Thinking beyond sole proprietorship starts with collaborative approach in entrepreneurship. All collaborative approaches like partnership , LLP , Private ltd , Public ltd , co-operative societies etc are different forms of entity construction where more than one person can associate for common good and thrive for the best. Apart from general partnership all other forms of entities are limited liability entities. Partnership lacks this quality of limited liability but it is an association constructed through an agreement for profit sharing and mutual agency. In K.D. Kamath & Co. v. CIT (1971) , the supreme court reiterated that the two essential elements to establish a partnership are profit sharing and mutual agency.
Choosing the right partners requires more brain storming than the initial enthusiasm to bring changes through collective effort. This is because, humans are highly unpredictable species and the real nature of association will reveal only after years of association. Ego clashes, Power struggles , asymmetric effort and loss of trust are all factors that can affect the well being of the association. A partnership might born with an agreement but only grow with commitment and trust. Entrepreneurs should understand the fact that trust is not blind faith in one person , it is more about the transparency build through proper disclosures and decision making through collective understanding.
The another aspect that test the nerves of business man is the changing nature of risk parameters over a period of time. The partnership might have started with less risk but it might escalate at any point of time . Even Geo political changes can alter the risk parameter of the partnership. It is good for the partners to change the nature of entity to limited liability entities when risk mounds beyond the expectation of partners. Otherwise the trap of unlimited liability might bring unexpected havoc in your business. In Annapuran B uppin v Malsididappa (2024) the supreme court clarified that legal heirs of the deceased partner are not personally liable. However this context might vary in each situation, if the deceased had contributed assets to the family. Even it might be difficult for the court to fix the liability , when succession laws testamentary documents and trusts are used to gain different advantages in asset creation.
A well drafted partnership agreement can solve many problems that a partnership might face in future. Hence don’t make it mere exercise for just starting the business. It is the parent document that requires constant review and make meaningful amendment if necessary. The word agreement might invite all essential concepts of contractual laws to a partnership. Rigidity with any entity formation is not a good practice when law allows that change in entity after fulfilling the essential compliance. A entrepreneur can easily plan the growth and succession through the change in entity. The tag of unlimited liability has its own cost and the central element for entity transformation is the change in risk parameters . Having said this , if the risk is defined element or a measurable element , the entrepreneurs shall not shy away from the enjoying the freedom and easiness in operating through sole proprietorship and partnerships.