NTPC School

of Business
(NSB)
PGDM(EM ),BATCH-
5-TERM-3 2022-24
Business Laws &
Corporate Governance

Elements of Law relating to

Partnership and LLP

By CS Naresh Kumar Sinha

INTRODUCTION
The Indian Partnership Act, 1932, came into force w.e.f. 1st
October, 1932 except section 69, which came into force on the
1st day of October, 1933. It extends to the whole of India except
the state of Jammu and Kashmir.
It lays down the important provisions relating to partnership
contracts. However, the general principles of the Indian
Contracts Act, 1872 which formally contained the provisions of
the law of partnership shall apply so far as they are not
inconsistent with this Act. (Section 3)
DEFINITIONS
Partnership
According to Section 4 “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”.
When analysed, the definition tells us that in order that persons may become partners, it
is essential that:
(1) There must be at least two persons
(2) There must be a relationship arising out of an agreement between two or more
persons to do a business
(3) The agreement must be to share the profits of a business
(4) The business must be carried on by all or any of them acting for all
Partners, Firm and Firm Name
Persons who have entered into partnership with one another are called individually
“partners” and collectively “a firm”, and the name under which their business is carried
on is called the “firm name”. (Section 4)
In law, “a firm” is only a convenient phrase for describing the partners, and the firm has
no legal existence apart from its partners. It is neither a legal entity, nor it is a person as
is a corporation; it is only a collective name of the members of a partnership.
As regard the “firm name”, partners have a right to carry on business under any name
and style which they choose to adopt, provided they do not violate the rules relating to
trade name or goodwill. They must not adopt name calculated to mislead the public into
confusing them with a firm of repute already in existence with a similar name. They must
not use a name implying the sanction of patronage of the Government. A partnership
firm cannot use the word “Limited” as a part of its name.
Essentials of a Partnership and True Test of Partnership

(i) Association of two or more Persons

(ii) Agreement
(iii) Business
(iv) Sharing of Profits
(v) Mutual Agency the True Test
Formation of Partnership
According to the definition of partnership under the Indian Partnership
Act, 1932, there must be an agreement between the partners of a
partnership firm. Thus, partnership arises by the contract.
The partnership agreement must comply with all the essentials of a valid
contract. There must be free consent of the parties who must be
competent to contract and the object of partnership should not be
forbidden by law or immoral or opposed to public policy. Two exceptions,
however, may be noted:
(i) A minor may be admitted to the benefits of an existing partnership firm
with the consent of all other partners.
(ii) As relations of partners inter se are that of agency, no consideration is
required to create the partnership.
Partnership Deed
The agreement of partnership may be oral but to avoid future disputes it is
always advisable to have it in writing. The mutual rights and obligations of
partners must be discussed in detail and should be put into writing in the
shape of a ‘Partnership Deed’, before the partnership is actually started. Thus,
the written document which contains the mutual rights and obligations of
partners is known as partnership deed. (The partnership deed is also called as
‘Partnership Agreement’, ‘Constitution of Partnership’, ‘Articles of Partnership’
etc.). The deed must be property drafted and stamped according to the
provisions of the Indian Stamp Act. Each partner should be given a copy of the
deed and if the firm is to be registered, a copy of the deed should be filed with
the Registrar of Firms at the time of such legislation. The partnership deed is
not a public document and therefore binds only third parties so far as they
have notice of it.
Contents of Partnership Deed
The exact terms of the partnership deed (or agreement) will depend upon the
circumstances but generally a partnership deed contains the following covenants:
(i) The firm name and business to be carried on under that name.
(ii) Names and addresses of partners.
(iii) Nature and scope of business and address(s) of business place(s).
(iv) Commencement and duration of partnership.
(v) The capital and the contribution made by each partner.
(vi) Provision for further capital and loans by partners to the firm.
(vii) Partner’s drawings.
(viii) Interest on capital, loans, drawings and current account.
Contents of Partnership Deed
(ix) Salaries, commission and remuneration to partners,
(x) Profit (or loss) sharing ratio of partners.
(xi) The keeping of proper books of accounts, inspection and audit, Bank
Accounts and their operation.
(xii) The accounting period and the date on which that accounts are to be
prepared.
(xiii) Rights, powers and duties of the partners.
(xiv) Whether and in what circumstances, notice of retirement or dissolution
can be given by a partner.
Contents of Partnership Deed
(xvi) Valuation of goodwill on retirement, death, dissolution etc.
(xvii) The method of valuation of assets (and liabilities) on retirement
or death of any partner.
(xviii) Provision for expulsion of a partner.
(xix) Provision regarding the allocation of business activities to be
performed by individual partners
(xx) The arbitration clause for the settlement of disputes. The terms
contained in the partnership deed may be varied with the consent of
all the parties, and such consent may be express or implied by a
course of dealing. [Section 11(1)]
CLASSIFICATION OF
PARTNERSHIP

(i) Particular Partnership (Section 8)

(ii) Partnership at Will (Section 7)
Co-ownership and Partnership

There is a possibility that two co-owners may employ their

property in a business and share the profits, and still be not
partners. A distinction between the two is in point. Partnership is
between two persons, co-ownership may have two or any
number more than two. Co- ownership is not always the result of
an agreement: it may arise by the operation of law or from
status, e.g., co-heirs of a property. Partnership must arise from
an agreement. A partner is the agent of the other partners, but a
co-owner is not the agent of the other coowner(s).
Co-ownership and Partnership

Co-ownership does not necessarily involve community of profits

and loss, partnership does. A co-owner can transfer his rights
and interests to strangers without the consent of the others, a
partner cannot do so without the consent of all the other
partners so as to make the transferee a partner in the firm. A co-
owner can ask for division of property in specie, but no partner
can ask for this. His only right is to have a share of the profits out
of the properties. A co-owner has no lien on the property while a
partner has a lien on the firm property.
Hindu Joint Family Firm and Partnership
A partnership comes into existence by means of a contract
between the partners; a Hindu joint family firm arises as a result
of status, i.e., by birth in the family. The death of a partner
dissolves the partnership, but the death of a co-parcener does
not dissolve the family firm. In a joint family firm only the Karta
or manager (who is the head of the family) has implied authority
to borrow and bind other members; in a partnership each
partner is entitled to do so. Every partner is personally liable for
the debts of the firm; in a joint family business only the Karta is
personally liable. A minor is a member of a joint family firm from
the very day of his birth by virtue of his status, but he is not
personally liable.
Hindu Joint Family Firm and Partnership
A minor cannot be a partner, although he may be admitted to the
benefits of partnership. A partner can demand the accounts of the
firm, a co-parcener cannot ask for accounts, his only remedy is to ask
for partition of the assets of the family firm. No registration of a family
firm is necessary, while a partnership firm must be registered before it
can maintain suits against outsiders. Each partner has a definite share
in the business and this can be changed only by agreement, but the
share of a coparcener is not fixed; it may be enlarged by death or
reduced by a birth in the family. There is a definite limit to the number
of partners, but there is no such limit in the case of a Hindu joint
family firm. A Hindu joint family business is governed by Hindu Law,
while Indian Partnership Act, governs partnerships and excludes Hindu
joint family firms. (Section 5)
Company and Partnership
The members constituting a partnership do not form a whole as
distinct from the individuals composing it. The firm has no legal
entity and has no rights and obligations separate from the
partners. In a firm every partner is an agent of the rest of the
partners, but a member of a company is neither the agent of the
company nor of other members. A company, as soon as it is
incorporated, say by registration under the Companies Act,
becomes a legal entity distinct from its members constituting it
(Salomon v. Salomon & Co., 1897, A.C. 22).
Company and Partnership
It can sue and be sued in its own name like any natural person. In
a partnership, there are rights and obligations as against
individual partners, but in the case of a company, the rights and
obligations are as against the fictitious entity of the whole of the
company and not the members composing it. The creditors of
the partnership can call upon individual partners to pay the
firm’s debt, but the members of a company are not personally
liable for the company’s debts. In other words, a partner’s
liability is unlimited while the liability of the members of a
company is limited to the extent of the amount remaining
unpaid on their shares (Prasad v. Missir).
Rights of Partner
Unless otherwise agreed by the partners, the following rules apply:
(a) Every partner has a right to take part in the conduct and management of the business.
[Section 12(a)]
(b) Every partner whether active or dormant, has a right of free access to all records,
books and accounts of the business and also to examine and copy them. [Section 12(d)]
(c) Every partner is entitled to share in the profits equally, unless different proportions
are stipulated. [Section 13(b)]
(d) A partner who has contributed more than the share of the capital for the purpose of
the business is entitled to an interest at a rate agreed upon, and where no rate is
stipulated for, at six per cent per annum.
But a partner cannot claim interest on capital, unless there is an agreement to pay it.
[Section 13(d)]
Rights of Partner
(e) A partner is entitled to be indemnified by the firm for all expenses incurred by him in
the course of the business, for all payments made by him in respect of partnership debts
or liabilities and disbursements made in an emergency for protecting the firm from loss.
[Section 13(e)]
(f) Every partner is, as a rule, a joint owner of the partnership property, and have it
applied exclusively for the purposes of the partnership. (Section 15)
(g) A partner has power to act in an emergency for protecting the firm from loss. (Section
21)
(h) Every partner is entitled to prevent the introduction of a new partner into the firm
without his consent. (Section 31)
(i) Every partner has a right to retire by giving notice where the partnership is at will.
[Section 32(1)(c)]
Liability of an Incoming Partner
As a general rule, an incoming partner is not liable for the
debts incurred before he joined the firm as a partner
[Section 31(2)]. The incoming partner may, however,
assume liability for past debts by novation, i.e., by a
tripartite agreement between (i) the creditor of the firm,
(ii) the partners existing at the time the debt was incurred,
and (iii) the incoming partner.
Liability of an Outgoing or Retiring
Partner
An outgoing partner remains liable for the partnership debts contracted
while he was a partner. He may, however, be discharged by novation, i.e.,
by an agreement between himself, the new firm and the creditors. He may
also continue to be liable after retirement if he allows himself to be held
out as a partner, e.g., by allowing his name to remain the firm name. To
protect himself from his liability, he should give express notice of his
retirement to the persons who were dealing with the firm before his
retirement or give public notice in the manner as laid down in Section 72 of
the Act, that is to say, by publishing it in the Official Gazette and in at least
one vernacular newspaper where the firm carries on the business. [Section
32(3)]
Death or Insolvency
The estate of a partner who dies, or who becomes
insolvent, is not liable for partnership debts contracted
after the date of the death or insolvency. It will, however,
be liable for debts incurred before death or insolvency.
(Sections 34 and 35)
Implied Authority of a Partner

Subject to the limitations mentioned above, every partner binds the firm for
the acts done within the scope of
implied authority. Following acts are under the implied authority:
(i) To sale firm’s goods;
(ii) To Purchase goods for the firm;
(iii) To accept any payment of debts due to the firm; and
(iv) To engage and discharge employees.
Dissolution of Partnership
The dissolution of partnership takes place (even when there is no dissolution of the firm)
in the following circumstances:
(a) By the expiry of the fixed term for which the partnership was formed. [Section 42(a)]
(b) By the completion of the adventure. [Section 42(b)]
(c) By the death of a partner. [Section 42(c)]
(d) By the insolvency of a partner. [Section 42(d)]
(e) By the retirement of a partner. [Section 42(e)]
In all the above cases, the remaining partners may continue the firm in pursuance of an
agreement to that effect.
If they do not continue then the dissolution of the firm takes place automatically.
Dissolution of the Firm
In the following cases there is necessarily a breaking up or
extinction of the relationship between all the partners of the
firm, and closing up of the business:
(a) By mutual agreement
(b) By the insolvency of all the partners but one
(c) By business becoming illegal
(d) By notice of dissolution
Registration of the Firm
The registration of a firm may be effected at any time by sending by
post or delivering to the Registrar of the area in which any place of
business of the firm is situated or proposed to be situated, a
statement in the prescribed form and accompanied by the prescribed
fee, stating:
(a) the name of the firm;
(b) the place or principal place of business of the firm;
(c) the names of any other places where the firm carries on business;
Registration of the Firm
(d) the date when each partner joined the firm;
(e) the names in full and permanent addresses of the partners;
and
(f) the duration of the firm.
The statement shall be signed and verified by all the partners or
by their agents specially authorised in this behalf. (Section 58)
Registration of the Firm

The Partnership Act, 1932, does not make registration of a firm

compulsory but it introduces certain disabilities, which makes
registration necessary at one time or other. An unregistered firm
is not an illegal association.
LIMITED LIABILITY PARTNERSHIP

Limited Liability Partnership has been introduced in India by way

of Limited Liability Partnership Act, 2008.
A Limited Liability Partnership, popularly known as LLP combines
the advantages of both the Company and Partnership into a
single form of organization. In an LLP one partner is not
responsible or liable for another partner’s misconduct or
negligence; this is an important difference from that of an
unlimited partnership.
LIMITED LIABILITY PARTNERSHIP

In an LLP, all partners have a form of limited liability for each

individual’s protection within the partnership, similar to that of
the shareholders of a corporation. However, unlike corporate
shareholders, the partners have the right to manage the business
directly. An LLP also limits the personal liability of a partner for
the errors, omissions, incompetence, or negligence of the LLP’s
employees or other agents.
LIMITED LIABILITY PARTNERSHIP
LLP has a separate legal entity, liable to the full extent of its
assets, the liability of the partners would be limited to their
agreed contribution in the LLP. Further, no partner would be
liable on account of the independent or unauthorized actions of
other partners, thus allowing individual partners to be shielded
from joint liability created by another partner’s wrongful
business decisions or misconduct.
Limited Liability Partnership Act, 2008 came into effect by way of
notification dated 31st March 2009. Provisions of the Partnership
Act, 1932 do not apply to Limited Liability Partnership.
LLP as Body Corporate
According to LLP Act, 2008 –
(1) A limited liability partnership is a body corporate formed and
incorporated under this Act and is a legal entity separate from
that of its partners.
(2) A limited liability partnership shall have perpetual succession.
(3) Any change in the partners of a limited liability partnership
shall not affect the existence, rights or liabilities of the limited
liability partnership.
There's an assumption by many partners that no matter what
happens to their business, they'll be partners forever.
David Gibbs
Thankyou!