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LoansJagat Team

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28 Jul 2025

What is Partnership? Definition, Types & Features in Business

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A partnership is a business where two or more people work together and share profits.

Each partner contributes skills, money, or effort as per their agreement to run the business.

Let’s understand it with the help of an example:

Amit and Ravi decide to open a small café together.

Amit invests ₹60,000
Ravi invests ₹40,000

This makes their total capital ₹1,00,000.

They agree to share profits and losses in the same 60:40 ratio.

In the first year, the cafe earns a profit of ₹50,000.

Amit receives ₹30,000 (60%)
Ravi receives ₹20,000 (40%)

In the second year, the cafe incurs a loss of ₹10,000.

Amit bears ₹6,000
Ravi bears ₹4,000

This example shows that in a partnership, both profits and losses are shared based on each partner’s agreed share. It highlights how responsibilities and rewards go hand in hand in a partnership.

This blog will help you in understanding the definition of partnership, its different types and features in business.

What is a Partnership?

A partnership is when two or more people run and share a business together. They split responsibilities, profits, and losses based on a mutual legal agreement.

Let’s understand it with the help of an example:

Amit and Ravi decide to start a business together.
They both put money into the business.

Amit gives ₹60,000
Ravi gives ₹40,000

So together, they invest ₹1,00,000.

They agree to share profits and losses based on how much money they gave.
This means Amit gets 60% and Ravi gets 40%.

Year 1: Business makes a profit of ₹50,000.

Amit gets 60% of ₹50,000 = ₹30,000
Ravi gets 40% of ₹50,000 = ₹20,000

Year 2: Business has a loss of ₹10,000.

Amit pays 60% of ₹10,000 = ₹6,000
Ravi pays 40% of ₹10,000 = ₹4,000

So, in a partnership, both people share the money earned and the losses, based on their agreement.

What Are The Key Characteristics of a Partnership?

A partnership is built on mutual understanding, trust, and shared responsibility. The table below highlights the main features of a partnership

Feature	Meaning	Example
1. Two or More Persons	A partnership needs at least 2 people to start a business.	Amit and Ravi start a business together.
2. Contractual Relationship	Partners must have an agreement (written or oral) to work together.	Amit and Ravi sign a partnership deed.
3. Mutual Agency	Every partner can make decisions that affect the whole business.	If Ravi signs a deal, the whole partnership is responsible for it.
4. Shared Risks and Rewards	Profits and losses are shared among all partners.	Business earns ₹50,000 profit – Amit gets ₹30,000, Ravi gets ₹20,000 (60:40).
5. Profit and Loss Sharing	How profits and losses are divided depends on the agreement.	Loss of ₹10,000 is split – Amit pays ₹6,000, Ravi pays ₹4,000 (60:40).
6. Unlimited Liability	Partners are personally responsible for business debts.	If the business owes ₹1,00,000, both Amit and Ravi may have to pay from their own money.
7. No Separate Legal Entity	The business and partners are legally the same.	Business loans or taxes are in the name of partners, not a separate company.
8. Flexibility	Partners can decide how they want to run the business.	Amit handles marketing, and Ravi handles finance, as per their agreement.
9. Decision-Making	Partners share decision-making or as per the agreement.	Ravi can’t buy expensive equipment without Amit’s approval (if mentioned in the deed).
10. Ownership Sharing	All assets belong to the partnership, not just the person who paid for them.	Ravi buys office furniture; both Amit and Ravi own it equally (based on the deed).
11. Dissolution	The partnership can end due to various reasons.	If Amit wants to leave or a partner becomes bankrupt, the partnership can be dissolved.

These key characteristics define how partnerships operate, from shared ownership and profits to joint decision-making and personal liability. Understanding these elements is crucial for anyone planning to start or join a partnership business.

Types Of Partnerships:

Partnerships can take different forms depending on the level of liability, control, and profit-sharing involved. The table below outlines the three main types of business partnerships: General Partnership, Limited Partnership, and Limited Liability Partnership

Type of Partnership	Liability	Management	Profit/Loss Sharing
1. General Partnership (GP)	All partners have unlimited personal liability for business debts.	All partners actively manage the business and share decision-making.	Usually shared equally, unless stated otherwise in the agreement.
2. Limited Partnership (LP)	At least one general partner has unlimited liability; others (limited partners) have limited liability.	General partners manage the business; limited partners typically have no active role.	Based on the agreement, general partners often receive a larger share.
3. Limited Liability Partnership (LLP)	All partners have limited liability, protecting personal assets from business debts.	All partners can be involved in management, but still enjoy limited liability.	Profits and losses are shared as per the partnership agreement.

Choosing the right type of partnership depends on the needs of the business and the risk each partner is willing to take. Understanding these differences helps in forming a partnership that aligns with legal, financial, and operational goals.

What Are The Advantages of Partnership?

Partnerships offer many benefits that make them a popular choice for entrepreneurs. The table below highlights the key advantages of partnerships.

Advantage	Meaning	Example
1. Ease of Formation	Easy and low-cost to start; fewer legal steps compared to companies.	Amit and Ravi write a simple agreement and start their business without legal fees.
2. Shared Resources and Responsibilities	Partners share money, ideas, and work equally or as per agreement.	Amit handles sales, Ravi manages accounts – work is divided, and both use their strengths.
3. Access to Capital	More partners = more money for the business.	Amit invests ₹60,000, Ravi adds ₹40,000 – total ₹1,00,000 for better growth opportunities.
4. Flexibility and Adaptability	Easy to change rules, strategy, or roles with mutual agreement.	After 6 months, they agreed that Ravi would handle marketing instead of finance, quickly adapted.
5. Potential for Tax Advantages	Profits are taxed only once in partners' hands, not at the company level.	The business earns ₹2,00,000 instead of company tax, and each pays income tax on their ₹1,00,000.

These advantages show that partnerships combine simplicity, flexibility, and shared strength, making them ideal for those looking to grow a business together with trust and teamwork.

What Are The Disadvantages of Partnership?

While partnerships offer many benefits, they also come with certain risks and limitations. The table below outlines some common disadvantages of partnerships.

Disadvantage	Meaning	Example
1. Unlimited Liability	Partners are personally responsible for business debts.	If a business owes ₹2,00,000 and can’t pay, partners may have to sell personal assets.
2. Potential for Conflicts	Partners may disagree over decisions, roles, or money matters.	Amit wants to invest in advertising; Ravi disagrees, causing delay and tension.
3. Limited Capital	Fewer people = less money to grow the business compared to large companies.	Amit and Ravi together can raise only ₹1,00,000, not enough to buy new equipment worth ₹5,00,000.
4. Lack of Continuity	The partnership may end if a partner dies, retires, or leaves.	If Ravi exits due to illness, the partnership may dissolve unless there's a prior agreement.
5. Decision-Making Challenges	All partners must agree, which can slow down decisions.	Amit wants to launch a new product, but has to wait days for Ravi to agree.

Understanding these drawbacks is important before entering a partnership. With proper planning, clear agreements, and open communication, many of these issues can be managed, but it's wise to be aware of them from the start.

Conclusion:

A partnership is an easy way to start a business with someone you trust. You both share the money, work, ideas, and profits. There are different types, and each has its own rules. It’s simple to start and manage, but it has some risks too. With a clear agreement and good talk, it can be a great way to work together.

FAQs:

Q1: What are the three elements of a partnership?

A partnership must involve doing business together, jointly, with the goal of making a profit.

Q2: What are the PARTNERS Principles?

They focus on transparency, honesty, and fairness in working with local communities and sharing benefits equally.

Q3: What is LLP?

LLP (Limited Liability Partnership) is a business structure where partners share profits but have limited personal liability for business debts.

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?

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