Partnership

Introduction:
Around in our society there are business and non-business organizations. Example of non-business organization: welfare
societies, writer guilds, labor unions, charitable associations, clubs, political parties and trust etc. Example of non-business
organization: Sole Proprietorship, Partnership firms and Company.

What is Sole Proprietorship?

A sole proprietorship, also known as the sole trader or simply a proprietorship, is a type of enterprise that is owned and run by
one natural person and in which there is no legal distinction between the owner and the business entity. The owner is in direct
control of all elements and is legally accountable for the finances of such business and this may include debts, loans, loss, etc.

The sole trader receives all profits (subject to taxation specific to the business) and has unlimited responsibility for all losses and
debts. Every asset of the business is owned by the proprietor and all debts of the business are the proprietor's. It is a "sole"
proprietorship in contrast with partnerships (which have at least two owners).

A sole proprietor may use a trade name or business name other than his, her, or its legal name. They may have to legally
trademark their business name if it differs from their own legal name, the process varying depending upon country of residence.

Thus,
It is said sole proprietorship is one man in business for himself only.
Best feature of sole proprietorship is: “Sole Ownership”.
Worst feature of sole proprietorship is: “Unlimited Liability”; all of the personal assets of the proprietor are at risk.

Partnership

A partnership is an arrangement where parties, known as partners, agree to cooperate to advance their mutual interests. The
partners in a partnership may be individuals, businesses, interest-based organizations, schools, governments or
combinations. Organizations may partner to increase the likelihood of each achieving their mission and to amplify their reach. A
partnership may result in issuing and holding equity or may be only governed by a contract.

A partnership consists of two or more people (whether individuals or corporations) carrying on a business in common with a view
to profit.

In Pakistan the partnership is regulated by the Partnership Act 1932. The Act came in to force on 1st October 1932. It extends to
the whole of Pakistan. The object of the law is to codify the rules concerning partnership.

Meaning of the term ‘Partnership’ according to Black’s Law Dictionary (Edition 8th)

“A voluntary association of two or more persons, who jointly own and carry a business for profit”

Thus, it may be stated that partnership is a freely established relationship of two or more persons who mutually own and manage
a business for profit.
Definition of Partnership (Section 4 of the Partnership Act 1932)
“Partnership is a relation between the persons who have agreed to share the profits of a business carried on by all or any one of
them acting for all.”

Salient Features of Partnership:

Voluntary association:
Partners are not coerced to enter in to partnership. They are free to exercise their free will. Free consent is considered necessary
to form a valid relation of partnership.

Contribution:
In Partnership, members contribute their capital, services, skill and experience. Partnership deed explicitly contains provision
regarding partner’s contribution ratio in business. In the absence of such provision, it is assumed that partners contribute equally.

Sharing of Profits:
Partnership business is formed to earn profit. Profit is distributed according to the agreed profit and loss ratio. In the absence of
the ratio the profits and losses are distributed equally among the partners.

Implied authority of partner:

The Partnership Act 1932 states, a partner is the agent of the firm for the purpose of the business. A transaction made by one
partner is binding on the firm.

No separate legal entity:

Partnership firm is not an artificial legal person. It cannot sue or to be sued in his own name. It is identified with its partners. The
rights and duties of firm are considered the rights and duties of partners. Partners are the owners of the firm whereas
shareholders are not the owner of the company.

Formation:
Partnership is formed by executing a partnership deed between the partners. Partnership deed is a kind of contract. It contains
different provisions regarding mutual relationship of the partners. It is written on a stamp paper of Rs.500.

Maximum partners:
The Act is silent as to the maximum number of partners in a firm but section 14 of The Companies Ordinance 1984 states; a
partnership consisting of more than 20 persons is illegal.

Unlimited liability:
The term ‘liability’ means ‘state of being accountable’. Where the financial liability of firm has arisen to the level that the business
assets are insufficient to pay business liabilities, the personal assets of partners are applied to pay off the liabilities. In other
words it may be said that in firm no difference is observed between business assets and the personal assets.

Transfer of interest:
In the absence of an agreement to the contrary, a partner cannot transfer his share to third party unless the other partners
consent.

Best feature of partnership: “Huge Capital”

Worst feature of partnership is: “Collective ownership with unlimited liability”

For capital intensive industry sole proprietorship and firm are not suitable business organization.
Logically speaking, there must be an organization which has two best features: huge Capital, sole ownership and limited liability.