company’s profits
  • The management responsibilities of partners
  • The consequences in case of sudden circumstances like withdrawal, disability, retirement or even a partner’s death
  • The income and profit sharing at the time of partnership liquidation or dissolution

Partnership is also not confined to the national boundaries. Building a relation with a foreign country helps national and local partners to bridge in a widened gap of language barriers. It also helps national partners to work more efficiently with foreign entities rather than spending their crucial time on irrelevant issues for e.g. falling into traditional or cross-cultural traps.