CBSE Class XI Business Studies

1. Partnership

2. Why Partnership?
The proprietorship form of ownership suffers from certain
limitations such as limited resources, limited skill and
unlimited liability.
Expansion in business requires more capital and managerial
skills and also involves more risk.
A proprietor finds him unable to fulfill these requirements.
This call for more persons come together, with different edges
and start business.

3. For example, a person who lacks managerial skills but
may have capital.
Another person who is a good manager but may not
have capital.
When these persons come together, pool their capital
and skills and organize a business, it is called
partnership.
Partnership grows essentially because of the
limitations or disadvantages of proprietorship.

4. Meaning
Partnership is the relation between persons who
have agreed to share the profit of the business
carried on buy all or any one of them acting for all.
It is governed by ‘Indian Partnership Act, 1932’
The persons who own the partnership business are
individually called ‘partners’ and collectively they are
called as ‘firm’ or ‘partnership firm’. The name under
which partnership business is carried on is called ‘Firm
Name’. In a way, the firm is nothing but an abbreviation
for partners.

5. Features of Partnership
1. Formation: It comes into existence through a legal
agreement under the Indian Partnership Act, 1932
2. Liability: Like proprietorship, each partner has
unlimited liability in the firm. This means that if the
assets of the partnership firm fall short to meet the
firm’s obligations, the partners’ private assets will also
be used for the purpose.
3. Risk bearing: There is an agreement among the
partners to share the profits earned and losses
incurred in partnership business.
4. Decision Making and control: The responsibility of
business will be taken by all the partners equally untill
an dunless mentioned specifically in agreement. Hence
it is managed through joint efforts of partners.

6. 5. Continuity: Partnership dissolves on the death,
retirement or insolvency of any of its partners. However ,
remaining partners may continue it with mutual consent.
6. Membership: There should be at least two persons
subject to a maximum of ten persons for banking business
and twenty for non-banking business to form a
partnership firm.
7. Mutual Agency: The partnership firm may be carried
on by all partners or any of them acting for all. While
dealing with firm’s transactions, each partner is entitled to
represent the firm and other partners. In this way, a
partner is an agent of the firm and of the other partners.
As an agent, he represents other partners
As a principal, he is bound by the acts of other partners.

7. Merits of Partnership
1. Easy Formation: Partnership is a contractual
agreement between the partners to run an enterprise.
Hence, it is relatively ease to form. Legal formalities
associated with formation are minimal. Though, the
registration of a partnership is desirable, but not obligatory.
2. More Funds: Partnership overcomes the problem of
limited resources, because now there are more than one
person who provide funds to the enterprise. It also
increases the borrowing capacity of the firm. Moreover, the
lending institutions also perceive less risk in granting credit
to a partnership than to a proprietorship because the risk
of loss is spread over a number of partners rather than only
one

8. 3. Balanced Decision making: As there are more than one
owners in partnership, all the partners are involved in
decision making. For example, if there are three partners,
one partner might be a specialist in production, another in
finance and the third in marketing. This gives the firm an
advantage of collective expertise for taking better decisions.
Thus, the old maxim of “two heads being better than one”
aptly applies to partnership.
4. Sharing of risk: In case of partnership, the losses of the
firm are shared by all the partners as per their agreed profit-
sharing ratios. Thus, the share of loss in case of each partner
will be less than that in case of proprietorship.
5. Tax Advantage: Taxation rates applicable to partnership
are lower than proprietorship and company forms of business
ownership.

9. Demerits of Partnership
1. Unlimited Liability: In partnership firm, the liability of
partners is unlimited. Just as in proprietorship, the
partners’ personal assets may be at risk if the business
cannot pay its debts.
2. Lack of Continuity: Death or withdrawal of one partner
causes the partnership to come to an end. So, there
remains uncertainty in continuity of partnership.
3. Limited Resources: Large scale business operations
cannot be supported by partnership firms due to legal
ceilings on the number of partners.

10. 4. Possibility of Conflicts: Any differences in the
opinion may lead to disputes between partners. Any
wrong decision by one partner may result in
financial ruin of all other partners.
5. Lack of Public Confidence: As the partnership
firm is not legally required to publish its accounts,
public is not aware of its true financial status.

11. Types of Partners
Active or Working
Partner: who contributes
capital, participates in
management, shares its
profit and losses and bears
an unlimited liability
Sleeping or Dormant
Partner: One who does not
take part in day to day
activities of business.
Secret Partner: One
whose association with the
firm is unknown to the
general public

12. Nominal Partner: One
who allows the use of his
name and goodwill for the
benefit of the firm.
Partner by Estoppel:
One who, unknowingly
by his words or conduct
gives an impression to
others that he is a partner
of the firm.
Partner by Holding Out:
One who is not a member
but knowingly allows
himself / herself to be
represented as a partner.

13. Types of Partnerships
Classification on the
basis of Duration
Classification on the
basis of Liability
Partnership
at Will
Particular
Partnership
General
Partnership
Limited
Partnership

14. Partnership at Will
When forming a partnership if there is no clause about the
expiration of such a partnership, we call it a partnership at will.
According to Section 7 of the Indian Partnership Act 1932, there are
two conditions to be fulfilled for a partnership to be a partnership at
will. These are
• There is no agreement about a fixed period for the existence of a
partnership.
• No provision with regards to the determination of a partnership
So if there is an agreement between the partners about the
duration or the determination of the firm, this will not be a
partnership at will. But if a partnership was entered into a fixed
term and continues to operate beyond this term it will become a
partnership at will from the expiration of this term.

15. Particular Partnership
A partnership can be formed for carrying on continuous business,
or it can be formed for one particular venture or undertaking.
If the partnership is formed only to carry out one
business venture or to complete one undertaking such a
partnership is known as a particular partnership.
After the completion of the said venture or activity, the
partnership will be dissolved.
However, the partners can come to an agreement to continue the
said partnership.
But in the absence of this, the partnership ends when the task is
complete.

16. General Partnership
When the purpose for the formation of the partnership is to
carry out the business, in general, it is said to be a general
partnership.
Unlike a particular partnership, in a general partnership
the scope of the business to be carried out is not defined.
So all the partners will be liable for all the actions of the
partnership.

17. Limited Partnership
It is one in which liability of at least one partner is
unlimited, whereas, rest of the partners may have limited
liability.
Such a partnership does not get terminated with limited
liability
Registration of such partnerships is compulsory under “The
Limited Liability Partnership (LLP) Act, 2008”
The provision of Indian Partnership Act, 1932 are not
applicable to LLP
Every LLP shall use the word “Limited Liability Partnership”
as the last word of its name.

18. Partnership Deed
• Partnership comes into existence through an agreement
which is called partnership deed.
• It may be oral or written
• Partnership deed is the written agreement, which
specifies the terms and conditions that govern the
partnership.
• It includes following aspects:
• Name of firm
• Nature of business and location of business
• Duration of business
• Profit and loss ratio
• Duties and obligations of partners
• Salaries and withdrawals of partners
• Investment made by each partner etc.

19. Registration of Partnership Firm
It means entering of the firm’s name, along with the
relevant prescribed particulars, with the Registrar of
firms.
However registration is optional for the firms, but there are
certain consequences for non – registration:
• A partner of unregistered firm cannot file suit against the firm
or other partners.
• The firm can not file a suit against third parties
• The firm cannot file s suit against the partners

20. Procedure for registration of Partnership
Firm
• Submission of application in the prescribed form to the
Registrar of Firms. It should contain following particulars:
• Name of the firm
• Location of the firm
• Name of the other places where the firm carries on
business
• Date of joining of partners
• Name and address of partners
• Duration of Partnership
• Deposit of required fees with the Registrant of firms
• The Registrar after approval will make an entry in the
register of firms and will subsequently issue a certificate of
registration