Abhishek Khare Outlines the Legal Roadmap for Partnership Business

Talks on partnership business

If a person has to start a business he has many avenues, either he can start a company by raising capital from public by issuing shares commonly known as Public Ltd. Company or some people can come together and contribute to the capital of the company without raising funds from the public, which is commonly known as Private Ltd. Company.

These companies are incorporated with a purpose defined in the MOA or objects of the company, under the Companies Act. There is another form of business similar to the concept of Private Ltd. Company but without following the steps required for incorporation of the company under the Companies Act, popularly known as partnership. It has similar characteristics to the Private ltd. Company except the mode of incorporation of the company and the documents which define the object of the company. Partnership is the species of contract whereby two or more people enter into a contract to carry out business to earn profits and for the purpose, defined in the contract of partnership, which acts as a constitutional document for the partnership business.

Creation of partnership has four essential features-

• That it is the result of an agreement
• That it is organized to carry on a business
• That the persons concerned agree to share the profits of the business.
• That the business is to be carried on by all or any of them acting for all.

A 'partnership' is the relationship between persons who have agreed to share the profits of a business carried on by all the partners or any of them acting or all the partners. Partnership is association of two or more people who contribute in the business both by their skill and capital and in turn share the profits and liabilities whether limited to their share in the business. It is a symbiotic form of business whereby one partner uses its skill to fulfill the purpose of the business and other partner facilitates the fulfillment of the purpose by providing finances. But this is not the case always, at times people form an association and contribute to the pool of finances and employ skilled people under them to carry out the business. A partnership is a contract between inpiduals who, in a spirit of cooperation, agree to carry on an enterprise, contribute to it, by combining property, knowledge or activities and share its profits as well as losses in the form of shared liabilities limited to the share in the business. Partners may have a partnership agreement, and in some jurisdictions such agreements may be registered and available for public inspection. A partnership is a legal entity. The another indispensable feature of partnership is the joint and several liabilities of the partners i.e. one partner is liable for the acts of another partners and liability cannot be imposed on a single partner for any loss caused due to the partner but it is to be assumed by all the partners jointly. This kind of association is formed and incorporated under Indian Partnership Act, 1932.

The Indian Partnership Act, 1932 is a comprehensive piece of legislation, governing the formation, registration, working, dissolution of partnership firm and the rights and liabilities of the incoming and outgoing partners.

Partnership can be generally be pided in two forms;

• General Partnership
• Limited Partnership

General Partnership:

The General Partnership (or simple partnership) is an association of two or more people carrying on a business with a goal of earning profit. There is a little formality involved in forming a partnership. In fact, if someone can establish that he is carrying out business with someone else then there is no need to show intention of the same. Therefore it is called as general partnership.

Limited Partnership:

A business organisation with one or more general partners who manage the business and assume the legal debts and obligations, and one or more limited partners, who are liable to the extent of their share in the business i.e. investments in the business. Limited partners also enjoy rights to the partnership’s cash flow, but are not liable to company’s obligation.

Merits and demerits of partnership:

The following are often seen as being positive attributes of being in a partnership:

• Two people working together have complimentary skills, which can be very beneficial as people are specialized in there respective fields and contribute efficiently to the business. One partner might be good in marketing and presenting to clients, while another is better at bookkeeping, one may be financially well, while another may be skilled in producing the article.
• When two or more than two people come and contribute to the business, you have access to a wider pool of knowledge, skills and contacts.
• You can be at two places at the same time, i.e. it adds to your mobility and efficient working of the business because if one partner is out for a deal then the other partner carry out in-house work without hampering the business.
• Partnership provides moral support and provides opportunity for more creativity.
• You can share resources like money, skill and equipment.
• Partnerships have better administration and financial systems in place than trading by sole proprietorship.

On the negative side:

• A partnership is for the long term, whereby the aspirations and the desires of the partners may change and which can lead to conflict of interest and therefore dissolution of partnership.
• In a partnership business any decision with regard to the business cannot be taken by a single partner alone but should be taken by the consent of other partners which generally causes delay due to non-availability of al the partners at the time of decision making.
• All the partners are jointly and severally liable for the acts of all the partners i.e. any loss caused due to the negligence of a partner shall be incurred by all the partners. This is even the case if debts were incurred by your partner’s dishonesty or mismanagement without your knowledge
• Partners share profits and decide on how to value each other’s time and skills. Profits are shared irrespective of the skill, hard work, negligence but depending on the capital shared in the business by the partner.
• Partnerships can dissolve very easily either by insolvency of any one partner or death of any one partner among others. It does not have perpetual existence unlike the Companies incorporated under the Companies Act, 1956.

Things to remember while entering partnership business.

• All types of partnership should have every detail spelled out and signed by all parties.
• General partnerships have the problem of taking on liability for the debts and obligations of the business.
• Make sure to be diligent and complete and review all forms as necessary as per the requirement by the state.
• The lack of adequate capital for the projected business operation is a major mistake made by many partnerships.
• Prepare projected cash flow and income statements to determine how much capital you'll need to start with.
• Parties entering I partnership contract shall appoint a qualified attorney to draft the partnership agreement so as to avoid any unforeseen event.
• In partnership agreements, you need to define an exit strategy that allows either party to walk away or buy each other out, without destroying the business.
• Each partner's time commitment should be clearly understood at the beginning. One must stop and review the positives and negatives before rushing into such a commitment
• Make sure you consider your potential partner's manner of doing business, his or her personality, and the business goals prior to starting a partnership.

Success story

Nearly three-quarters of a century ago, two brothers-in-law shared a dream to create an innovative ice cream store that would be a neighborhood gathering place for families. Burton "Burt" Baskin and Irvine ‘Iry” Robbins had a mutual love of old-fashioned ice cream and the desire to provide customers a variety of flavors made with ingredients of the highest quality in a fun, inviting atmosphere. Irv worked in his father's ice cream store. During World War II, Burt was a Lieutenant in the U.S. Navy and produced ice cream for his fellow troops. When the war was over, the two were eager to capitalize on the business of ice cream business .They started out in separate ventures at the advice of Irv’s father. In 1945, Irv opened Snowbird Ice Cream in Glendale, California. His store featured 21 flavors and emphasized high-quality ice cream sold in a fun, personalized atmosphere. A year later, Burt opened Burton's Ice Cream Shop in Pasadena, CA. By 1948, they had six stores between them. This concept eventually grew into Baskin-Robbins. As the number of stores grew, Burt and Irv recognized that to maintain the high standards they set in the beginning, each store would require a manager who had an ownership interest in its overall operation. Even though they didn't realize it at the time, the two founders had pioneered the concept of franchising in the ice cream industry. In 1949, there were more than 40 stores in Southern California when Burt and Irv purchased their first dairy in Burbank. This business decision allowed them to have complete control over the production of their ice cream, and the development of new ingredients and flavors. It wasn’t until 1953 that the ice cream chain dropped the separate identities of Snowbird and Burton's and became Baskin-Robbins. In 1954, Baskin-Robbins put their product on the line against their competitors at the Los Angeles County Fair. That year they won their first Gold Medal and set the pattern for county and state fair participation, earning Gold Medals for Baskin-Robbins Ice Cream every year since that first contest. And now Baskin-Robbins has grown to become the world's largest chain of ice cream specialty stores, with more than 2,800 locations throughout the United States and 5,800 around the globe.

In India also Partnership business has now started flourishing and adding to it there is another success story in the textile market, Madura Garments, a unit of Aditya Birla Nuvo and Esprit, the leading international lifestyle brand today celebrated their successful association in India. Madura Garments and Esprit entered into a partnership in 2005 to target the growing premium retail market in India and have successfully strengthened their brand portfolio in key segments (women segment/ premium relaxed clothes segment/accessories).

Esprit has expanded its presence with 10 stores in the country covering Mumbai, Delhi, Chandigarh, Bangalore and Pune. Over the next two years the company plans to roll out many more stores across the country thereby expanding its retail base manifold.

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