Law of Partnership
Meaning and Definition
According to Partnership act, 1932 (sec. 3).
A partnership is a voluntary association of two or more
persons, who contribute money, property, time and skill
to carry on business for profit and to share the losses of
the business.
USA Partnership law “Act 1907” define Partnership as: “ An
association of two or more persons who carry on as coowners, a business for profits.”
Prof. Haney: “Partnership is the relation existing between
persons to make contracts who agree to carry on a lawful
business with view to earn profit.”
Characteristics
The following are the characteristics of partnership:
1. Legal Entity
A partnership has no separate legal entity apart from its
members. The rights and liabilities of the firm are
considered the rights and liabilities of the partners. If any
of the partners dies, retires or become insane, the
partnership agreement comes to an end.
2. Agreement
A partnership is the result of an agreement between persons.
An agreement may be written or oral. Only the persons who
are competent to the contract can form a partnership.
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3. Number of Partners
There must be at least 2 persons to form a partnership. The
partnership act section 14 mentioned that there should be
not more than 20 partners in partnership.
4. Sharing of Profit and loss
The agreement between the partners must be to share the
profit and loss of a business. The profit and loss will be
distributed among the partners according to their
investment.
5. Capital
Generally, the capital of the firm is supplied by all the
partners. Capital is contributing according to the agreement.
A person without contributing any capital may become a
partner on the basis of his ability, education and experience.
Test of Partnership
In order to determine the existence of partnership, the
following must be proved:
1. There must be an agreement among the parson to be held
as partners.
2. The agreement must be to share the profit and loss of
business.
3. There must be an agreement to carry on the business by all
or any of them acting for all.
4. The agreement must be for doing some legal business.
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Partner
Person who have entered into partnership with one another
are called individually partners. Generally, the word partner
means a person who has agreed to share the profit and loss
of the business.
Firm
The persons who have entered into a partnership with one
another are collectively called a firm.
Firm’s name
The name under which partners carry on their business is
called the firm’s name. The partner can choose any name
for the firm according to section 58, which says the name of
firm must not be identical or similar to the name of an
existing firm.
Kinds of Partners
The following are kinds of partners according to liability,
participation in management and profit etc.
1. Active Partner
A partner who takes an active part in the management of firm
is called active partner. He takes interest in the affairs of the
firm. Such a partner must give public notice of his
retirement from the firm in order to free himself from
liability. He is also called working partner.
2. Sleeping partner
One who does not take an active part in the management of
the firm is called sleeping or dormant (resting) partner.
Such partner brings only capital in the business. He is also
liable to the creditor of the firm like other partners. He is
not required to give notice to general public about his
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retirement from the firm because he is not know to the public.
3. Nominal Partner
One who lends his name and reputation to the firm is called
nominal partner. He does not invest in business. He does not
take part in the management like other partners. He does not
get share in profits. A nominal partner is well known, well
connected individual whose name lends credibility and
recognition to the firm, he is paid a fees for this reputation.
But, he is regarded as partner in the eye of law. He is liable to
the outsiders for the debts of the firm.
4. Senior Partner
A partner who has a more investment in the firm and receive
more profit is called senior partner. He plays a major role in
the management of the business due to experience,
capability and other skills.
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5. Junior Partner
A junior partner is the opposite of a senior partner. Usually he
is a young man who has recently become a partner of the
firm. He has a small investment in the business. Due to small
investment and less experience, he receive a small share in
the profits and loss. He has no major role in decision making.
6. Secret partner
He is a partner whose membership is kept secret from
outsiders. He takes an active part in management of the firm.
He is liable for the debts of the firm like other partners.
7. Minor Partner
A minor is a person who has not completed 18 years of age.
He is not competent to contract. But with the consent of all
partners he may be admitted to the benefits of partnership
by an agreement with his guardian.
Formation of Partnership
There must be an agreement among the partners to form a
partnership.
The following points must be considered before entering into
an agreement of partnership:
The partners of a firm should be selected with care.
2. The object of the firm should lawful.
3. The rights and duties of partners must be discussed in
detail and in writing.
4. The partnership should be registered.
1.
Partnership Deed
The partnership agreement in writing is called partnership deed. It
is better to have a written agreement. The partnership deed
generally contains the following provisions:
1. The name of the firm.
2. The name and address of all partners.
3. The nature of business of the firm.
4. The town and place where the business will be carried on.
5. The amount of capital invested by each partner.
6. The duration of the partnership.
7. The ratio of sharing profits and losses.
8. The amount, a partner can withdraw from the firm.
9. The circumstances under which a firm shall dissolve.
10. The rights, duties and liabilities of partners.
11. The period of accounting year. etc
Types of Partnership
The following are three types of partnership.
1. Partnership at will
Where no provision is made in the agreement regarding the
duration of the partnership, it is called partnership at will.
Any partner can terminate it any time, by giving a notice of
termination. A partnership is called partnership at will
under the following cases.
a. When a partnership is formed for unlimited period.
b. When a partnership firm is formed for limited period and it
continues after the expiry of this period.
c. When a partnership firm is formed for a particular project
and it continues after the completion project.
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2. Particular Partnership
When a partnership is formed to do a particular business or for
a particular period, it is called a particular partnership.
Such a partnership is dissolved immediately on the
completion of the particular business, e.g. producing a film.
(sec. 8)
3. Limited Partnership
A limited partnership is regulated and controlled by
Partnership Act 1907 of England. The following are the
features of limited partnership:
a. It is formed under Limited Partnership Act 1907 of England
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b. Some partners may be with limited liability.
c. There is at least one partner with unlimited liability.
d. A limited partner can not take active part in the
management of the firm.
e. The limited partner can inspect the books of the firm any
time.
f. He can give suggestions and recommendations to other
partners.
g. A new partner can be admitted to the partnership firm
without the consent of the limited partner.
h. It cannot have more than 20 partners in the ordinary type of
business except banking it has only 10 partners.
Dissolution of Firm
The dissolution of a partnership is different from dissolution of a
firm. When one partner dies, retires or becomes insolvent but
the remaining partners continue the business, it is called
dissolution of the partnership.
When the relationship between all the partners comes to an end
and the business is closed, it is called dissolution of firm. It
means that the dissolution of the firm includes the
dissolution of partnership, but the dissolution of the
partnership may or may not include the dissolution of the
firm.
Grounds of Dissolution of firm
A firm may be dissolved on any one of the following grounds:
1. Dissolution by Agreement
A firm may be dissolved with the consent of all the partners
or in accordance with contract between the partners. The
consent of majority is not enough to dissolve a partnership
firm. (sec. 40)
2. Compulsory Dissolution
compulsory dissolution takes place in the following
circumstances.
a. When all the partners are declared insolvent.
b. When all except one of the partners are declared insolvent.
c. When the business of the firm becomes unlawful. (Sec 41)
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3. Contingent (conditional) Dissolution
Subject to contract between the partners, a firm is dissolved
on the happening of the following events: (sec. 42)
a. On the expiry of fixed period for which the firm was
formed.
b. On the completion of project for which the firm was
formed.
c. On the death of a partner.
d. On the insolvency of any partner.
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4. Dissolution by notice
When the partnership is at will, the firm may be dissolved by
any partner giving notice in writing form to all the other
partners of his attention to dissolve the firm. A notice of
dissolution once given cannot be withdrawn without the
consent of other partners. The firm is dissolved from the
date mentioned in notice. If no date is mentioned, it
dissolved from the date of the communication.
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5. Dissolution by Court
The court decides about the dissolution of a firm if there is a
difference of opinion between the partners regarding the
dissolution. For example, when a partner has become
insane, some of the partners are willing to continue while
others are insisting on the dissolution of firm. The court
may dissolve a firm on any decision.