Chapter 6- Partnership

by • 10/06/2011 • B.COM PART 1 Introduction to BusinessComments (0)801

Q1- Define partnership. Elucidate its advantage and disadvantage.



“Partnership is an association of two or more persons to carry on as co owners a business for profit”.

It is a business ownership, which must have at least two partners. The maximum number is 20 but in the case of banking it is only 10. Sole proprietorship, partnership is the commonest form of ownership in the business world.



The partnership business enjoys the following advantages.

1.   Larger Capital:

In partnership capital of the business may be greater than the sole proprietorship. Capital can be increased any time by increasing the number of partners. But in sole proprietorship the capital is limited to only one man’s contribution.

2.   High Credit Standing:

Assuming equal size, the partnership enjoys the highest credit standing of all three types of business ownerships (sole proprietorship, partnership, and company). If the assets of the business are insufficient to pay off debts, the personal property of partners can be utilized.

3.   Combined Judgment And Skills:

It is a common belief that two heads are better than one, and it is true especially in partnership where partners have different skills, experiences, abilities and qualifications.

4.   Retention Of Valuable Employees:

Partnership has more than one co owners. If is has Chef de Vote or key and valuable employee, and if there is a risk that he may leave the job, he may be offered to join the firm as a co owner. In this way important emloyees can be retained.

5.   Personal Interest:

The business and its success depends upon the enthusiastic involvement of the co owner. Partners are very keen in running their business. The business gets prosperous from their personal interest and efforts.

6.   Definite Legal Status:

Partnership is one of the oldest form os business ownership and therefore it has clear cut answers about the legal acts, rights, duties, liabilities of partners. Therefore, partnership problems can be clearly and definitely solved in the light of partnership law.

7.   Tax Saving:

Partnership allows for tax saving. Since the profit is divided among partners the taxable income of the firm is reduced resulting in low income tax.




1.  Unlimited Liability:

This is a serious disadvantage in which the personal property of the partners is very much at stake if the business assets are not enough in the full settlements of the debts. That is, if the assets fall short in the payment of the firm’s debts, the unpaid balance will be recovered from the personal property of the partners in accordance with their profit sharing ratios.

2.   Divided Control And Management:

Management and control is divided among various partners owing to which many                            administrative problems are created. Divided control causes delayed decision. Duties and responsibilities are difficult to fix. Accountability is weak

3.   Lack Of Continuity:

Partnership lacks in continuity. It has a limited life. It comes to an end in the following situations some of which are very common.

a-   Death of a partner

b-   Admission of a partner

c-   Retirement of a partner

d-   Bankruptcy of a partner

e-   Insanity

4.   Lack Of Transferability:

Partnership has a frozen investment. Whatever once invested in the business cannot be withdrawn. If a partner withdraws his share the partnership will stand dissolve.

5.   Disagreement Among The Partners:

The greater the number of partners, the higher are the chances of disagreement among them. The partnership business is at loss from the possibility of the disagreement among the partners.

Q2-Describe usual points of Partnership agreement.

Partnership Agreement:

Partnership agreement is a written or oral mutual consent to run a business as co-owner for profit. Partnership agreement is also known as articles of partnership.

Contents Of The Agreement / The Common Provisions Of A Partnership Contract

1.   The name of the firm

2.   The place of the business

3.   Nature of business

4.   The names and addresses of partners

5.   The amount of investment by each partner

6.   The length of a life of partnership

7.   The profit sharing ratio of partners

8.   Extent of withdrawals by each partner

9.   Procedure of admission of a new partner

10. A provision of salaries to partners

11. A provision of dissolution of the firm

12. Determination of an accounting year and a fiscal year

13. Rights, duties and liabilities of partners

14. The name of the banker

15. The signing authority of the check

16. A provision of the retirement of a partner

17. Determination of goodwill

18. A provision of bonus to partners

19. A provision of the method of the settlement of disputes

20. A provision for minor partner

21. Interest on capital

22. Interest on loan

23. Loan from partners

24. Loan to partners

25. Method of inventory valuation

26. Depreciation Method

Q3- Explain in detail conditions of dissolution of partnership.


Following are the conditions of dissolution of partnership.

  • Admission Of Partner:

If a new partner is admitted to the firm, the old partnership will have to be dissolved, and a new agreement is drawn up to continue the business anew.

  • Retirement Of A Partner:

In the case of retirement of a partner the partnership stands dissolve. The firm will not be dissolved if the remaining partners agree to continue their business.

  • Insolvency Of A Partner:

If a partner in a firm is adjudged bankrupt by the court of law, the partnership will turn dissolved. However, the remaining partner may decide to continue the business i.e. the firm.

  • Insanity Of Partner:

If a partner gets mad or insane the partnership stands dissolved.

  • A Convict Partner:

When a partner is convicted of crime i.e. he is declared to be guilty by the court of law, the partnership will get dissolved.

  • Expiry Of Period:

If the partnership was formed for a definite period of time it would break up after the expiry of that term.

  • Death Of A Partner:

The death of a partner brings the partnership to the dissolution unless there is an agreement to the contrary.

  • Conclusion Of Venture:

Partnership may be formed to undertake a particular venture or project. Once the project is complete the partnership stands dissolved. Such partnership is also referred to as joint venture.

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