A partnership is a relation between people who agreed to share the profits and losses of a business carried by all of them.
A partnership can also refer to establishing an agency among two or more individuals to run a business to share the profits.
Per section 4 of the partnership act, 1932, a partnership is a relation between individuals who agree to share business profits carried on by all or anyone acting for all.
The Indian partnership act governs and regulates the business of partnership firms in India.
Characteristics of a Partnership Firm
- A partnership firm gets established under a contract between the partners.
- A partnership is not based on the status of members; instead, it is the result of entering into a contract.
- It is not a legal entity and does not have a legal identity different from its constituting members.
- In a partnership firm, the liability of partners is not restricted to any limit. If the firm’s assets are insufficient to satisfy the creditors’ claims, then the partners’ private properties can be attached to satisfy the claims.
- Each of the partners is liable to repay the firm’s debt incurred by them in the capacity of the business.
- The property owned by a partnership firm is the property of that firm and is called a joint estate property and cannot get claimed by any individual partner.
- The shares distributed in a partnership firm are transferable, subject to the consent of all partners.
- The profits of a partnership firm are distributable among the partners based on the partnership deed.
- In a partnership firm, the number of partners must not exceed 20, and for banks, this maximum limit gets reduced to 10.
- It is not obligatory to conduct an audit of a partnership firm.
- Each partner acts as an agent for all the other partners. So the change in partners affects the partnership and causes dissolution of that partnership.
- The death and insolvency of any partner affect the partnership results in the dissolution of the partnership firm.
- If there’s no agreement expressed for the access and control of partners in the partnership firm, then all the partners are entitled to have access to control the business
- A minor cannot be a partner, but he can get the benefits of the partnership subject to the consent of all the other partners(Section 30).
Essential elements of partnership
There are four elements of the partnership required for the formation of a partnership firm. If any of these is not present, there cannot be any partnership.
These elements are:-
- There must be an agreement enforceable by law to(i.e. contract) enter into a partnership.
There must be a partnership resulting from an agreement. This partnership can’t be formed based on status, operation of law or inheritance.
As per Section 5 of The Indian Partnership Act, 1932
“The partnership does not arise from the status of the law or the operation of the law but is the result of the agreement”.
The members of Hindu undivided family running a family business together cannot be termed as partners as their relation arose from status and not from contracts.
- The contract must be between two or more individuals to carry on a business.
Their maximum number of partners is 20 to enter into a contract of partnership.
This limit on the number of members to enter into a partnership contract is not prescribed in the Indian Partnership Act, 1932.
Instead, the companies act, 2013 prescribed that a partnership consisting of more than the prescribed limit(i.e. 10 for banking institutions and 20 for partnership firms) is illegal.
- The object of the contract is to share profits.
The third essential element of this partnership is that the partners enter into this partnership to share the business’s profits. A partnership without an intention to earn a profit is not a partnership in itself. The profits can get shared in any ratio as per the partnership deed.
- The business must get carried on by all or acting for all(Principal-agent relationship).
The last element of this partnership is that each partner is an agent of all other partners. Each partner is a principal and agent for himself and all other partners, respectively.
This element enables each partner to carry on the business and act on behalf of other partners.
Types of partnership
The partnership gets classified into four categories based on:-
- The duration of the partnership
- The extent of business carried on by a partnership.
Partnership based on the duration of the term of partnership get classified in two categories:-
Partnership at will
When no fixed period gets prescribed for the expiration of a partnership, then it is a partnership at will. Per the Indian partnership act, 1932, section 7, two conditions must be satisfied to establish a partnership at will.
- There should be no agreement determining the period of partnership
- No provision for constituting a partnership
If an established partnership continues beyond the expiration period then, it becomes a partnership at will.
Partnership for a fixed period
Suppose all the partners in a partnership firm agree on conducting such business by fixing a term duration for such partnership by agreeing. In that case, it is called partnership for a fixed period.
In other words, a partnership established for a fixed period with the consent of all the partners will be a partnership for a fixed period.
In other words, a partnership established for a fixed period with the consent of all the partners will be a partnership for a fixed period.
Partnership based on the extent of business gets classified into two categories:-
If a partnership gets established to conduct business for a particular entity or undertaking, it is known as a particular partnership.>
This type of partnership dissolves after the completion of such a venture or business activity.
Such partnership can get continued either on the will or by agreeing.
When creating a partnership is just business conduct in general, it’s a general partnership.
The scope of business is not defined, and the conduct is general.
Types of Partners
In a partnership, all the partners don’t need to participate in the conduct of the business. All the members of a partnership get termed as ‘partners’.
The partner is classified based on their conduct in the business, the extent of liability, etc. These are:-
- Active/managing partner: The partner who takes active participation in the conduct of the business daily. This type of partner is also called an ostensible partner.
- Sleeping/Dormant: The partner does not participate in the conduct of the business. But he/she gets bound by the conduct of all the other partners.
- Nominal partner: This is just a partner to the firm only for namesake. He has no significant interest in the firm.
- Partner in profit only: The partner who agrees to share the profit but does not suffer losses.
This partner is not liable against any claim by a third party.
- Minor: A minor cannot be a partner, but he benefits from a partnership with the consent of all the other partners.
He will share the profit equally, but his liability will be limited in case of loss of the firm.
- Partner by estoppel: If a person represents himself by conduct or words to another person to be the partner, he cannot deny afterwards even if he is not an actual partner in that firm.
That particular person becomes the partner of the firm by holding out or by estoppel.
Advantages and disadvantages of a partnership firm
Advantages Of A Partnership Firm
- Easy to establish- A partnership business is easy to establish by agreeing without any legal formalities.
- Credit rating in favour- As each partner in a partnership firm has unlimited liability, that’s why it is easy to advance a loan to such a firm.
- Profit-sharing without hassle- The partnership deed binds all the partners in a partnership, so the profit-sharing gets done per the deed.
- Swift management- Just because of having many partners, a partnership firm’s management is feasible because of the distribution of duties and responsibilities among them.
- Advantage of secrecy- Partners of a partnership firm are not required to publish their profit and loss statement and balance sheet in the public domain by any law. They can maintain the secrecy of their business.
- Hassle-free dissolution- A partnership can easily be dissolved with mutual consent or according to the contract terms. Any formal documentation is not necessary
Disadvantages Of A Partnership firm
- The dispute among the partners: All the partners in a partnership firm are responsible for their actions to all the other partners. So, there is a lot of probability of disputes arising among the partners.
- Misuse of resources- All the partners own the firms’ resources, so there are high chances of misuse.
- Delay in decision making- The consent of all the partners is essential in decision making. It causes a delay in decision making when any partner is absent.
- Unlimited liability- In a partnership, all the partners have unlimited liability, which means that if a partnership fails to satisfy the creditors’ claims, then the partners’ private property can be attached to meet the claims.
- Limited duration- A partnership entity has a limited term duration of its working; sudden death, insolvency or change in partnership could result in the dissolution of that partnership. It does not enjoy perpetual successions like any company or LLP.
- Lack of public confidence- Due to lack of publicity and regulations its does not enjoy public confidence.
Registration of a partnership firm
The registration of a partnership firm is not a requirement under the partnership act, 1932. It is at the discretion of partners and voluntary. Unlike a company, a partnership firm can register itself during the continuance of the business
Importance of registering a partnership firm
A partnership firm enjoys some advantages to its registration:-
- A partner can file a suit against other partners or the partnership firm for enforcing his rights arising from a contract against the other partner(s) or the firm, which is not possible in an unregistered firm.
- The registered firm can file a suit against any third party for enforcing a contract.
However, any third party can file a suit against the unregistered firm.
- he registered firm can claim or initiate any other proceedings to enforce a right arising from a contract.
Any unregistered firm is not authorized to do the same.
Process for registering a partnership firm
An application for registration of a partnership firm gets under section 58 of the partnership act, 1932, containing the following details:-
- The firm’s name
- The firm’s place or principal place of business
- The location of any other place where the firm carries on business
- The date of joining of each partner
- The name and permanent address of all partners
- The duration of the firm
According to section 58(3) of this act, the name of the firm should get selected keeping in mind the following conditions:-
- The name should not be identical to an existing firm or,
- The name should not be specified in the schedule to the emblems and names(prevention of improper use) act, 1950.
According to section 59 of the act:
When the registrar is satisfied that the provisions of section 58 were duly complied by the firms he would record the entry of a statement in the register of firms and file such a statement, immediately after filing, the firm is deemed to be registered.
The registered firm has to place ‘(registered)‘ immediately after its name.
Documents for registration of a partnership firm
Documents required for registration of a partnership firm:-
- Application for registration of partnership under section 58 of partnership act.
- Certified copy of Partnership Deed.
- An affidavit certifying all the details mentioned in the partnership deed and documents are correct to the extent of the deponent’s knowledge.
- PAN Card and address proof of all the partners.
- Proof of principal place of business or the firm’s main office location (ownership documents or rent/lease agreement).
A partnership deed is a document that mentions each partner’s rights, duties, and profit shares. A partnership can be oral or written.
A partnership deed mentions the nature of each person’s work with all other obligations of each partner.
A partnership deed also mentions the respective profit shares percentage of each partner, which they can draw.
Contents of partnership deed
Some details need to be mentioned in the partnership deed to avoid disputes and conflicts.
- Name and address (of the firm and all the partners).
- Nature of business.
- Date of the contribution of business capital to be contributed by each partner.
- Capital to be contributed by each partner
- Profit/loss sharing ratio among the partners.
- Capital invested and any loan provided to the firm by its partners.
- Capital drawn by partners out of business and interest on capital invested.
- Salaries, commissions or any other amount payable to partners of the firm
- Each partner’s right, including additional rights to be enjoyed by the active partners
- All partner’s duties and obligations
- Processes to be followed on partner’s retirement or death or dissolution of the partnership firm
- Other clauses as mutually decided by all the partners
Guru nanak singh faridabad v. Amar Singh
The distinction between the retirement of the partner and dissolution of the partnership firm
In Guru Nanak Singh v. Amar Singh 2020 SC 469, the supreme court laid the distinction between the retirement of the partner and dissolution of the partnership firm. It observed that:
“On the retirement of the partner, the reconstituted firm continues, and the retiring partner is to be paid his dues in terms of Section 37 of the Partnership Act. In case of dissolution, accounts have to be settled and distributed as per the mode prescribed in Section 48 of the Partnership Act”.
Tarsem Singh v. Sukhminder Singh
Should a contract be oral or in writing? If oral, will it be binding?
The case of Tarsem Singh v. Sukhwinder Singh (1998) 3 SCC 471 answers the question; the supreme court observed that:
It is not necessary for the law that every contract must be in writing. An oral contract will be equally effective and binding, and enforceable in a court of law unless there is law prescribed which requires agreements to be in writing.
In which landmark case the supreme court laid the elements to consider a relationship as a partnership?
Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam v. K. Kelukutty (1985) 4 SCC 35
How can one or more partners dissolve a partnership?
Any partner can initiate the procedure for dissolution of a partnership by serving a notice to all other partners or can be done by the terms previously laid in the partnership deed.
Which section of the Indian partnership act, 1932 prescribes the provision for a minor’s position in a partnership?
Section 30 of the Indian partnership act, 1932 provides that a minor can't be a partner in a partnership firm but can avail the advantages of the partnership by the consent of all other partners.
Which section of the partnership act laid down the duties of partners in a partnership?
Section 9 of the partnership act lays the duties for all the partners in a partnership business.