The Law of Partnership

1. 1. Definition of Partnership Business:

Partnership is a business organization in which two or more individuals manage

and operate the business. Both owners are equally and personally liable for the

debts from the business.

British PartnershipAct.1890 defines, “Partnership is the relation which subsists

between persons carrying on a business in common with a view of profit.”

According the partnership Act 1932, “Partnership is the relation between persons

who have agreed to share profit of business carried on by all or any of them acting

for all.”

A partnership is a single business where two or more people share ownership. Each

partner contributes to all aspects of the business, including money, property, labor

or skill. This type of business organization is very popular in our country. At last it

can be said, partnership is an association of people who carry on business together

for the purpose of making profit.

1. 2. Elements of partnership business:

1. Lawful business: The term “business” includes all trades, professions or

occupations. The purpose of partnership agreement is to carry on a lawful business

and nothing else.

2. Name of the business: The partnership firm must have its own name. The name

in which the business is carried on is called the “firm name”.

3. Association of persons: At least two persons are needed to make a partnership.

The Indian Companies Act provides the maximum number of members as ten in

case of banking business and as twenty in other cases.

4. Profit motive and sharing of profits: Partnership business is formed with the

object of earning profit. The earned profit is to be distributed among the partners as

per an agreed ratio.

5. Contractual relationship: Partnership is a contractual relationship between the

persons who are competent to enter into a contract. Relationship between partners

arises from contract and not from status.

6. Mutual trust and confidence: The successful working of a partnership depends

on mutual trust and confidence of its partners. Partners have the duty to observe

utmost good faith in business dealings.

7. Principal-agent relationship:  It’s not necessary that all the partners should

manage the business. Any one or more partners can run the business on behalf of

all the partners. Each partner is an agent of the firm and his activities bind the firm.

8. Restrictions on transfer of share: No partner can transfer his share in the

partnership without the prior consent of all the other partners. Thus, a partner

cannot transfer his interest at his own will.

9. Unlimited liability: Partnership is based on the principle of unlimited liability.

The personal property of the partners can be attached to satisfy the claims of

creditors of the firm, if the assets of the firm are insufficient to meet the claims of

the creditors.

1. 3. Characteristics or Features of Partnership Business:

There are some specific Characteristics or Features of Partnership Business; some

of them are given below:

1. Agreement: Without agreement partnership cannot be formed. The agreement

may be written or oral. But it must be written on settle the dispute.

2. Numbers of persons: There must be at least two or more persons to form a

partnership firm. The Indian Companies Act provides the maximum number of

members as ten in case of banking business and as twenty in other cases.

3. Contractual relationship: There should be a contractual relationship between the

persons forming partnership. Persons competent to contract can be partners.

4. Sharing of profits: The agreement between the partners must be to share the

profits of business. There can be no partnership without the intention of mutual

gain. The profits must be distributed among the partners in an agreed ratio.

5. Agency: Partnership contract is based on principle of agency. Each partner is an

agent of other partners. The business is carried on by all or any one of them acting

on behalf of all other partners.

6. Utmost good faith: The partners should have utmost good faith in each other.

They should be sincere and honest. They should present true accounts and must

disclose true information to one another.

7. Unlimited liability: Every partner is jointly and severally liable to an unlimited

extent for the debts of the partnership firm. In case the assets of the firm are

insufficient to pay the debts in full, the personal property of each partner can be

attached to pay the creditors of the firm.

8. Restriction on transfer of interest: No partner can transfer his share in the

partnership without the prior consent of all other partners.

9. Capital contribution: Each partner contributes his share in the capital of the

partnership firm. The capital contribution need not be equal or in any particular

proportion.

10. Duration of the partnership: The existence of the partnership firm continues

at the pleasure of the partners. Legally of partnership comes to an end, if any

partner dies or becomes insolvent or retries.

11. Lawful business: The term “business” includes all trades, professions or

occupations. The purpose of partnership agreement is to carry on a lawful business

and nothing else.

12. Transferability of shares: No partner can transfer his share in the partnership

without the prior consent of all the other partners. Thus, a partner cannot transfer

his interest at his own will.

13. Dissolution: It is a temporary form of business. It operates at the pleasure of

the partners. It is dissolved if a partner leaves, dies or declared bankrupt. Partners

can also dissolve by obtaining the degree from the court.

14. Payment of Tax: Every partner pays the tax on his share of profit individually.

1.4. Rights of a Partner:

Subject to a contract between partners, the following are the main rights of a

partner of a partnership enterprise.

1. Right to take part in management: Every partner has the right to take part in

the management of the business of the partnership enterprise.

2. Conduct of business: Every partner has a right to take part in the conduct of

business of the partnership enterprise.Sec.12 (a)

3. Right to express opinion: Every partner has right to express his opinion on the

matters relating to business of the partnership enterprise. Sec.12 (c)

4. Right to take out copies and inspect the books of account: Every partner has

a right to inspect the books of accounts of the partnership enterprise and further

take out the copies of the same. Sec.12 (d)

5. Equality of profits: The partners are entitled to share equally in the profits

earned. Otherwise, they have to share the profit and loss as per the agreed ratio

stated in the partnership deed. Sec.13 (b)

6. Interest on capital: A partner is entitled to get interest on the capital out of

profits only. Sec.13 (c)

7. Right to have interest on advances: Every partner in the partnership enterprise

is entitled to get interest on any advances made by him over and above his capital

@ 6% per annum. Sec.13 (d)

8. Right to be indemnified: Every partner has the right to be indemnified by the

firm in respect of any losses suffered and expenses incurred by him in the conduct

of the business of the firm. Sec.13 (e)

9. Right to have joint share in the partnership property: The property of the

firm belongs to all the partners and can be used for the common benefit of all the

partners. Sec.15

10. Partners authority: Every partner has right to act on behalf of the firm. He

has express and implied authority. Secs.18 and 19.

11. Powers in emergency: A partner has the certain powers in an emergency.

Sec.21

12. Right to retirement: Every partner has the right to retire from the firm with

the consent of all other partners or in accordance with an express agreement among

the partners, or by giving a notice in writing to all other partners.

13. Right to dissolve: Every partner has the right to dissolve the partnership firm

with the consent of all other partners. In that case dissolution of firm takes place

after giving notice by any partner in writing to all other partners.

14. Right to having no liability before joining the partnership firm: A partner

is not liable for any of the liabilities of the firm before he has joined the firm.

Simply stated, a new partner joining the firm can’t be held responsible for the

earlier acts of the old partners.

15. Right to carry on competitive business: A retiring partner has a right to carry

on compatible business i.e. a business similar to the firm’s business, but in the

absence of contract to the contrary he can’t use the firm’s name in which he was

originally a partner and represent himself as carrying on the business of the

partnership enterprise.

16. Right to have profits after retirement or death: After retirement every

partner and his legal heirs (in case of his death) had the right to share the profits or

to have 6% interest as per choice unless the balance due to the partner is paid off.

1.5. Duties of a Partner:

The duties of a partner are as follows:

1. To carry on the business to the greatest common advantage: Every partner is

bound to carry on the business of the firm to the greatest common advantage. In

other words, the partner must use his knowledge and skill in the conduct of

business to secure maximum benefits for the firm.

2. To be just and faithful to each other: Every partner must be just and faithful to

other partners of the firm. Every partner must observe utmost good faith and

fairness towards other partners in business activity.

3. To pay indemnify: Every partner shall indemnify the firm for any loss caused

to it by his fraud in the conduct of the business of the firm. Sec.10

4. To render true accounts: Every partner must render true and proper accounts

on his co-partners. Each and every entry in the books must be supported by

vouchers.

5. To attend diligently to his duties: Every partner is bound to attend diligently to

duties in the conduct of the business of the firm. Sec.12 (b)

6. To provide full information: Every partner must provide full information of £

activities affecting the firm to the other co-partners. No information should be

concealed, kept secret.

7. To share losses: It is the duty of the partners to bear the losses of the firm.

Every partners share the losses equally when there is no agreement or as per their

profit share ratio.

8. To work without remuneration: A partner is not entitled to receive any kind

remuneration for taking part in the conduct of the business. But in practice, the

working partners are generally paid remuneration as per agreement, so also

commission in some case.Sec.13 (a)

9. To hold and use partnership property exclusively for the firm: The partners

must hold and use the partnership property exclusively for the purpose of business

of the firm not for their personal benefit.

10. To account for personal profits: If a partner derives any personal profit from

partnership transactions or from the use of the property of the firm or business

connection the firm or the firm's name, he must account for such profit and pay it

to the firm.

11.No private benefit: A partner cannot use the partnership properties directly or

indirectly for his own benefit.

12. Not to carry on any competing business: A partner must not carry on

competing business to that of the firm. If he carries on and earns any profit then he

must account for the profit made and pay it to the firm.

13. To act within authority: Every partner is bound to act within the scope of

authority. If he exceeds his authority and the firm suffers from any loss, he shall

have compensated the firm for such loss.

14. Duty to be liable jointly and severally: Every partner is jointly and individual

liable to the third parties for all acts of the firm done while he is a partner.

15. Duty not to assign his interest: A partner cannot assign or transfer his partner

interest to an outsider so as to make him the partner of the firm without the consent

of other partners.

1.6. Liabilities of a Partner to Third Parties:

The following are the liabilities of a partner to third parties:

1. Liability of a partner for acts of the firm: Every partner is jointly and

severally liable for all acts of the firm done while he is a partner. Because of this

liability, the creditor of the firm can sue all the partners jointly or individually.

2. Liability of the firm for wrongful act of a partner: If any loss or injury is

caused to any third party or any penalty is imposed because of wrongful act or

omission of a partner, the firm is liable to the same extent as the partner. However,

the partner must act in the ordinary course of business of the firm or with authority

of his partners.

3. Liability of the firm for misutilization by partners: Where a partner acting

within his apparent authority receives money or property from a third party and

misutilizes it or a firm receives money or property from a third party in the course

of its business and any of the partners misutilises such money or property, then the

firm is liable to make good the loss.

4. Liability of an incoming partner: An incoming partner is liable for the debts

and acts of the firm from the date of his admission into the firm.

5. Liability of a retiring partner: A retiring partner is liable for the acts of the

firm done before his retirement. But a retiring partner may not be liable for the

debts incurred before his retirement if an agreement is reached between the third

parties and the remaining partners of the firm discharging the retiring partner from

all liabilities. After retirement the retiring partner shall be liable unless a public

notice of his retirement is given. No such notice is required in case of retirement of

a sleeping or dormant partner.

1.7. The different kinds of Partners:

The different kinds of Partners that are found in Partnership Firms are as follows:

1. Active partner: An active partner is one who actually participates in the

business of the firm. A person becomes a partner only by agreement. He shares

profits of the firm. He is a full-fledged partner.

2. Sleeping or dormant partner: Sleeping or dormant partners are those who do

not share in the management and administration of the firm. He shares in the

profits or losses of the firm. His liability for the firm's debts is unlimited.

3. Secret partner: This type of partner contributes capital and takes active part in

the management of the firm's business. He shares in the profits and losses of firm

and his liability is unlimited.

4. Limited partner: A limited partner is a person whose liability is limited to the

amount that he has paid to the business. He is not entitled to take active part in the

management of the firm's business.

5. Partner in profits only: He shares in the profits of the firm but not in the losses.

But his liability for the firm's debts is unlimited. He is not allowed to take part in

the management of the firm. Such a partner is associated for his money and

goodwill.

6. Nominal or quasi partner: Such a partner neither contributes capital nor takes

part in the management of business. He does not share in the profits or losses of the

firm. He only lends his name and reputation for the benefit of the firm.

8. Sub partner: He is a third person with whom a partner agrees to share his

profits desired from the firm. He does not take part in the management of the firm.

He is not liable for the firm's debts.

7. Minor Partner: Partnership arises from contract and a minor is not competent

to enter into contract. Therefore, strictly speaking, a minor cannot be full-fledged

partners. But with the consent of all the partners he can be admitted into

partnership for benefits only. He is not personally liable to third parties for the

debts of the firm, on attaining majority, if he continues as a partner; his liability

will become unlimited with effect from the date of his original admission into the

firm.

1.8. Who can be a partner?

1. Person: Under the Indian Partnership Act. A person may be partner if he has

the capacity to enter into a contract.

2. Minor: A minor cannot be partner. But in existing partnership, a minor can be

admitted into a firm if all the partners of the firm agree. Such a minor gets all the

benefits of the partnership.

3. Person of unsound mind: A Person who is of unsound mind cannot become a

partner.

4. Woman: A woman cannot be partner, married or unmarried. Of course a

woman cannot be a partner if she is a minor or she is of unsound mind.

5. Company: In a company the capacity to enter into contract is determined by the

Memorandum and Articles of the Association of the company. The liability of the

members of a firm under the partnership Act, for the debts of the firm, is unlimited.

But a company can not incur unlimited liability. Therefore a company cannot

become a partner of a firm.

6. Alien enemy: An alien enemy cannot enter into a contract of partnership with a

citizen of India. (Sec.55)

1.9. Consequences of Non-Registration:

An unregistered partnership firm suffers from the following limitations:

1. It cannot enforce its claims against a third party in a court of law.

2. It cannot claim adjustment for any sum exceeding Tk. 100.

3. It cannot file a legal suit against any of its partners.

4. Partners of an unregistered firm cannot file any suit to enforce a right against the

firm.

5. A partner of an unregistered firm cannot file a suit against other partners. Non-

registration of a firm, however, does not affect the following rights:

(i) The right of a partner to sue for the dissolution of the firm or for the accounts of

a dissolved firm or to enforce any right or power to realize the property of a

dissolved firm.

(ii) The power of an Official Assignee or Receiver to realize the property of an

insolvent partner.

(iii) The rights of the firm, or its partners, having no place of business.

(iv) Any suit or set off in which the claim does not exceed taka’s one hundred.

(v) The right of a third party to sue the unregistered firm or its partners.

1. 10.What is Dissolution?

Dissolution of a firm means the end of a firm by the breakup of the relation of

Partnership between all the partners. Dissolution is to be distinguished from

reconstitution of a firm. In the latter case, the Partnership continues but there is a

change in the number of partners.

Partnership Act describes, “The dissolution of partnership between all the partners

of a firm is called the dissolution of the firm." It means that dissolution of the firm

includes the dissolution of partnership. In the case of dissolution of firm the Assets

of the business are sold, Liabilities are paid off and the accounts of the partners are

settled out.

The dissolution of partnership may take place in any of the following ways:

(1) Change in existing profit sharing ratio among partners;

(2) Admission of a new partner;

3) Retirement of a partner;

(4) Death of a partner;

(5) Insolvency of a partner;

(6) Completion of the venture, if partnership is formed for that; and

(7) Expiry of the period of partnership, if partnership is for a specific period of

time

1.11. The grounds of dissolution of a partnership firm:

The ground s of dissolution: A firm may be dissolved on any of the following

grounds:

1. Dissolution by Agreement (Sec.40): A firm may be dissolved any time with the

consent of all the partners of the firm. Partnership is created by contract; it can also

be terminated by contract.

2. Compulsory Dissolution (Sec.41): A firm is dissolved compulsorily in the

following cases:

(a) When all the partners or all but one partner, become insolvent, rendering them

incompetent to sign a contract;

(b) When the business of the firm becomes illegal; or

(c) When some event has taken place which makes it unlawful for the partners to

carry on the business of the firm in partnership.

But if a firm has more than one undertaking, some of which became unlawful and

some remain lawful, the firm may continue to carry on the lawful undertakings.

3.On the happening of certain contingencies(Sec.42): Subject to 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 ventures, by the completion thereof;

(c) By the death of a partner;

(d) By the adjudication of a partner as an insolvent.

The partnership agreement may provide that the firm will not be dissolved in any

of the aforementioned cases. Such a provision is valid.

4. Dissolution by Notice (Sec.43): In case of partnership at will, the firm may be

dissolved if any one of the partners gives a notice in writing to the other partners,

signifying his intention of seeking dissolution of the firm. The firm is dissolved as

from the date mentioned in the notice as the date of dissolution, or, if no date is

mentioned, as from the date of communication of the notice.

5. Dissolution by Court (Sec.44): At the suit of a partner, the court may order a

partnership firm to be dissolved on any of the following grounds:

(a) When a partner becomes insane;

(b) When a partner becomes permanently incapable of performing his duties as a

partner;

(c) When a partner is guilty of misconduct which is likely to adversely affect the

business of the firm

(d) When a partner persistently commits breach of partnership agreement;

(e) When a partner has transferred the whole of his interest in the firm to a third

party;

(f) When the business of the firm cannot be carried on except at a loss; or

(g) When, on any ground, the court regards dissolution to be just and equitable

Insanity

1.12. What is partnership deed? Mention the Contents of a Partnership deed.

A partnership deed can be defined as a document that is prepared to explain important

points so that the chances of conflict among partners are minimized to a great extent.

Partnership is formed by an agreement. The agreement may be verbal or in writing or

may be conditional from the conduct of the partners. To avoid future disputes and

differences between the partners it is desirable to have a written agreement. The written

agreement between or among the partners is known as “Partnership Deed” otherwise

known as 'Articles of Partnership'. It must be signed by all partners and stamped in

accordance with the Indian Stamp Act. A partnership deed generally contains the

following important particulars:

Contents of a Partnership Deed

The partnership deed must contain the following particular:

1. The name of the firm and addresses of the partners.

2. The nature of the business.

3. The term or duration of partnership.

4. The amount of capital to be contributed by each partner.

5. The ratio in which the profits or losses are to be shared among the partners.

6. The interest to be allowed on capital and charged on drawings.

7.    Rights of partners and Duties of partners.

8. Remuneration to partners.

9. Loans and advances by partners to the firm.

10. The keeping of proper books of accounts and the preparation of Balance Sheet.

11. Settlement of amount on the dissolution of the firm.

12. The procedures to be adopted in the case of disputes among the partners.

13. The mode of admission and retirement of partners.

14. Method of settlement of accounts on retirement and death of a partner

15. Provision for arbitration in case of disputes

16. The methods of dissolution of partnership firm

17. Partnership agreement between advocates

18. Agreement admitting a minor to the benefit of partnership

19. Partnership agreement between two limited companies

20. Partnership agreement between an individual and a limited company

21. Partnership agreement between a partnership firm and a Hindu joint family .