LAW OF PARTNERSHIP

Law of Partnership
The law of partnership is contained in the Partnership Act.1932 which came into force on 1st
October 1932. It extends to whole of Pakistan.

Meaning and Definition

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
Some other definitions of partnership are:
"An association of two or more persons who carry on as co-owners, a business for profits"
Partnership has two or more members, each of whom is responsible for obligation of the
partnership. Each of the partners may bind the others and the assets of partners may be taken for
the debts of the Partnership.
A partnership is a group of men who have joined capital or services for the prosecuting of some
business.
Partnership is the relation existing between persons to make contracts who agree on carry on a
lawful business with a view to private gain.
Partnership is the relation between persons who have agreed to share the profits of a business
carried on by all or any one of them acting for all.

Characteristics
The following are characteristics or features of partnership.
1.Legal Entity
A partnership has no separate legal entity apart from its members. It means that the partnership
and partners are not separate from one another. The rights and liabilities of the firm are
considered the rights and liabilities of the partners. If any of the partners dies, retires or becomes
insane, the partnership comes to an end.
2. Agreement
A partnership is the result of an agreement between two or more persons. An agreement may be
written or oral. Only the persons who are competent to contract can form a partnership. On the
death of father who was a partner in a firm, the son can claim share in the partnership property
but cannot become a partner unless he enters into an agreement with the other partners.
3. Number of Partners
At least 2 persons are required to form a partnership. The Partnership Act does not mention any
maximum limit of persons who can be partners in a partnership firm. According to Section 14 of
Companies Ordinance,1984 a partnership consisting of more than 20 persons cannot be formed.
4. Existence of Business
In order to form a partnership, the partners must agree to carry on a certain business. If the
purpose is something other than business, it cannot be called a partnership. Therefore, where
there is no business, there is no partnership.
5. Sharing of Profits
The agreement between the partners must be to share the profits of a business. The profit will be
distributed among the partners according to their agreement. If there is no agreement regarding
the distribution of profit, it will be equally distributed among the partners. The partners will
share the loss according to the agreed ratio. Some partners may agree to bear all the losses of the
business.
6. Mutual Agency
The business must be carried on by all the partners or any of them acting for all the partners.
Each partner acts as an agent of the other partners of the firm. Again, each partner acts as a
principal also because he finds himself to the activities of other partners. It means that the
contract of agency exists among partners.
7. Unlimited Liability
The liability of all the partners is unlimited. All the partners are individually and collectively
responsible for the debts of the business. It means that if there is any loss and the business
sources are insufficient to satisfy the claims of the creditors, the private assets of the partners can
be sold to satisfy the claims of creditors.
8.Capital
Generally, the capital for the partnership firm is provided by all the partners. It is not necessary
that all the partners contribute equal amount of capital. Capital is contributed according to the
partnership agreement. A person without contributing any capital may become a partner on the
basis of his ability.
9. Utmost Faith
A partnership is based on mutual confidence and trust of the partners. The partners must be fair
and honest with each other. They must disclose all facts and provide true accounts relating to the
business to each other. They must not make any secret profit or involve in any activity which
could harm the
interests of other partners.
10.Management
According to law, every partner can participate in the conduct and management of the
partnership firm. Usually, the management work is divided among the partners according to their
experience, ability and knowledge. In practice, the senior partner exercises overall supervision
over the firm.
11.Control
Since a partnership is formed by an agreement, its control depends on the terms of the
agreement. Where all the partners take an active part in the conduct of the business, the control
remains with all of them and major decisions are taken with the consent of all the partners.
Otherwise, control may be given to one or more partners under the agreement.
12. Transfer of Ownership
Usually, the partnership deed includes provisions regarding transfer of ownership of partners. If
there are no such provisions in the partnership deed, a partner cannot transfer his ownership in
the partnership to an outsider without the consent of all other partners. Thus, the share in a
partnership is not freely transferable.
13. Duration
The partnership continues as long as the partners are willing to run the business. It comes to an
end on the death, insanity or insolvency of any of the partners. However, if the remaining
partners agree to continue the business and make a new agreement, the firm will not dissolve.

Advantages
The following are important advantages of partnership:
1. Easy Formation
The partnership can be formed easily because no complicated legal formalities are required for
its formation. The registration of firm is not compulsory. The cost of formation of partnership is
small and process can be completed quickly.
2. Larger Capital
In sole proprietorship, the amount of capital is limited to the personal and borrowing capacity of
one individual. But in case of partnership, there are more persons who can easily collect huge
amount of capital. If the present partners are not in a position to supply the needed capital, the
amount can be borrowed.
Moreover, the capital can also be increased by admitting new partners.
3. Better Management
In sole proprietorship, it is difficult for sole proprietor to manage the business effectively. But in
case of partnership, the partners may perform those duties for which they are more suitable. In
case of important matters all the partners can get together and decide. This ensures more
efficiency and increase
profits.
4. High Credit Standing
In sole proprietorship, the sole proprietor due to unlimited liability enjoys high credit standing. In
case of partnership the liability of all the members is also unlimited. It means that in case of loss
the personal assets of all the partners can be held liable to meet the claims of the creditors, so the
financial institutions give loans without fear.
5. More Participation
All the partners work hard to make the partnership firm successful. They know that in case of
failure of business, they will have to bear the loss. Moreover, if the resources of business are not
enough to meet the loss, their personal assets shall be utilized to satisfy the claims of the
creditors. Thus, all the partners participate in business activities.
6. Skilled Employees
In sole proprietorship, it is difficult to employ skilled persons because they demand high salaries.
But in case of partnership, the resources of the firm are larger, so the services of educated,
experienced and skilled persons can be obtained. In addition, such persons can also be attracted
by making them partners of the firms.
7. Public Relations
The partners personally look after the affairs of business, so they develop good relations with the
employees and customers which are beneficial to the firm. Direct contact with customers helps to
build trust and loyalty. The employees can be supervised more effectively when the partners
show active interest in management.
8. Flexibility
A partnership is free from legal restrictions. It is formed by an agreement so the business can be
changed easily. Its objects, membership and capital may be easily adjusted according to changes
in the business conditions. But in case of company, a change in objects requires the sanction of
Securities and Exchange Commission of Pakistan.
9. Decision Making
The interest of minority partner in a partnership is protected by law. In policy matters, all
partners must agree. In ordinary affairs, a dissatisfied partner may withdraw his share and
dissolve the firm. Thus, the minority partner enjoys the right of veto. In fact, the law gives each
partner the right to be heard and consulted.
10. Protection of Minor Partner
In partnership, the interest of minor partner is properly protected. A minor partner enjoys special
protection in a partnership firm. His liability is limited to the extent of his capital contribution.
This protection is beneficial as the death or insanity of partner does not dissolve the firm if in his
place his minor successor is taken as a partner.
Disadvantages
The following are disadvantages of partnership:
1. Unlimited Liability
The partners have unlimited liability with regard to debts of the business. Every partner is
individually and jointly liable for all the debts of the firm. If the business suffers loss and the
business assets are not. Enough to satisfy the claims of the creditors, the personal assets of all the
partners can be utilized to clear the claims. If some partners become insolvent, the solvent
partner has to bear all the losses.
2. Risk of Dissolution
In case of death, insolvency or insanity of a partner, the partnership is terminated. The remaining
partners will have to make a new agreement if they want to continue with the business. The
remaining partners can purchase the share of such partner or sell these shares to an outsider.
3. Possibility of Disagreement
A partnership is started by a group of persons having good relations. But with the passage of
time, differences may develop among them resulting in dissolution of firm. The business
decisions are made by consultations, discussions and voting among the partners. This may create
distrust among the partners resulting in the failure of the firm.
4.Limited Resources
In a joint stock company, there are thousands of shareholders and a large amount of capital can
be gathered in order to expand the business. But in case of partnership, the maximum limit of
members is 20 and large amount of capital cannot be raised easily. Moreover, a company can
raise funds by issuing bonds and debentures which is not possible in firms.
5. No Transfer of Ownership
In a joint stock company, the shareholder can transfer his shares any time to any person. But in
case of partnership, the partner cannot transfer his ownership to any other person without the
consent of all the other partners. It is easy to invest in a partnership but difficult to withdraws.
6. Lack of Public Confidence
A partnership firm does not enjoy public confidence due to lack of marketing and publicity. The
people have little knowledge about its activities because its accounts and reports are not
published. The affairs of business are not legally controlled. As a result, people do not have a
favorable opinion about partnership firms.
7.Lack of Authority
All the partners have independent decision making authority in the management. As a result,
many types of problems may arise when there is no mutual trust, understanding and cooperation.
Disagreement, opposition and misunderstanding among partners may result in dissolution of
partnership.
8. Lack of Harmony
As all the partners have equal authority in the management of the firm, so every partner tries to
impose his own decision which leads to misunderstanding distrust and dispute. As a result, the
harmony among partners is disturbed and the business is negatively affected.
9. Lack of Secrecy
Lack of secrecy may occur in a partnership because business secrets are known to all the
partners. While in case of sole proprietorship, the secrets remain restricted to a single person.
The business rivals may exploit this weakness if a partner is ready to reveal the secrets.
10. Authority of Partners
A partner acts as the agent of the firm and co-partners. He can bind the firm and co-partners by
making agreements with outsiders. Thus, a dishonest careless and incompetent partner may
create problems for his co-partners and the firm.

Test of Partnership
In order to determine the existence of partnership, the following must be proved:
1. There must be an agreement among the persons to be held as partners.
2. The agreement must be for doing some business.
3. The agreement must be to share the profits of a business.
4.There must be a relationship of principal and agent among the partners.
5. There must be an agreement to carry on the business by all or any of them acting for all.
Partner
Persons 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 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 partners
can choose any name for the firm according to the following
1. The name must not be identical or similar to the name of an existing firm.
2. The name must not contain words 'Government', 'Jinnah', 'Quaid-e-Azam' or words showing
the approval or patronage of the Federal Government or any Provincial Government, without the
consent of the provincial government.
3. A firm name must not contain the name of 'United Nations' or abbreviations of its subsidiary
body without the sanction of the Secretary-General of the UNO.
4.A firm name must not contain the name of the `World Health Organization' or its abbreviations
without the sanction of the Director-General of WHO.
5. A firm must not contain any word which may be declared by the Provincial Government as
undesirable.
Ideal Partnership

The following are characteristic of ideal partnership:

1. Mutual Understanding
There must be mutual understanding and cooperation among the partners. Mutual trust is
essential to effectively run a firm and to make it a success. This is possible only when the
partners entering into an agreement know each other for a long time.
2. Common Purpose
All the partners must act for the common benefit of the partnership firm. The partners must
cooperate with each other and make joint efforts to achieve common objectives. The partners
should not pursue individual or personal goals but focus on collective benefits of the partners.
3. Good Faith
All the partners in a firm should work in good faith. They should act with complete honesty,
sincerity and integrity. The partners must not take any unfair advantage of each other. Every
partner should fully participate in the management of the firm.
4.Sufficlent Capital
The business needs capital for both long term and short term purposes. The partners can borrow
capital from external sources like banks and financial institutions. The profits extracted from the
business must not be too large. The profits should be reinvested in the business to achieve further
growth and development.
5. Long Duration
The duration of partnership should be long. Only long-term partnerships can property formulate
and implement long term plans for the business. It takes time to understand the affairs of
business so the short term partnerships rarely succeed. Expansion and growth strategies cannot
be implemented in short term partnerships.
6. Number of Partners
The number of partners must be appropriate and suitable. If the number of partners is small, the
firm will suffer from lack of capital resources. If the number of partners is large, there is
possibility of disagreement and mistrust among the partners.
7. Written Agreement
In order to avoid misunderstanding and future disputes, there must be a written agreement among
the partners. The rights and duties of the partners must be included in the partnership deed. It
should contain full details about capital, profit sharing and authority of each partner.
8. Registration
The registration of partnership is not compulsory. It is better to register a partnership as soon as it
is formed. If a partnership is not registered, it cannot sue outsiders although the outsider can sue
it.

Kind of Partners
The following are kinds of partners according to liability, participation in management, shares of
profits, etc.
1. Active Partner
A partner who takes an active part in the management of firm is called active partner. He takes
much 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 the working partner.
2. Sleeping Partner
One who does not take an active part in the management of the firm is called sleeping or dormant
partner. Such partner brings only capital in the business. He is also liable to the creditors of the
firm like other partners. He is not required to give notice to general public about his retirement
from the firm because he is not known to the general 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. 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 receives more profit is called senior
partner. He plays a major role in the management of the business due to experience, age,
capability and other skills.
5. Junior Partner
A junior partner is the opposite of a senior partner. Usually, he is some 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 receives a nominal share in the profits. He has no major role
in decision-making.
6. Partner in Profits Only
He is a partner who shares the profits of a firm but is not liable for the losses. A sleeping partner
may be a partner in profits only. He is equally liable to the outsiders like other partners.
7.Secret Partner
A secret partner is a partner whose membership is kept secret from the outsiders. Secret partner
takes an active part in management of the partnership firm He is liable for the debts of the firm
like other partners.
8. Minor Partner
A minor is a person who has not completed 18 years of age. The person who wants to enter into
partnership must be competent to contract. As a minor is not competent to contract, so he cannot
become a partner. But with the consent of all the partners he may be admitted to the benefits of
partnership by an agreement with his guardian. The following points must be noted in this
connection:
a. Position during Minority
The rights and liabilities of a minor during minority areas under.
i. He has a right to receive his agreed share of the property and profits of the firm.
ii. He can inspect and take copies of the accounts but not the books of the firm as they may
contain business secrets.
iii. He is not personally liable for the debts. His liability is limited to the agreed share in profit
and property of the firm.
iv. He cannot take part in the management of the business.
v. He has a right to sue other partners for his share in profit or property of the firm when he
breaks his relation from the firm.
vi. He cannot be declared insolvent.
b. Position after Majority
The minor must decide within 6 months whether he will continue in the firm or leave it. These 6
months start on attaining majority or on knowing that he was admitted to the benefits of
partnership. whichever date is later. He should give public notice about his decision. If he fails to
do so, he will be considered a major partner.
c. Decision to Become Partner
If he decides to become a partner, his position will be as follows:
i. His rights and liabilities will be similar to those of a major partner.
ii. He becomes personally liable to third parties for the debts and obligations of the firm from the
date of his admission to the benefits of partnership.
iii. His share of profits and property in the firm remains the same unless changed by agreement.
d. Decision not to become Partner
If he decides not to become a partner, his position will be as follows:
i. His rights and liabilities continue to be those of a minor up to the date of
giving public notice.
ii. He is not liable for the acts of the firm done after the date of his public notice.
iii. He has right to sue the partners for his share of the property and profits in the firm.