Business laws

UnitUnit-II Partnership Act, 1932

Introduction to Topic  

One of the forms in which business can be carried on is µpartnership¶, where two or more persons join together to form the partnership and run the business. In order to govern and business. guide partnership, the Indian Partnership Act, 1932 was enacted. enacted. Since public at large would be dealing with the partnership as customers, suppliers, creditors, lendors, employees or any other capacity, it is also very important for them to know the legal consequences of their transactions and other actions in relation with the partnership. partnership.

1933. except 10. .( contract contract. 1872. (made Act.10.1932. Kashmir.1932. section 69 which came into force on the 1st Day of October. 1932 is a Central Act. This Act extends to the whole of India except the state of Jammu and Kashmir. by Parliament This Act deals with special type of contract. of partnership) Provisions regarding contract of partnership were earlier contained in the Indian Contract Act.Features of Partnership Act. This Act came in to force on 1. 1872. 1932      Indian Partnership Act. 1933.

Thus. . 1932 defines the term µPartnership¶ as under: µ¶PARTNERSHIP IS THE RELATION BETWEEN TWO OR MORE PERSONS WHO HAVE AGREED TO SHARE THE PROFITS OF A BUSINESS CARRIED ON BY ALL OR ANY OF THEM ACTING FOR ALL¶¶. ALL¶¶.Meaning &Definition of µPartnership¶ Section 4 of the Partnership Act. Partnership is the name of legal relationship between/among persons who have entered in to the contract. contract.

.Meaning of µPartner¶ µFirm¶ and µFirm Name¶  Section 4 of Indian Partnership Act. together´. 1932 provides that: Persons who have agreed into partnership with one another are called individually PARTNERS and collectively FIRM and the name under which their business is carried on is called the FIRM NAME ³Partnership is thus Invisibility which binds the partners together and firm is the visible form of those partners who are thus bound together´.

. the partnership firm becomes an illegal association. of persons. a firm can have: no. have: 10 20 In case of partnership firm carrying on a banking business In case of partnership firm carrying on any other business If the number of partners exceeds the aforesaid limit. If an association of persons or firm having members or partners exceeding the Above limit will not be an illegal association if that firm¶s objective is not to earn profit.Maximum Limit on Number of Partners  Section 11 Companies Act provides that the maximum no.

µMutual Agency is the conclusive proof For explanation go through the next slides: .Essential elements of Partnership Two or more persons Sharing of profit Mutual agency An agreement Business For forming a partnership the above elements should be present. Though each element is important.

v it. Co. It [sec. CIT] Further Section 5 of the Act provides that partnership arises from contract and not from status (like HUF). HUF). 31)] has no separate legal entity (like company) apart from the partners constituting it.  .2 (31)] ). [Malabar Fisheries Co.Nature of Partnership  A partnership firm is not a person in the eyes of Law (except for the purpose of taxation [sec.

they do so? Answer: Answer: ?  .Solve the Case  There are two firms namely M/s PQR and M/s ABC. Can firm. contemplating to form a new firm. These two firms are ABC.

evidence. i.e. partnership.The business is carried on by all or by any of them acting for all. Sharing of profit is an essential element of partnership but it is not a conclusive proof of partnership. 6]    The true test of partnership is the existence of µMutual Agency¶ relationship. partners. Thus partnership can be presumed when a.There is an agreement to share the profits of business and b. .Real test of partnership [Sec. the capacity of a partner to bind other partners by his acts done in firm¶s name and be bound by the acts of other partners. Sharing of profit is Prima facie evidence. Contd.

Contd. contract. statement of employees etc.  The relation among partners can be ascertained as under: under: The real relation is ascertained from the partnership contract. . a. books of account.If there is an express contract.If there is no express The real relation is ascertained contract from all the relevant factors such as contract of parties. etc. b.

Meaning of Mutual Agency Mutual agency refers to the relationship of principal and agent Among partners Example in case of firm of A.Agent A and B.Agent B and C.B and C When A acts A.Principal When B acts B.Principal .Principal When C acts C.Agent A and C.

Joint owners of some property sharing profits or gross returns arising from the property.  In the following cases there is profit sharing but partnership does not exist just because of lack of Mutual Agency: Agency: 1. Leading case: Govind V.000 per annum and share the rental income equally. They let it out on a rent Of Rs.00. 1. Maga Contd. [explanation I to Sec.Partnership does not exist though there is profit sharing. . 6] Example: X and Y jointly purchased a building and contributed capital Equally to convert the building into a hotel.

Commissioner V. (Mollow March V. 5] business. Keshamal Keshardeo) A servant (a manager) or an agent who receives a share of profit as part of his remuneration. T.      . Gopeshwar remuneration. business. (I. [Sec.Contd. 5] Burmese Buddhist husband and wife carrying on business.[Sec. [Sec.  A lender of a firm (who has lent money) who receives a share of profit. A member of a Hindu Undivided Family carrying on family business. Chatoraj) A person who receives a share of profit in consideration of sale of business or goodwill of the business. business. profit. The court of Wards) A widow or child of a deceased partner who receives a share of profits.[Sec. profits. (I. (Munshi Abdul Latif V.

Restriction on transfer of interest: 6. No separate legal existence 5. . Partners are competent to contract 8. Based on agreement 7. Voluntary registration 4. Unlimited liability 3. Two or more members 2.Characteristics of Partnership A partnership firm has the following characteristics: 1. Partnership may be only for lawful business.

8) .Types of Partnership On the Basis of Duration Partnership at Will (Sec.7) Particular Partnership (Sec.

Partnership at Will [Sec.43)] When there is no provision in partnership agreement (known as partnership Deed. then the partnership is called µPartnership at Will¶.  Special feature of µPartnership at will¶ is that such firm may be dissolved by any partner by giving a notice in writing to all other partners of his intention to dissolve the firm  The firm will be dissolved from that date which is mentioned in the notice as the date of dissolution and if no date is mentioned then from the date of communication of notice. Sec. if in writing) for: for:  The duration of their partnership. notice.43)] Sec. or  The determination of their partnership. Will¶.  .7 read with [Sec.

period.Particular Partnership [sec. . A particular partnership may be dissolved before the expiry of the term or completion of the venture only by the mutual consent of all the partners. it is deemed to be a partnership at will. partnership¶. If such partnership is continued after the expiry of term or completion of venture. Such partnership comes to an end on the completion of the venture or the expiry of time period. or  Particular period (fixed term)     then such partnership is called a µparticular partnership¶. partners. 8]  When a partnership is formed for a Specific venture or undertaking. will.

17 (b) of the Act provides that if a firm .constituted for a fixed term. expiry. continues to carry on business after the expiry of that term.Contd. Sec.  Sec. . then the partnership will become partnership at will AND mutual rights and duties of partners will remain same as they were before the expiry.

A simple agreement or partnership deed. to get the firm registered.  Availability of large resources: Since two or more partners join resources: hands to start a partnership business. it may be possible to pool together more resources as compared to a sole proprietorship. is sufficient to create a partnership. partnership businesses can be form: formed easily without any compulsory legal formalities. partnership. . The partners can proprietorship. oral or in writing. more effort and more time for the business Contd. contribute more capital. It is not necessary formalities.Advantages of Partnership Firm  Easy to form: Like sole proprietorships. either registered.

organization.  Better decisions: The partners are the owners of the business.  organization. the partners can decide to change the size or nature of the business or area of it¶s operation. Each of decisions: business. procedure. There is no need to follow operation. they can sit together to solve the problem. there is less scope for decisionreckless and hasty decisions. Flexibility in operations: A partnership firm is a flexible contd. them has equal right to participate in the management of the business.Advantages contd. required. In business. At any time. any legal procedure. partners participate in the decision-making process. . case of any conflict. Since all problem. Only the consent of all the partners is required. decisions.

specialization may start a clinic in partnership. . then all partners Rs.  Sharing risks: In a partnership firm all the partners share the risks: business risks. makes a loss of Rs. to provide legal consultancy to people. more. Because of this. Similarly. then one partner may deal with civil cases. may share it and the individual burden will be Rs. partnership.Contd.12. Rs.  Benefits of specialization:Since all the partners are owners of the specialization: business. one in criminal cases. If you want to start a firm experience. they can actively participate in every aspect of business as per their specialization.000 in a particular period. if there are three partners and the firm risks.4000 only.12. knowledge and experience. and another in labor cases and so on as per the individual specialization. only. For example. the partners may be encouraged to take up more risk and hence expand their business more. two or more doctors of different specialization.

In extreme cases an unsatisfied taken. goes against the interest of any partner. absence of the partnership deed. If any decision business. partner may withdraw from the business and can dissolve it. no legal protection is given to the partners. In required. partners. In it. every partner has an equal say in decision making and the management of the business. Protection of interest of each partner: partner: . such extreme cases the ³partnership deed´ is required.Contd. he can prevent the decision from being taken.  In a partnership firm.

partnership. the retirement of a partner.Disadvantage of Partnership Firm  Unlimited liability:All the partners are jointly liable for the debt of the firm. without the consent of other partners. They can share the liability among themselves or any one can be asked to pay all the debts even from his personal properties depending on the arrangement made between the partners. can also give notice at any time for the dissolution of the partnership.  Uncertain life:The partnership firm has no legal existence separate life: from it¶s partners. This creates inconvenience for the partner who wants to leave the firm or sell part of his share to others. incapacity or partners.  No transferability of share:If you are a partner in any firm. Contd. . It comes to an end with death. you cannot transfer your share or part of the company to outsiders. insolvency. Further. any unsatisfied or discontent partner partner.

the capital to be raised is always limited. Limited capital: Since the total number of partners cannot capital: exceed 20. of the partnership and the business. limited. partner can place his or her opinion or viewpoint before the management regarding any matter at any time. It may not 20. time.  .Contd. Because of this.  Lack of harmony: In a partnership firm every partner has an harmony: equal right to participate in the management. Also. business. Difference of opinion may lead to the end partners. every management. sometimes there is a possibility of friction and discontent among the partners. be possible to start a very large business in partnership form.

partners. The partnership Deed is to be duly stamped as per the Indian Stamp Act. and duly signed by all the partners. . it is desirable t o have it in writing in order to avo8id any dispute avo8 with regard to the terms of the partnership.though the law does not expressly require oral. which contains the term of a partnership as agreed among the partners is called ³partnership deed´. be in writing or oral. that the partnership agreement should be in writing. deed´. This agreement may agreement. The document partnership. Contd.Partnership deed   A partnership is formed by an agreement. Contd.

Contents of partnership Deed A partnership deed may contain any matter relating to the regulation of partnership but all provisions in the deed should be within the limits of Indian Partnership Act. A Partnership Deed should contain the following clause: Nature of business Duration of partnership Name of the firm Capital Share of partners in profits and losses Bank Account firm Books of account Powers of partners Retirement and expulsion of partners Death of partner Dissolution of firm Settlement of disputes             . 1932. However.

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