Great to have you back on the road to learning the ABC of the Stock Markets with me. Feels good to go back to basic schooling but in a very comfortable way on our own terms and time slot, is it not? Fantastic!! The topic for the day is Partnership Firms.
As you learnt earlier in Post #1, under the Sole Proprietorship Business, expansion is restricted because of the limited capital one can pump into his/her business and also the onus of risk falling on the shoulders of one person only. So a Sole Proprietorship Business tends to max out very quickly.
Human intelligence is very superior and the instinct for survival is very strong. Need for more capital & less risk led to the birth of Partnerships. Persons wanting to start on or expand their business started roping in and partnering with like minded individuals. These partners would contribute to the capital and also help in the running of the business. Their combined goal was the growth of business and healthy profits. Also diversification of risk was an important factor to consider. Smart thinking, right?
In simple terms it is a for profit entity with two or more people working together to make money.
The partners collectively called themselves a “Partnership Firm” and registered their firm accordingly. Though it could be very informal also. Common interest, common goals and a mutual agreement was all it took to enter into an informal partnership. At least 2 persons have to get together to form a partnership firm.
Benefits of a Partnership
A Partnership Firm has the luxury of having an increased capital. Also risk is distributed between the partners which is a big plus. The capacity for expansion is better under this format. Job allocation and execution becomes better as each partners expertise comes into play. (Yay! Team spirit always triumphs!)
Limited Liability Partnership (LLP)
LLP is a partnership wherein the partners have limited liabilities. A partner under this format stands to lose only his assets under the partnership but not his personal assets. This format combines the benefits of Companies as well as partnerships. The LLP is more formal than a general partnership and requires a written partnership agreement. In India LLP came into being only in 2008.
Do you want to know some examples of brilliant and successful partnerships? Hewlett Packard (HP) is the result of the efforts of it’s founders, Bill Hewlett and Dave Packard. Google founders, Larry Page and Sergey Brim, creators of the worlds leading search engine is another prime example. It would be interesting to note here that, the name “Google” originated from a misspelling of “googol“, which refers to the number represented by a 1 followed by one-hundred zeros.
Reliance Industries Ltd (RIL) was co-founded by Dhirubhai Ambani and his cousin brother Champaklal Damani in the 1960’s as Reliance Commercial Corporation. However, this Partnership ended in 1965. In 1966, it was incorporated as Reliance Textiles Industries Ltd and in 1985 it became the gigantic RIL and today is the most valued company in India.
However, with rapid industrialization happening all over the world, this format of partnership firms was also proving to be restrictive. The need for more capital and diversification and limiting of risk, was intensely felt by all big businessmen and traders. The path to heavy expansion was the need of the time and so further avenues were explored.
This led to the next business format- formation of Companies. It is also the topic of my next post.
So friends, ponder on this and keep giving your valuable comments and suggestions. Come back recharged to learn the next basic and simple and evolved form of business in my next post.