What are the Profits and Losses of a partnership Firm
Hemlata Khandelwal / 2021-06-25 12:09:02Before know about the profits and loss of a Partnership Firm we should know about Partnership Firm.
When two or more persons jointly arrange capital and commence business under mutual agreement or contract (Indian Partnership Act) So this agreement is called a partnership deed and the organization formed by it is called a partnership firm or partnership firm.
According to the Indian Partnership Act 1932, Schedule IV, a partnership is an association of persons organized for the purpose of earning a profit, and the firm and the organization may be conducted by all the partners together or by any of their representatives.
When a business is owned by it, it is called a Proprietorship Firm, and a business run by a group of more than one person is called a Partnership Firm.
The Agreement made by the Partners is called the Agreement of Partnership Deed.
The person who invests capital in equal amount or proportionately in the business, then it is called partnership and the organization is called partnership firm or partnership firm.
Required Information related to Partnership Firm
1. Capital Management
In partnership, capital is managed by all the partners in equal or proportionate amounts.
2. Unlimited Liability
The liability of all the partners in a partnership is unlimited, so if the partnership exceeds the capital invested in the firm and all the debts cannot be paid even by selling the firm, the partners must repay the debt by selling their personal assets.
3. Number of Partners
As per the Companies Act, the maximum number of partners can be 10 for banking business and 20 for other business
4. Contract
Partnerships can be formed by written or oral contract.
- Oral Contract: Speaking Orally
- Written Contract: To avoid any kind of dispute in the future it is necessary that the contract should be in writing and it is called a contract.
5. Profit and Loss Sharing
All the partners have to share profit and loss equally or it can also be divided in the ratio of capital employed, it all depends on the agreements made by him (Partnership Deed)
6. Establishment and Registration of Partnership Firm
Partnership in India is governed by the Indian Partnership Act 1932. The registration of a partnership firm is done before the commencement of business. Application for Partnership Agreement and prescribed fee is needed to be submitted to the State Registrar of Firms or online. Documents need to be submitted with the application:
- Original copy of FORM-1 with signatures of all the participants
- Duly filled samples of the affidavit
- A certified original copy of the deed of partnership
- Proof of ownership of the original place of business or rent or lease agreement
- Id and Address proofs copy of all Partners
Thereafter a copy of all the particulars of the firm registered with the MCA or registrar of companies by Company Registration in India is given to the applicant on payment of the mentioned fee.
A partnership firm can be organized easily in India as it does not require any more legal formalities. Partners can easily enter a partnership firm and start a business.
What are the Advantages and Disadvantages of a Partnership Firm/Company?
Profit and Loss of a Partnership Firm
1. Easy to Setup
Two or more people can start a business very easily with mutual consent under an agreement among themselves.
2. Elasticity
The partnership also has the property of flexibility, in which, with mutual consent, the number of partners can be changed as per the requirement.
3. Low Operation Cost
It is easy to run a partnership firm at a low cost. The partnership consists of people with different types of abilities like rich, clever, skilled managers, experienced, courageous, etc. who contribute to the success of the business.
4. Mutual Discussion
To reach any decision in the firm of partnership there is enough discussion among them, which reduces the chances of mistakes.
5. Quick Decision
In partnership, each person gives his opinion on the basis of his abilities, knowledge, and experience; so that there is no difficulty in taking the related decision in the firm of partnership it is easy to reach the decision quickly.
You may also read about The Advantages and Disadvantages of LLP.
6. Mutual Understanding
Because the partnership is written or oral, in partnership the contract is by mutual consent, so mutual harmony and cordial relations are maintained between the partners.
Loss and Problems in Partnership Firm
1. Greater Risk
The risk in partnership business is high because sometimes due to lack of mutual agreement on any decision, there can be lost in the firm of partnership and everyone has to bear the loss.
2. Unlimited Liability
In a partnership organization, the partner’s liability is unlimited i.e. in case of loss or profit, they may have to pay the debtors by selling their personal property.
3. Differences
When the number of partners is more, there is a possibility of continuous differences of opinion in the decisions related to the firm or in the absence of ideas.
4. Lack of Privacy
All the secret information and decisions of the firm are limited to the partners, many times such information should be in the middle of the partners, if that information reaches other persons, then there can be loss in business.
5. Inefficient Operation
Sometimes it becomes very difficult to make efficient management due to a lack of common opinion of the partners.
6. Dissolution of Partnership Firm
- The existence of a partnership organization is often uncertain
- Death of one of the partners
- Bankruptcy of partners
- A partner is declared insane
- Due to differences
- Due to the loss of trade
- With the mutual consent of the partners
- By the court on the involvement of partnership firm in any illegal or unconstitutional act
- There may be dissolution or termination of the partnership firm.
Q: Can a Partner change be done in a Partnership Firm?
Ans: It can be done, but in this, both the leaving and joining should be agreed and a new partnership deed (contract, agreement) will have to be made again between all the partners.