Partnership

Definition:
• Partnership is the relationship between
persons who have agreed to share the profits
of a business carried on by all or any of then
acting for all
• Persons who have entered into partnerships
with one another are called individually
‘partners’ and ‘collectively’ a firm.
• Characteristics of a partnerships are as follows:
a)Association of two or more persons:There should be at least two competent
persons to form a partnership.
Number of partners in a firm carrying on banking business should not exceed ten and
in any other business this number is twenty.
If the number of partners exceed ten the partnership becomes an illegal association
and cease to be a partnership.
The term ‘persons’ does not include a firm because as such a firm is not separate
legal entity. Thus two partnership firms cannot enter into a single partnership
though all the partners of the two firms may form a partnership out of their
separate firms provided their number does not exceed the statutory limit.(which is
20).
A company on the other hand is separate legal entity distinct from its members and
can enter into a contract of partnership if it is authorised by its Memorandum of
Association.(Steel Bros. and Co v Commr.of Income Tax,).
b)Agreement
Partnership is contractual in nature and arises
from contract and not from statute. An
agreement between the parties is thus the basis
of this contract. The agreement maybe express
or implied.
Partnership agreement like any other contract
must have all the essential elements of a
contract present.
c)Business:
A partnership can only be formed for the purpose of carrying on ‘Business.’ This
includes every trade, occupation and profession.
d)Sharing of profits:
The object of partnership must be to make profit. Profit must be distributed
amongst the partners in an agreed ratio. If any person claiming to be a partner is
deprived of his right to profits he is not a partner. The sharing of profit also
involves sharing of loss which in fact is negative profit. But as between the
partners it may be agreed that one or more of them shall not be liable for losses.
e) Mutual Agency:
The Business of partnership may be carried on by all the parties or any of them
acting for all. A partner is both an agent(in the sense that he can bind by his acts
the other partners) and a principal(in the sense that he can be bound by the acts
of the other partners).
• A firm is a collective name for all the partners.
Partnership is an abstract thing and a firm is a
concrete thing.
 Types of Partners

• Actual Partner i.e. one who becomes a partner by an agreement and is

actively engaged in the conduct of the business of a partnership.
• Sleeping Partner i.e. one who does not take an active part in the conduct of
the business of the firm.
• Nominal Partner i.e. one who lends his name to the firm without having any
real interest in it.
• Partners in profits only i.e. one who gets a share in profits only.
• Partner by estoppels or holding out: Anyone who by words spoken or written
or by conduct represents himself or knowingly permits himself to be
represented to be a partner in a firm is liable as a partner in that firm.
• Minor Partner: With the consent of all the partners for the time being a
minor maybe admitted to the benefits of partnership. A minor has a right to
such share of the property and of the profits of the firm as may have been
agreed upon.
 Formation of Partnership
• Partnership is a special type of contract and so as
such all the essentials of a valid contract must be
present. However the following two points are
worth noting
a)Minor partner: A minor may be admitted to the
benefits of partnership with the consent of all
other partners.
b)Consideration
No consideration is required to create partnership.
• The name under which the business is carried
out in the partnership is the firm name. The
partner may carry on business under any
name and style but it should not resemble the
name of any existing firm and it should not
show or imply the parronage of the
Government like ‘king’, ‘Crown’ ,’Emperor’ etc.
 Duration of Partnership
• A partnership may be for a fixed period of
time. Where no provision is made by the
partners for the duration of the partnership is
a partnership at will.
• When a person becomes a partner with
another person or persons in a particular
adventure or undertaking it is a particular
partnership.
 Test of Partnership
• In order to determine the existence of partnership between a
group of persons one has to look at the agreement between
them. If the agreement is to share the profits of a business and
the business is carried on by all or any one of them acting for all
there is partnership, otherwise not. The difficult arises when
there is no specific agreement. In such a case we have to look at
the rule laid down by Cox v Hickman of ‘real relation’ between
the parties as shown by all the relevant facts taken together.
• The sharing of profits does not necessarily make the person a
partner. The rest of partnership is mutual agency and not
necessarily the contribution of capital, the holding of a
particular properly jointly or sharing of profits.
 Registration of Firms

• The Partnership Act does not provide for the compulsory

registration of firms. But by creating certain disabilities from which
an unregistered firm suffers the Law has made the registration of
firms compulsory indirectly.
• Effects of non registration:
1)A partner of an unregistered firm cannot file a suit against the firm
or any partner thereof for the purpose of enforcing a right arising
from a contract or a right conferred by the partnership Act.
2)No suit can be filed on behalf of an unregistered firm against any
third party for the purpose of enforcing a right arising form a
contract.
3)An unregistered firm cannot claim a set off exceeding Rs 100.
 Procedure for Registration
• The registration of a firm may be effected any time
by filing an application in the form of statement
giving the necessary details with the Registrar of
Firms in your area. The application for registration
should be accompanied by the prescribed
registration fee. When the Registrar is satisfied that
the provisions as laid down in the Act have been duly
complied with, he records an entry of the statement
in the Registrar of Firms and files the statement. He
then issues a certificate of registration.
 Duties of Partner
1)To observe good faith.
2)To indemnify for fraud.
3)To attend diligently to the business of the firm.
4)Not to claim any remuneration.
5)To share losses
6)To indemnify for wilful neglect
7)To hold an use property of the firm for the firm.
8) To account for personal profits
9)To account for profits in competing business.
10) To Account for profits in competing business
11) To act within Authority
To be liable jointly and severally
12 Not to assign his rights.
 Rights of a Partner

Subject to the agreement between the

partners a partner has the right
1)To take part in the conduct of the business
of the firm.
2)to be consulted
3)Of access to accounts and books
4)To share in the profits of the business
5)To interest on capital (only if there is an agreement)
6)To interest on advances at 6 percent per annum.
7)To be indemnified where he incurs liability in the ordinary course of business
of the firm
8)To have the use of partnership property for the purposes of the business of
the firm.
9) To retire
10)Not to be expelled
Further an agent of the firm he has the right to act in an emergency to protect
the firm from loss.
 Dissolution by the Court
• At suit of a partner the court may dissolve a
firm on any of the following grounds a)
insanity b) permanent incapacity of a partner
c)misconduct of a partner d) persistent breach
of agreement by a partner e)transfer of
interest by a partner f) business working at a
loss g) any other ground which the court
deems just and equitable.
 Dissolution without the Order of Court
• This takes place in the following ways:
1)Dissolution by agreement: A firm may be dissolved i) with the consent of all the
partners or ii)in accordance with a contract between the partners.
2)Compulsory Dissolution: A firm is compulsorily dissolved a) when all the partners
or all the partners but one are adjudicated insolvent b) on the happening on any
event which makes it unlawful for the business of the firm to be carried on for the
partners to carry it on in partnership.
3)Dissolution on the happening of certain contingencies: Subject to the contract
between the partners a firm is dissolved a) if constituted for a fixed term by the
expiry of that term b) if constituted to carry out one or more adventures or
undertakings by the competition thereof c)by the death of a partner and d) by the
adjudication of a partner as an insolvent.
4)Dissolution by notice of partnership at will: Where a partnership is at will the firm
may be dissolved by any partner by giving a notice in writing to all the other
partners of his intention to dissolve the firm.
 Rights and Liabilities of Partners on
Dissolution
• Rights
On the dissolution of a firm a partner has the right to 1) have the business of the
firm wound up and the debts of the firm settled out of the property of the firm b)
share in the profits of the firm earned after dissolution 3) have the premium
returned on premature dissolution 4) restrain the use of firm name or property by
any partner for his own benefit.
In case the partnership is rescinded on the ground of fraud or misrepresentation
the partner has the right of a) lien on the surplus assets b) subrogation and c)
indemnification.
.Liabilities
If a public notice is not given of the dissolution of the firm the partners continue to
be liable to third parties for nay act done by any of them after dissolution. After
the dissolution of the firm the partners continue to be liable for acts done to wind
up the affairs of the firm and to complete transactions begun but unfinished at
the time of the dissolution.