In which form of organization is a trade agreement made by one owner binding on the others? Give reasons to support your answer.


By Harshvardhan, the Subject Matter Expert at Edumarz

Solution: In a partnership form of business organisation, a trade agreement made by one owner binding on the others.

The following are the characteristics of a Partnership firm that proves the above statement.

  1. Unlimited Liability of all Partners: The partners of a firm have unlimited liability. Personal assets may be used for repaying debts in case the business assets are insufficient. Further, the partners are jointly and individually liable for the payment of debts. Jointly, all the partners are responsible for the debts and they contribute in proportion to their share in the business and as such are liable to that extent. Individually too, each partner can be held responsible for repaying the debts of the business. However, such a partner can later recover from other partners an amount of money equivalent to the shares in liability defined as per the partnership agreement. 
  2. Risk bearing: The partners bear the risks involved in running a business as a team. The reward comes in the form of profits which are shared by the partners in an agreed ratio. However, they also share losses in the same ratio in the event of the firm incurring losses.
  3. Decision making and control: The partners share amongst themselves the responsibility of decision making and control of day to day activities. Decisions are generally taken with mutual consent. Thus, the activities of a partnership firm are managed through the joint efforts of all the partners.
  4. Continuity: Partnership is characterised by lack of continuity of business since the death, retirement, insolvency or insanity of any partner can bring an end to the business. However, the remaining partners may if they so desire continue the business on the basis of a new agreement.
  5. Mutual agency: The definition of partnership highlights the fact that it is a business carried on by all or any one of the partners acting for all. In other words, every partner is both an agent and a principal. He is an agent of other partners as he represents them and thereby binds them through his acts.  He is a principal as he too can be bound by the acts of other partners.

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