What is Partnership?

ADVERTISEMENTS:

Everything you need to know about what is partnership. The partnership deed is a must for a partnership.

Indian Partnership Act defines certain rights and duties of a partner, but mostly the provisions of the Act come into operation only when there is no agreements among the partners. If there is no agreement, differences may develop.

The partnership firm may continue its business with the help of all its partner or any of them acting on behalf of all. Any partner acting on behalf of other partners can bind the firm to third parties.

ADVERTISEMENTS:

The success of partnership firm depends on mutual trust and confidence of its members. It provides greater opportunities for the expansion of the business in comparison to sole proprietorship organisation.

The Partnership Deed should define the mutual rights and obligations. If there is no Deed, the following rules laid down in the Indian Partnership Act apply. Further, if on any point the Deed is silent, the relevant rule will apply.

Learn about:-

1. Definitions of Partnership 2. Characteristics of Partnership 3. Kinds 4. Limited Partnership 5. Ideal Partnership 6. Partnership

ADVERTISEMENTS:

7. Registration of Firms 8. Mutual Rights and Obligations 9. Partner as Agent 10. Dissolution 11. Advantages and Disadvantages of Partnership.

What is Partnership: Definitions, Characteristics, Kinds, Limited, Ideal, Deed, Registration of Firms, Advantages and Disadvantages


Contents:

  1. Definitions of Partnership
  2. Characteristics of Partnership
  3. Kinds of Partnership
  4. Limited Partnership
  5. Ideal Partnership
  6. Partnership Deed
  7. Registration of Firms
  8. Mutual Rights and Obligations
  9. Partner as Agent
  10. Dissolution of Partnership
  11. Advantages and Disadvantages of Partnership

What is Partnership – Definitions Provided by J.L. Hanson, Kimball, L.H. Haney, John A. Shubin and The Uniform Partnership Act of U.S.A

Since the resources of a sole proprietor to finance, and his capacity to manage a growing business are limited, the need for a partnership firm evolved. Partnership business, therefore, grows out of the need for expansion of business with more capital, specialised knowledge, better supervision and control, division of work and spreading of risks.

The partnership firm may continue its business with the help of all its partner or any of them acting on behalf of all. Any partner acting on behalf of other partners can bind the firm to third parties. The success of partnership firm depends on mutual trust and confidence of its members. It provides greater opportunities for the expansion of the business in comparison to sole proprietorship organisation.

ADVERTISEMENTS:

“Partnership is a form of business organization in which two or more persons up to a maximum of twenty join together to undertake some form of business activity.” -J. L. HANSON

“A partnership firm is often called, is then a group of men who have joined capital or services for the prosecution of some enterprise.” — KIMBALL

“An association of two or more persons to carry on, as co-owners, a business for profit.” -THE UNIFORM PARTNERSHIP ACT OF U.S.A.

“Partnership is 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.” -INDIAN PARTNERSHIP ACT, 1932

ADVERTISEMENTS:

Persons who join a partnership concern, are individually called partners and collectively a firm and the name under which the business is carried on is called the firm’s name. A partnership firm can be formed with a minimum of two partners and it can have a maximum of twenty partners. The formation of partnership in India is governed by the Indian Partnership Act of 1932.

“Partnership is the relation between persons who have agreed to share profits of a business carried on by all or any one of them acting for all.” —Indian Partnership Act, 1932, Section 4

“Partnership is the relation existing between persons competent to make contract, who agree to carry on a lawful business in common with a view to private gain.” – L.H. Haney

“A partnership or firm, as it is often called is, then a group of men who have joined capital or services for the prosecuting of some enterprise.” – Kimball & Kimball

ADVERTISEMENTS:

“Two or more individuals may form a partnership by making a written or oral agreement that they will jointly assume full responsibility for the conduct of business.” – John A. Shubin


What is Partnership – 10 Major Characteristics: Number of Partners, Contractual Relationship, Competence of Partners, Unlimited Liability,Transfer of Interest and a Few Others

Characteristic # 1. Number of Partners:

There must be at least two persons to form a partnership business. The Indian Partnership Act, 1932 fixes no maximum limit on the number of partners in a partnership firm. However the maximum limit on the number of partners is ten in case of banking business and twenty in case of all other types of business. But the Companies Act, 1956 lies down that any partnership or association of more than the above limit is illegal unless registered as a Joint Stock Company.

Characteristic # 2. Contractual Relationship:

The relation between the partners of a partnership firm is created by contract and not by status as in case of Joint Hindu Family. There must be an agreement between two or more persons to enter into partnership. The agreement may be verbal, written or implied. If the agreement is in writing it is known as a ‘Partnership Deed’.

Characteristic # 3. Competence of Partners:

All partners must be competent to enter into a contract. Minors, lunatics, insolvent and other persons incompetent to enter into a valid contract cannot enter into a partnership agreement. However, a minor can be admitted to the benefits of partnership, i.e., he can have a share in the profits.

Characteristic # 4. Sharing of Profit and Loss:

There must be an agreement to share the profits and losses of the business of the partnership firm. In order to avoid the disputes which may arise in future, the partnership deed is clarifying the share of profits and losses. In the absence of an agreement, they share it equally.

Characteristic # 5. Unlimited Liability:

Partnership is a contractual relationship among the partners of a firm. They are liable jointly and severally for the debts and obligations of the firm. That means if the assets of the firm are not sufficient to meet the obligations of creditors of the firm, the private assets of the partners can be attached to satisfy their claims.

Even a single partner may be called upon to pay the debts of the firm. Of course, he can get back the money due from other partners. The liability of a minor is, however, limited to the extent of his share in the profits, in case of dissolution of a firm.

Characteristic # 6. Principal-Agent Relationship:

There is a principal and agent relationship exists in the partnership business. Partnership firm may be carried on by all the partners or any one of them acting for all. This means that every partner is acting as an agent on behalf of others and he is a principal when others act on his behalf. It is, therefore, essential that there should be mutual trust and faith among the partners in the interest of the firm.

Characteristic # 7. Transfer of Interest:

A partner cannot transfer his proprietary interest to any person (except those who are already the partners) without the unanimous consent of other partners.

Characteristic # 8. Legal Status:

A partnership firm is just a name for the business as a whole. The firm means partners and the partners mean the firm. Law does not recognize the firm as a separate entity distinct from the partners.

Characteristic # 9. Voluntary Registration:

The registration of partnership is not compulsory. Registration is considered as desirable because it helps a firm to avail several benefits. For example, if it is registered, any partner can file a case against other partners, or a firm can file a suit against outsiders in case of disputes, claims, disagreements, etc.

Characteristic # 10. Dissolution of Partnership:

Dissolution of the partnership firm implies not a complete closure of partnership business. When any change occurred in the existing agreement or in the number of partners, the partnership is dissolved.


What is Partnership – Kinds: Partnership at Will, Joint Venture, General Partnership, Limited Partnership, Illegal Partnership and Partnership of Fixed Period

The partnership business has been divided into different categories on different norms, some of the important types of the partnerships are as under:

(1) Partnership at Will:

Section 7 of the Indian Partnership Act does not specify the period of working of the partnership, therefore, it is always at will. Even if the partnership agreement specify any period or duration of firm, the partners if so like may dissolve the working of the firm even earlier.

(2) Joint Venture:

It is a short-period partnership to bear the risks of certain temporary assignments of contracts. Two or more persons work together to complete a contract of profitable nature, after completion of the work, they share the profits and their amount is also withdrawn.

For example, Harish Kumer and Hem Chandra enter into a contract to complete a building construction contract. Each of them contributes some amount also. After the completion of the contract, they will be getting the money and share the profits and will also withdraw their balance, if any left with the Joint Venture.

(3) Partnerships of Fixed Period:

If some persons agree to work for a fixed period only, then it is called the partnership of fixed period.

(4) General Partnership:

Under this category the partners do not agree for any of the provisions of the contract. They contribute some capital and start the business. Thus in the absence of any agreement, the provision of the Indian Partnership Act shall be applicable on them, therefore it is called a general partnership.

(5) Limited Partnership:

If persons desire to become the partners, but do not want to bear the unlimited liability of the partnership, they may become the partner of such firm. The present law of partnership does not permit the limited partnership, in such firm at least one partner must be having the unlimited liability.

(6) Illegal Partnership:

When the business of the partnership firm is declared or becomes illegal, violating the provisions of any law of the country, then it is called an illegal partnership. Suppose Anita and Rosy entered into a partnership agreement to snatch the purses of the ladies and share the money received. It will be an agreement of illegal partnership and it will be void.

If in case Rosy refuses to give the due share, Anita cannot file a suit in the court of law to claim her share because basically their agreement of business was illegal, therefore, it was an illegal partnership.

The above study of the different types of partnerships helps us in determining the nature of the business of kind of partnership business to be selected.


What is Partnership – Limited Partnership

The unlimited liability of partners in ordinary partnership discourages the investment of large sums in the firm. The limited partnership (not permitted under the Indian law) is, to some extent, a way out of this difficulty. Such partnership is allowed in several European countries and the U.S.A. Limited Liability Partnership Act has been enacted in India also. In England, for instance, the Limited Partnership Act of 1907 provides for such firms.

The chief features of such a partnership are:

(а) A limited partnership consists of two classes of partners, namely, ‘general partners’ with unlimited liability and ‘special’ with their liability limited to their capital contribution. It must have one or more ‘general’ partners and also one or more ‘special’ partners.

(b) A ‘limited’ or ‘special’ partner simply invests his money in the firm. He is not entitled to take part in the management of the business. His acts do not bind the firm. But he is allowed to inspect the books of the firm for his information and may advise the general partners.

(c) The bankruptcy, death or lunacy of a special partner does not dissolve the firm. It is, thus, more stable than an ordinary partnership firm.

(d) A special partner cannot withdraw any part of capital contributed by him. If he does so, his liability on the portion so withdrawn becomes unlimited. He will have to undertake separate liability for such amount.

(e) A special partner cannot assign his share to an outsider without the consent of the general partners.

(f) A limited partnership must be registered under the law. This is necessary to provide information to the public about the capital contribution of the limited partners and the extent of their liability. Non-registration makes the firm liable to be treated as a general partnership.

Thus, the limited partnership shows some resemblance to the joint Hindu family business in India under which the Karta manages the concern and has unlimited liability whilst the other co-parceners have limited liability.


What is Partnership Ideal Partnership: Mutual Understanding, Common Approach, Good Faith, Long Duration, Written Agreement and Registration

One should choose one’s partner with as much care as one would use while choosing one’s wife. A wrong choice in both cases can be ruinous. A partner can act on behalf of all his partners without consulting them as far as third parties are concerned. He can enter into commitments which the other partners will have to honour; the other partners will be responsible even for frauds committed by a partner in the course of the business.

A partner may, out of foolishness, recklessness or sheer mischief, land the whole firm in trouble. One must, therefore, be extremely careful in entering into a partnership. There are a large number of firms which fail because the partners cannot work harmoniously.

The following can be said to be the requisites of an ideal partnership:

(a) Mutual Understanding:

Only such people who know one another thoroughly over a fairly long period should become partners. Moreover, the number of partners should be small—five seems to be the maximum; otherwise, the partnership will become unwieldy.

(b) Common Approach:

The partners should have common views regarding conduct of business. If one partner takes a legalistic view of things, and wishes to drive hard bargains while another partner takes a generous view of things—the two may not pull on together for long. To take another example, one partner may be extremely cautions and may play absolutely safe, whereas another may like to take risks. Such a partnership, too, cannot work for long.

(c) Good Faith:

The partners should work in absolute sincerity and good faith. They must contribute their best in terms of knowledge, time, attention and finance. Each partner should feel that his interest is being well looked after. No partner should try to take an unfair advantage over other partners.

(d) Balancing of Skills and Talents:

There should be balance in the firm. This means that the partners should possess talents of different types so that all the problems that come before the firm are properly solved. The skills should be complementary. If a firm consists only of financial experts, marketing and production problems will go by default and the firm will work in a lop-sided manner.

Balance is required in another sense also. There should be partners who think out new schemes for business—new ideas often turn out to be extremely fruitful – but there should also be partners who are capable of making exact calculations on paper about the implications of the schemes.

(e) Long Duration:

The term of partnership should be sufficiently long. Short-term partnership cannot obviously undertake a business which takes long to establish and consolidate.

(f) Written Agreement:

The mutual rights of partners and their obligations must be discussed in all details before the partnership is entered into. No mental reservations should be there when a partner gives his assent to the details when they are being worked out. The agreement should be put in black and white.

(g) Registration:

The partnership should be registered as soon as it is formed. In the absence of registration, the firm will not be able to enforce its legal remedies against outsiders.


What is Partnership Partnership Deed

The partnership deed is a must for a partnership. Indian Partnership Act defines certain rights and duties of a partner, but mostly the provisions of the Act come into operation only when there is no agreements among the partners. If there is no agreement, differences may develop.

For example, one partner may devote all his time while another may give little of his time to the firm. The first partner may legitimately ask for a salary, but cannot get it in the absence of an express agreement to this effect.

It is for this reason that before the partnership is formed, all mutual rights, powers and obligations should be discussed and incorporated in a written agreement. The services of a lawyer should be utilized for drafting the agreement. The Deed has to be stamped in accordance with the Indian Stamps Act. Each partner should have a copy of the Deed.

The following points should generally be covered in the Deed:

(i) The nature of business;

(ii) The name of the business and the town and place where it will be carried;

(iii) The amount of capital to be contributed by each partner;

(iv) Whether loans will be accepted from a partner over and above the capital and, if so, at what rate of interest;

(v) The duties, powers and obligations of all the partners;

(vi) The method of preparing accounts and arrangement for audit;

(vii) The appropriation of profit with particular reference to the questions as to- (a) whether interest will be allowed on capitals and, if so, at what rate, (b) whether a partner will be allowed salary or commission for work done by him, and (c) profit-sharing ration;

(viii) The amount to be allowed as private drawings for each partner and the interest to be charged on the drawings;

(ix) The method by which a partner may retire and the arrangements for payment of the dues of a retired or deceased partner;

(x) The method of valuation of goodwill on admission or death or retirement of a partner;

(xi) The method of revaluation of assets and liabilities on admission or retirement or death of a partner;

(xii) Whether a partner can be expelled and, if so, the procedure for expulsion;

(xiii) The circumstances under which the partnership will stand dissolved and in case of dissolution, the custody of books;

(xiv) Arbitration in case of disputes among partners; and

(xv) Arrangement in case a partner becomes insolvent.


What is Partnership Registration of Firms 

Indian Partnership Act does not make it compulsory for a firm to be registered, but there are certain disabilities which attach to an unregistered firm. These disabilities make it virtually compulsory for a firm to be registered. Registration can take place at any time.

For this, a form, containing the following particulars has to be sent to the Registrar of Firms:

1. The name of the firm;

2. The principal place of business of the firm;

3. Names of other places where the firm carries on business;

4. The names in full, and addresses of the partners;

5. The date on which various partners joined the firm; and

6. The duration of the firm.

Changes in the above particulars have to be communicated to the Registrar within a reasonable time. The entries made in the register maintained by the Registrar will be treated as conclusive.

An unregistered firm cannot file a suit to enforce rights against third parties if such rights arise out of a contract. Similarly, a partner, cannot file a suit to enforce his rights under the Partnership Deed. The rights of third parties against the firm are, however, not affected.

Non-Registration of a firm does not affect the following:

(а) The right of a partner to sue for dissolution of the firm or for accounts of, and his share in, the dissolved firm.

(b) The power of the Official Assignee or Receiver to realize the property of an insolvent partner.

(c) The rights of a firm or its partners having no place of business in India.

(d) A suit not exceeding Rs.100.

(e) Suits arising otherwise than under a contract. For example, an unregistered firm can sue a third party for infringement of its trademarks or patents.

Registration is also important from the point of view of income-tax:

This is different from the registration under the Partnership Act. If a firm is not registered with income-tax authorities, it will be charged tax on its whole income but, if a firm is registered, the income-tax authorities will have to divide the profits among partners and charge tax on the incomes of the partners individually.

If the income-tax officer so decides, he can treat an unregistered firm as registered. This will be so if he can collect more tax by this method. The first registration has to be made within six months of setting up of business or before the 30th June of the previous year, whichever is earlier. It can be renewed before 30th June every year.


What is Partnership Mutual Rights and Obligations 

The Partnership Deed should define the mutual rights and obligations. If there is no Deed, the following rules laid down in the Indian Partnership Act apply. Further, if on any point the Deed is silent, the relevant rule will apply.

Rights of a Partner:

(а) Each partner has a right to participate in the management of the firm. He has the right to be consulted in ordinary matters which will be decided by majority vote of the partners. Fundamental matters can be settled only by unanimity. A change in the composition of the firm, admission of a new partner, and a change in the business itself and its locality will require unanimous consent of the partners.

(b) A partner is entitled to receive interest at 6 per cent on loans given by him over and above the capital. The rate can be varied by agreement.

(c) A partner has the right to inspect books of accounts and records and to copy the accounts.

(d) If a partner has incurred expenses for the protection of the firm from a loss, he is entitled to be indemnified by the firm provided he acted in a reasonable manner, i.e., in a manner in which a prudent person would have acted in his own case in similar circumstances.

(e) A partner is entitled to have the property of the firm applied exclusively for the purpose of the firm.

(f) A partner has the right to retire according to the terms of the Partnership Deed or with the consent of the other partners. In case of partnership at will, a partner can retire by giving notice of retirement to the other partners.

(g) A partner has the right to continue in the firm unless he is expelled according to the provisions of the Deed and in good faith.

(h) On retirement, the partner (in case of death, the heir of the partner) is entitled to share in the profits of the firm earned with the help of the partner’s share in the firm, or interest at 6 per cent p.a. (as the partner or the heir concerned may choose) until the amount due to him or his heir is paid off.

Duties and Obligations:

(а) A partner must diligently carry on the business of the firm to the common advantage of the partners. He is not entitled to a salary unless agreed upon.

(b) A partner must act in a just and faithful manner towards other partners.

(c) A partner must-keep and render true, proper and correct accounts of the partnership and must permit other partners to inspect and copy the accounts.

(d) A partner must try to protect the firm from loss to the best of his ability. He is bound to indemnify the firm for any loss caused by his gross negligence and breach of trust. He is not liable for a mere error of judgement.

(e) A partner must not carry on a business which competes with that of the firm. If he does, he must hand over all the profits made to the firm; the firm is not responsible for any loss suffered on this score.

(f) A partner must not use the firm’s property for his private ends or business; if he does, he must hand over the profit so earned to the firm; the firm is not responsible for any loss suffered in this manner.

(g) Every partner is bound to share losses equally with other partners unless otherwise agreed upon.

(h) A partner must act within the scope of his authority; he must indemnify the firm if he exceeds his powers.

(i) A partner cannot assign or transfer his interest in the firm to another person as to make him a partner without the consent of all other partners.


What is Partnership Partner as Agent 

A partner has the power to participate in the management of the firm fully (unless he agrees to the limitation of such power). Third parties which enter into contracts with a partner are entitled to believe that the firm also agrees to the contract. As such, the firm will be liable for all acts done by a partner in the ordinary course of business.

In other words, the partner is an agent of the firm and the law of agency will apply to the relationship between the firm and every partner. The firm is responsible even for frauds committed by the partner in the course of business and his knowledge will be treated as knowledge of the firm.

If the firm wants that a certain partner should not act in certain matters, it must give a public notice of such limitation on the authority of a partner. If no public notice is given, the outsiders will continue to hold the firm responsible for acts done by the partner even if such acts are beyond his real authority. Of course, he will be responsible to the firm for having exceeded his authority.

In the absence of any public notice to the contrary, a partner has the implied authority to-

(а) Buy and sell goods on behalf of the firm;

(b) Receive payments on behalf of the firm and issue valid receipts;

(c) Draw cheques, and draw, accept and endorse bills of exchange and promissory notes on behalf of the firm;

(d) Borrow moneys on behalf of the firm by pledging the stock in trade or without it; and

(e) Engage servants for the business of the firm.

In the following cases a partner has no authority to act without the consent of other partners and, therefore, an action by a partner without authority or consent of others will not bind the firm:

(a) Submitting a dispute relating to the firm to arbitration;

(b) Compromise or relinquishment of any claim or portion of a claim by the firm;

(c) Withdrawal of a suit or proceedings filed on behalf of the firm;

(d) Admission of any liability in a suit or proceedings against the firm;

(e) Opening a bank account in the name of a partner but on behalf of the firm;

(f) Acquisition or purchase of immovable property on behalf of the firm;

(g) Transfer or sale of immovable property belonging to the firm; and

(h) Entering into partnership on behalf of the firm.


What is Partnership Dissolution

A partnership is dissolved automatically when- (a) the term for which the partnership was entered into expires; (b) the venture for which the partnership was formed is completed, and (c) when a partner dies, becomes insolvent or retires. It is not necessary that when a partnership is dissolved, the firm should also stand dissolved because it is up to the remaining partners to agree to continue the firm; the partnership is changed to continue the old business.

The dissolution of the firm takes place in the following circumstances:

(а) When the partners agree that the firm should be dissolved;

(b) When all the partners (or all except one) become insolvent;

(c) When the business becomes illegal;

(d) When a partner gives notice of dissolution in case the partnership is at will; and

(e) When the Court orders that the firm should be dissolved.

Dissolution by Court:

The circumstances in which the Court may order the dissolution of the firm are as follows:

(a) When a partner becomes of unsound mind;

(b) When a partner becomes permanently incapacitated;

(c) When a partner is guilty of misconduct affecting the business;

(d) When a partner or partners persistently disregard the partnership agreement;

(e) When a partner transfers or assigns his interest or share in the firm to a third person;

(f) When the business cannot be carried on save at a loss; and

(g) When it appears just and equitable to the Court.

If should be noted that in the above circumstances the Court has the option to refuse to order dissolution. In case the firm is dissolved, the rights and obligations of partners are not affected till the business is completely wound up.


What is Partnership Advantages and Disadvantages

Advantages of Partnership:

1. Ease of Formation:

A partnership can be formed without many legal formalities in terms of its formation. Every partnership firm need not be registered.

2. Larger Resources:

In comparison to the sole proprietorship, a partnership can pool larger resources. The credit worthiness is also greater in this form than in case of sole proprietorship. This enables a partnership to undertake operations on a relatively larger scale and thereby reaping the economies of scale.

3. Flexibility in Operation:

Partnership business is not regulated by any law so it imports flexibility in its operation. The partners can change their operations and amend objectives if necessary. It can change its business whenever the partners like. However, it is easier to change the line of business if the firm is not successful in one line of business because of its small scale operations.

4. Better Management:

As there is a direct relationship between ownership, control and profit, partners can take more interest in the affairs of business. Partners can take prompt decision as and when business needs which ultimately helps for better management.

5. Sharing of Risk:

In partnership, partners share their profits and losses as per the agreement made by them before commencement of the business. In the absence of any partnership agreement, they share the profits or losses equally.

6. Protection of Minority Interest:

Every partner has an equal say in the decision making of the business. As minor partners are taken into the partnership firm, their interests are protected by all other partners.

7. Better Human or Public Relations:

In a partnership firm, every partner can made to develop healthy and cordial relations with employees, customers, suppliers and citizens, etc. The fruits of such a relationship may be reflected in higher accomplishments and larger profits for the business.

Disadvantages of Partnership:

1. Instability:

A partnership comes to an end with the death, retirement or insolvency of partners. The life of the partnership firm is highly uncertain. Hence the business does not have stability to continue to exist indefinitely.

2. Unlimited Liability:

From this stand-point, the liability of partners is jointly and severally liable to an unlimited extent. Any one of the partners can be called upon to pay all the debts even from his personal properties. This may have more dangerous effect of curbing entrepreneurship because the partners may be afraid of venturing into new areas of business.

3. Lack of Harmony:

The partnership business works steadily as long as there is harmony and mutual understanding among the partners. There is an equal right and greater possibilities of friction and quarrel among the partners. Differences of opinion among partners may lead to distrust and disharmony which may ultimately result in disruption and closure of the firm.

4. Limited Capital:

As the maximum number of partners cannot exceed 10 in banking business and 20 in ordinary business, the amount of capital resources is limited to the contribution to be made by the partners. As there is a restriction on the maximum number of partners, the firm can raise limited capital.

5. Social Losses:

When a partnership firm dissolved due to the lack of harmony among the partners, it creates a loss to the society both in terms of supply of goods and services and in terms of source of employment.


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