PARTNERSHIP
ACT
Muhammad AsadUllah
PhD Business Management Scholar
CA Part Qualified
THE NATURE OF PARTNERSHIP
Definition: Partnership [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”.
Definition: Firm and partners [Section 4] “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”.
Definition: Act of firm [Section 2(a)] “An act of firm means any act or omission by all the
partners, or by any partner or agent of the firm which gives rise to a right enforceable by or against
the firm.”
Definition: Third party [Section 2(d)] “Third party used in relation to form or to a partner therein
means any person who is not a partner in the firm.”
ESSENTIAL ELEMENTS OF A PARTNERSHIP
Association of two or more persons
The partnership is an association between two or more persons and all persons must be competent to
contract. Thus, there can be no partnership consisting of a single individual. If the number gets reduced
to one, for any reason, it ceases to be a partnership. The partnership Act does not say anything about the
maximum number of partners. But Companies Ordinance fixes the following maximum numbers:
1.
In case of a partnership firm carrying on banking business maximum number is 10.
2.
2. In case of a partnership firm carrying on any other business maximum number is 20.
3.
3. In case of a partnership firm of professional persons maximum number may exceed 20.
If the number of partners exceeds in 1 & 2 then the partnership firm becomes an illegal association.
ESSENTIAL ELEMENTS OF A
PARTNERSHIP (CONT.)
Agreement
A partnership is a contractual agreement between the partners. This agreement may be express (whether written or oral) or
implied. The written agreement is known as ‘partnership deed’. In Pakistan partnership arises from contract and not from
status such as, (Joint Family Business) operation of law inheritance, or succession. A partnership deed usually sets out the
following:
1.
Firm name
2.
Place or principal place of business of the firm
3.
Names of any other places where the firm carries on business
4.
The date when each partner joined the firm
5.
Number of partners
6.
Names in full and permanent addresses of partners Duration of partnership (if any)
7.
Purpose of the partnership
8.
Rights and duties of the partners.
9.
Amount of capital that each partner should put into the business, and keep in the business until the partner retires or
the partnership is dissolved
ESSENTIAL ELEMENTS OF A
PARTNERSHIP (CONT.)
Carrying on business
To constitute a partnership, the parties must have agreed to carry on a business. Where there is no business to be
done, there can be no question of partnership. Business here includes any lawful trade, occupation and profession. An
agreement to carry on business at a future time does not result in partnership unless that time arrives and the business
is commenced. If the purpose is to carry on some charitable work it will not be a partnership.
Sharing of profits
The next essential element of partnership is that there must be an objective to make profit. The partners may agree to
share profits in any manner they like. The sharing of profits is a prima facie evidence and not a conclusive evidence
of partnership. Partners may share it equally or in any other proportion. Further, it is not necessary that the partners
should agree to share losses. It must be noted that even though a partner may not share in the losses of the business,
yet his liability towards outsiders shall be unlimited.
ESSENTIAL ELEMENTS OF A
PARTNERSHIP (CONT.)
Mutual agency
There must exist a mutual agency relationship among partners. Mutual Agency relationship means that each partner
is both an agent and a principal. Each partner is an agent in the sense that he has the capacity to bind other partners
by his acts done. Each partner is principal in the sense that he is bound by the acts of other partners.
Note Following two important features of the partnership need to be understood.
• A partnership does not have a legal personality. Unlike a company, it is not a legal person. A third party entering
into business transaction with a partnership does not have a contractual agreement with the partnership; the
contractual agreement is between the third party and all the partners as individuals.
• Partners in a partnership do not have limited liability, and are personally liable for any liabilities of the partnership
business that the partnership cannot pay.
TEST OF PARTNERSHIP
In determining whether a group of persons is or is not a firm or whether a person is or is not a
partner in a firm regard shall be given to the real relationship between the parties as shown by ALL
RELEVANT FACTS TAKEN TOGETHER i.e. [Section 6]
1.
Association of two or more persons
2.
Agreement
3.
Carrying on business
4.
Sharing of profits
5.
Mutual agency
TYPES OF PARTNERSHIP
Partnership-at-will
Where no provision is made between the partners for the duration of their partnership, or for the determination of their
partnership, the partnership is called partnership at will. In such partnership there is no provision as to when the partnership
will come to an end. Any partner is free to dissolve the partnership by giving a notice in writing to all other partners of his
intention to dissolve 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 the communication of the notice. [Section 7 and 43]
Particular partnership
Where a partnership is created for any particular adventure or undertaking or for a specific time period it is called a
particular partnership. Such partnership comes to an end on the completion of venture or on the expiry of the period.
If the partners decide to continue such a partnership even after the expiry of the specific period or completion of specific
venture then it becomes partnership at will. [Section 8]
TYPES OF PARTNERS
1.
Actual or ostensible partner
2.
Sleeping or dormant partner
3.
Nominal partner
4.
Partner in profits only
5.
Sub-partner
6.
Silent partner
7.
Partner by estoppel or holding out
RELATIONS OF PARTNERS TO ONE
ANOTHER
General duties of partner
1.
Duty to be just and faithful
2.
Duty to carry on business to the greatest common advantage
3.
Duty to render true accounts
4.
Duty to provide full information
5.
Duty to indemnify for loss caused by fraud
6.
Duty to be liable jointly and severally – unlimited liability
7.
Duty to act within authority
8.
Duty in case of emergency
RELATIONS OF PARTNERS TO ONE ANOTHER
Qualified duties of partner
Duty to attend diligently to his duties
Duty to contribute to the losses
Duty to indemnify for willful neglect
Duty to use firm’s property exclusively for the firm
Duty to account for personal profits derived
Duty not to compete with the business of the firm
Duty not to assign his interest
RELATIONS OF PARTNERS TO ONE ANOTHER
Rights of partner
1.
Right to take part in the conduct of the business
2.
Right to be consulted
3.
Right to have access to the books
4.
Right to share the profits
5.
Right to interest on capital
6.
Right to interest on advances
7.
Right to indemnity
8.
Right to retire
9.
Right of outgoing partner to share in the subsequent profits
10.
Rights after reconstitution of firm
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