Sole proprietorship, partnership and limited liability partnership

1. Sole proprietorship

A sole proprietorship is a business owned, managed and controlled by one person, who takes all the profit and bears all the risk. It is the oldest and most common form in India: kirana shops, tailors, small traders and local workshops. No separate law governs it; it needs only the licences the activity requires (shop and establishment registration, GST registration above the threshold, trade licence).

Features: single ownership; no separate legal entity (the owner and the business are the same person in law); unlimited liability; owner takes all profit; full control; easy formation and closure; no sharing of secrets; life of the business tied to the owner.

Merits:

1. Easy and cheap to form and to close.
2. Quick decisions; no need to consult anyone.
3. Direct motivation: all profit goes to the owner.
4. Secrecy of business affairs.
5. Personal contact with customers and employees.
6. Flexibility: the line of business can be changed at will.
7. Little government regulation.

Limitations (a short note set in June 2025):

1. Unlimited liability: the owner’s private property can be attached for business debts, which discourages risk-taking.
2. Limited capital: only the owner’s savings and borrowings.
3. Limited managerial ability: one person cannot be expert in buying, selling, finance and personnel.
4. Lack of continuity: death, insanity or insolvency of the owner may end the business.
5. Limited scope for expansion and for large-scale economies.
6. Heavy burden of work and hasty decisions.

2. Partnership

Section 4 of the Indian Partnership Act, 1932 defines partnership as “the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.” The persons are individually “partners” and collectively a “firm”. The definition yields its essentials: an agreement, between two or more persons, to carry on a business, to share profits, and mutual agency (each partner is agent of the others).

Number of partners: at least two; the maximum is 50 under section 464 of the Companies Act, 2013 read with rule 10 of the Companies (Miscellaneous) Rules, 2014. An association of more persons carrying on business for profit must register as a company.

Other features: unlimited and joint and several liability; no separate legal entity; registration with the Registrar of Firms is optional but an unregistered firm cannot sue third parties or its partners to enforce contractual rights (section 69); restriction on transfer of interest without consent of all partners; utmost good faith.

Kinds of partners: active (working); sleeping or dormant (contributes capital, takes no part in management, still fully liable); nominal (lends only his name); partner by estoppel or holding out (section 28, liable to those who relied on his representation); partner in profits only; minor admitted to the benefits of partnership (section 30, liability limited to his share).

Merits: easy formation; more capital than a proprietorship; combined skill and judgment; balanced decisions; sharing of risk; flexibility; close supervision; protection of minority interest since major changes need unanimous consent.

Demerits: unlimited liability; limited capital (maximum 50 partners); lack of continuity (a firm may dissolve on the death or retirement of a partner); risk of disagreement; mutual agency, so one partner’s mistake binds all; no easy transfer of interest; lack of public confidence because accounts are not published.

3. Limited partnership

A limited partnership has two classes of partners: at least one general partner with unlimited liability who manages the firm, and one or more limited partners whose liability is limited to their capital and who cannot take part in management. The form is recognised in the United Kingdom (Limited Partnerships Act, 1907) and the United States. The Indian Partnership Act does not provide for it, and its Indian equivalent is the LLP.

4. Limited liability partnership (LLP)

The Limited Liability Partnership Act, 2008 created a hybrid form with the flexibility of a partnership and the limited liability of a company. Features:

• Body corporate and legal entity separate from its partners, with perpetual succession (section 3).
• Liability of each partner limited to his agreed contribution; a partner is not liable for another partner’s independent wrongful act.
• At least two partners; no maximum.
• At least two designated partners, who are individuals, and at least one of whom is resident in India; they are responsible for compliance.
• Internal affairs governed by the LLP agreement; registration with the Registrar of Companies is compulsory; annual statement of accounts and annual return must be filed.
• The Indian Partnership Act, 1932 does not apply to an LLP (section 4).

Merits: limited liability, flexible management, fewer compliances than a company, and continuity. Demerits: public disclosure of accounts, and less ability than a company to raise capital since it cannot issue shares to the public.

How this is examined

January 2026 set “Explain the partnership type of organisation with its merits and demerits” (10 marks), features, advantages and disadvantages of partnership (16 marks) and a short note on sole proprietorship; June 2025 set a short note on limited partnership, the limitations of sole proprietorship, and the difference between general and limited partnership (10 marks). Define, list features, then merits and demerits in numbered points.