One of the important tasks that every entrepreneur needs to do while starting a startup is that of choosing a business structure for his new business. He has various options on the table such as a sole proprietorship, partnership, limited liability company. Here we will explain what does partnership in business with an example:
Definition: When two or more individuals agree to conduct a business jointly, it is referred as partnership.
Partnership involves the agreement between two or more people. The people who are involved in partnership form of business enterprise agree to share profits and bear the losses jointly.
Example: Suppose two friends Rashmi and Sonu have decided to start and run a restaurant in their town jointly with an amount of 2 lakh Rupees. Both Rashmi and Sonu agree to put in 50% capital each and share profit with the same percentage. This is a simple example of partnership.
Unlike the sole proprietorship, partnership firm requires more funds and hence enjoys better credit in the market, but, it can’t escape from many disadvantages like lesser public confidence, unlimited liability, dishonesty of partners etc
A firm based on partnership structure, however, enjoys many advantages as well compared to the sole proprietorship. In a partnership type of business, there is a promptness in decision making or in other words, decisions can be taken quickly and effectively.
The burden of loss doesn’t fall on one person rather is shared by all partners which is not the case with the sole proprietorship. Partners can easily decide to bring change in business operations.
In short, what you need to remember is that a partnership is one of the business ownership structures managed and controlled by more than two individuals whereas the management of a proprietorship firm is controlled by one person.