basics parternership

8/12/2019 Basics Parternership

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Business lawsUnit-II

Partnership Act, 1932


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Introduction to Topic

One of the forms in which business can be carried on is

partnership,where two or more persons join together to form

the partnership and run the business. In order to govern and

guide partnership, the Indian Partnership Act, 1932 was

enacted.

Since public at large would be dealing with the partnership as

customers, suppliers, creditors, lendors, employees or any

other capacity, it is also very important for them to know the

legal consequences of their transactions and other actions inrelation with the partnership.


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Features of Partnership Act, 1932

Indian Partnership Act, 1932 is a Central Act. (madeby Parliament

This Act deals with special type of contract.( contract

of partnership) Provisions regarding contract of partnership were

earlier contained in the Indian Contract Act, 1872.

This Act extends to the whole of India except the

state of Jammu and Kashmir. This Act came in to force on 1.10.1932, except

section 69 which came into force on the 1st Day ofOctober, 1933.


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Meaning &Definition of Partnership

Section 4of the Partnership Act, 1932 defines the termPartnership as under:

PARTNERSHIP IS THE RELATION BETWEEN

TWO OR MORE PERSONS WHO HAVE AGREEDTO SHARE THE PROFITS OF A BUSINESSCARRIED ON BY ALL OR ANY OF THEMACTING FOR ALL.

Thus, Partnership is the name of legal relationshipbetween/among persons who have entered in to thecontract.


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Meaning of Partner Firm and Firm Name

Section 4 of Indian Partnership Act, 1932provides that:

Persons who have agreed into partnership with

one another are called individually PARTNERSand collectively FIRM and the name underwhich their business is carried on is called theFIRMNAME

Partnership is thus Invisibility which binds thepartners together and firm is the visible form ofthose partners who are thus bound together.


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Maximum Limit on Number of Partners

Section 11 Companies Act provides that the

maximum no. of persons, a firm can have:

In case of partnership firm carrying on a banking business 10

In case of partnership firm carrying on any other business 20

If the number of partners exceeds the aforesaid limit,the partnership firm becomes an illegal association.

If an association of persons or firm having members or partners

exceeding the Above limit will not be an illegal association if that firms

objective is not to earn profit.


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Two or more

persons

An agreement

Sharing of profit

Business

Mutual agency

Essential elements of Partnership

For explanation go through the next slides:

For forming a partnership the above elements should be present. Though

each element is important, Mutual Agency is the conclusive proof


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Real test of partnership [Sec. 6]

The true test of partnership is the existence of Mutual

Agencyrelationship, i.e. the capacity of a partner to bind otherpartners by his acts done in firms name and be bound by the

acts of other partners. Sharing of profit is an essential element of partnership but it is

not a conclusive proof of partnership.

Sharing of profit isPrima facieevidence.

Thus partnership can be presumed whena.There is an agreement to share the profits of business and

b.The business is carried on by all or by any of them acting for all.

Contd.


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Contd.

The relation among partners can be ascertainedas under:

a.If there is an express

contract.

The real relation is ascertained

from the partnership contract.b.If there is no expresscontract

The real relation is ascertained

from all the relevant factors such

as contract of parties, books of

account, statement of employees

etc.


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Meaning of Mutual Agency

Mutual agency refers to the relationship ofprincipal and agent Among partners

Example in case of

firm of A,B and C

When A acts

A- Agent

B and C- PrincipalWhen B acts

B- Agent

A and C- Principal

When C acts

C- Agent

A and B- Principal


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Partnership does not exist though

there is profit sharing. In the following cases there is profit sharing but

partnership does not exist just because of lack of Mutual

Agency:

1. Joint owners of some property sharing profits or grossreturns arising from the property. [explanation I to Sec. 6]

Example: X and Y jointly purchased a building and contributed capital

Equally to convert the building into a hotel. They let it out on a rent OfRs. 1,00,000 per annum and share the rental income equally.

Contd.

Leading case: Govind V. Maga


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Contd. A lender of a firm (who has lent money) who receives a share of

profit. (Mollow March V. The court of Wards)

A widow or child of a deceased partner who receives a share ofprofits. (I. T. Commissioner V. Keshamal Keshardeo)

A servant (a manager) or an agent who receives a share of profitas part of his remuneration. (Munshi Abdul Latif V. GopeshwarChatoraj)

A person who receives a share of profit in consideration of sale ofbusiness or goodwill of the business.

A member of a Hindu Undivided Family carrying on familybusiness. [Sec. 5]

Burmese Buddhist husband and wife carrying on business.[Sec. 5]


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Characteristics of Partnership

A partnership firm has the following characteristics:

1. Two or more members

2. Unlimited liability

3. Voluntary registration4. No separate legal existence

5. Restriction on transfer of interest:

6.

Based on agreement7. Partners are competent to contract

8. Partnership may be only for lawful business.


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Types of Partnership

Partnership at Will

(Sec.7)

Particular Partnership

(Sec.8)

On the Basis of Duration


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Partnership at Will [Sec.7 read with

Sec.43)]

When there is no provision in partnership agreement(known as partnership Deed, if in writing) for:

The duration of their partnership, or

The determination of their partnership,

then the partnership is called Partnershipat Will. Special feature of Partnership at will is that such firm

may be dissolved by any partner by giving a notice inwriting to all other partners of his intention to dissolve the

firm The firm will be dissolved from that date which is

mentioned in the notice as the date of dissolution and if nodate is mentioned then from the date of communication of

notice.


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Particular Partnership [sec. 8]

When a partnership is formed for a Specific venture or undertaking, or

Particular period (fixed term)

then such partnership is called a particularpartnership.

Such partnership comes to an end on the completion of

the venture or the expiry of time period.

If such partnership is continued after the expiry of term

or completion of venture, it is deemed to be apartnership at will.

A particular partnership may be dissolved before the

expiry of the term or completion of the venture only by

the mutual consent of all the partners.


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Contd.

Sec. 17 (b) of the Act provides that if a firm

,constituted for a fixed term, continues to carry on

business after the expiry of that term, then the

partnership will become partnership at will ANDmutual rights and duties of partners will remain same

as they were before the expiry.


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Advantages of Partnership Firm

Easy to form: Like sole proprietorships, partnership businesses can beformed easily without any compulsory legal formalities. It is not necessary

to get the firm registered. A simple agreement or partnership deed, either

oral or in writing, is sufficient to create a partnership.

Availability of large resources: Since two or more partners joinhands to start a partnership business, it may be possible to pool together

more resources as compared to a sole proprietorship. The partners can

contribute more capital, more effort and more time for the business

Contd.


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Advantages contd.

Better decisions:The partners are the owners of the business. Each ofthem has equal right to participate in the management of the business. Incase of any conflict, they can sit together to solve the problem. Since all

partners participate in the decision-making process, there is less scope forreckless and hasty decisions.

Flexibility in operations: A partnership firm is a flexibleorganization. At any time, the partners can decide to change the size ornature of the business or area of itsoperation. There is no need to follow

any legal procedure. Only the consent of all the partners is required.

contd.


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Contd.

Sharing risks: In a partnership firm all the partners share thebusiness risks. For example, if there are three partners and the firmmakes a loss of Rs.12,000 in a particular period, then all partnersmay share it and the individual burden will be Rs.4000 only.Because of this, the partners may be encouraged to take up more

risk and hence expand their business more.

Benefits of specialization:Since all the partners are owners of thebusiness, they can actively participate in every aspect of business as pertheir specialization, knowledge and experience. If you want to start a firm

to provide legal consultancy to people, then one partner may deal with civilcases, one in criminal cases, and another in labor cases and so on as per theindividual specialization. Similarly, two or more doctors of differentspecialization may start a clinic in partnership.


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Contd.

Protection of interest of each partner: In apartnership firm, every partner has an equal say in decision

making and the management of the business. If any decision

goes against the interest of any partner, he can prevent the

decision from being taken. In extreme cases an unsatisfied

partner may withdraw from the business and can dissolve it. In

such extreme cases the partnership deed is required. In

absence of the partnership deed, no legal protection is given to

the partners.


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Disadvantage of Partnership Firm

Unlimited liability:All the partners are jointly liable for the debt of thefirm. They can share the liability among themselves or any one can be

asked to pay all the debts even from his personal properties depending on

the arrangement made between the partners.

Uncertain life:The partnership firm has no legal existence separatefrom itspartners. It comes to an end with death, insolvency, incapacity or

the retirement of a partner. Further, any unsatisfied or discontent partner

can also give notice at any time for the dissolution of the partnership.

No transferability of share:If you are a partner in any firm, you

cannot transfer your share or part of the company to outsiders, without theconsent of other partners. This creates inconvenience for the partner who

wants to leave the firm or sell part of his share to others.

Contd.


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Contd.

Lack of harmony: In a partnership firm every partner has anequal right to participate in the management. Also, every

partner can place his or her opinion or viewpoint before the

management regarding any matter at any time. Because of this,

sometimes there is a possibility of friction and discontent

among the partners. Difference of opinion may lead to the end

of the partnership and the business.

Limited capital: Since the total number of partners cannot

exceed 20, the capital to be raised is always limited. It may not

be possible to start a very large business in partnership form.


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Partnership deed

A partnership is formed by an agreement. This agreement may

be in writing or oral.though the law does not expressly require

that the partnership agreement should be in writing, it is

desirable t o have it in writing in order to avoid any dispute

with regard to the terms of the partnership. The documentwhich contains the term of a partnership as agreed among the

partners is called partnershipdeed.

The partnership Deed is to be duly stamped as per the Indian

Stamp Act, and duly signed by all the partners.

Contd.


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Contents of partnership Deed

A partnership deed may contain any matter relating to the

regulation of partnership but all provisions in the deed should bewithin the limits of Indian Partnership Act, 1932. However, APartnership Deed should contain the following clause:

Nature of business

Duration of partnership

Name of the firm Capital

Share of partners in profits and losses

Bank Account firm

Books of account Powers of partners

Retirement and expulsion of partners

Death of partner

Dissolution of firm

Settlement of disputes

h i h k i h d f h b i


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Every partner has a right to take part in the conduct of the business,

Every partner is bound to attend diligently to his duties in the conduct of business.

Any difference arising as to ordinary matters connected with the business may be decided by a majority of

partners and no change in the nature of the business shall be made without the consent of all the partners,

Every partner has a right to have access to and to inspect and copy any books of the firm

A partner is not entitled to receive remuneration for taking part in the conduct of the business,

The partners are entitled to share equally in the profits earned and shall contribute equally to the lossessustained by the firm,

Where the partner is entitled to interest on the capital subscribed by him, such interest shall be payable onlyout of the profits a partnership making, for the purpose of the business, any payment or advance beyondthe amount of capital he has agreed to subscribe, is entitled to Interest thereon at the rate of 6% per

annum.

The firm shall indemnify a partner in respect of payments made and liabilities incurred by him,

The partner shall indemnify the firm from any loss caused due to his wilful neglect in the conduct of thebusiness of the firm.

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