Patel’s commerce chamber

PARTNERSHIP

MEANING OF PARTNERSHIP
 Partnership is an association of two or more persons to carry a business in common with
a view to profit.
 It comes into existence as a result of expansion of the sole trading business or by
agreement between two or more persons to start a business.
Definition of Partnership
Sec-4 of Indian Partnership Act, 1932 defines partnership as “the relations between persons
who have agreed to share the profits of a business carried on by all any of them acting for all.”
A person who enters into partnership is individually called
“partner” and collectively called partnership or firm. The name under which business is carried
on is called the “firm name”.
CHARACTRISTICS OF FEATURES OF PARTNERSHIP
The characteristics or essential features of partnership are as follows
 Agreement between Two or More Persons: Partnership is an agreement between two
or more persons. The minimum is two and the maximum number is twenty in case of
general business. However incase of banking business the maximum is limited to ten.
 Contractual Relation: Partnership is the result of contract. The relation between
partners in partnership firm arises not from the status but from the contract. The
agreement entered among partners should be in writing and not in oral form.
 Legal Business: The primary objective of partnership is to carry on legal business.
Business like stealing, burglary, pick-pocketing and smuggling is not reapproved as legal
business in the eye of law.
 Utmost Good Faith: Partners in a firm are individually different and it will be fatal if they
behave in their individual capacities. The basis of the partnership business is good faith
and mutual trust.
 No Separate Entity: The partners and firm are treated as one in the eye of law. Since
partners are not distinct from partnership firm, death and insolvency of a partner affect
the very existence of a partnership firm.
 Mutual Agency: Every partner is regarded as the agent of firm as well as agent of other
partners. The relation among partners is created on agency. Every partner binds the
other partners by an act in the firm.
 Restriction on transfer of shares: A partner can’t transfer his share in the business to
an outsider without the consent of all other partners. In case any partner doesn’t want to
continue in the partnership, he can give a notice for dissolution of the firm.
 Unlimited Liability: The liability of the partners is unlimited. This implies that the private
properties of the partners are at risk and can be taken for the payment of liabilities of the
firm.
KINDS OF PARTNERS
There are various types of partners in a partnership firm. Partners are classified on the basic of
their ability, experience and rights. These are as follows

Patel’s commerce chamber

Regidi street, hinjilicut. Cell no. 8908091200, 8917391876
1. Active Partner:
 Active partner is a partner who contributes capital and takes active part in the day-to-day
working of the business.
 The liability of the active partner is unlimited.
 He is also known as general partner or working partner.
2. Sleeping partner:
 Sleeping partner is a partner who invests capital and does not take active part in the day
to day working of the business.
 The liability of the sleeping partner is unlimited like Active Partner.
 He is also known as dormant partner or inactive partner.
3. Nominal Partner:
 Nominal partner is a partner who neither contributes capital nor takes active part in the
day to day working of the business.
 He simply permits the firm to use his name as partner. He is liable to third parties like
other partners.
4. Partner for Profit Only:
 Partner in profit is a partner who shares in the profits only without being liable for the
losses.
 He doesn’t take part in the management of the business but he is liable to third parties.
 These partners are associated for their money and goodwill.
5. Partner by Estoppel:
 A partner by estoppel is a partner who behaves himself as a partner, either by words or
in writing or by his act but actually he is not a partner of the firm.
 He doesn’t share of profit but is liable for obligation of the firm.
6. Secret Partner:
 Secret partner is a real partner of the partnership firm but keeps this fact of partnership
secret.
 He can take part in the working of the business and his liability is unlimited.
7. Sub-Partner:
 When a stranger shares the profits derived from the firm by a partner, he is called as
sub-partner.
 A sub-partner is not connected with the firm or he is not a partner of the firm. He is
simply a partners’ partner.
8. Minor Partner:
 Minor partner is a partner who has not attained 18 years of age.
 A minor is not competent enough to contract and as such he is not a partner of the firm.
However, he can admit with the consent of other partner for benefits only.

WHAT IS PARTNERSHIP DEED OR AGREEMENT?

 Partnership deed is a written agreement containing terms and conditions for smooth run
of business.
 There is no prescribed format for writing a deed but it must be drawn and signed by all
partners and it should be stamped.

Patel’s commerce chamber

Regidi street, hinjilicut. Cell no. 8908091200, 8917391876
  It is drawn to avoid misunderstanding and undesirable situations. It is also known as
Articles of partnership.

WHAT A PARTNERSHIP DEED CONTAINS?

A partnership deed contains the following
 Name of the firm and name and addresses of partners who form partnership firm.
 Nature of firm’s business and the town and place where its business is carried on.
 Duration of partnership
 Amount of capital contribution by each partner.
 Nature of drawing allowed to partners to meet personal expenses and interest on
drawing, if any.
 Rate of interest on capital investment and amount of drawing.
 Allocation of work among partners for smooth conduct of business.
 Procedure of admission of new partner and retirement of old partner.
 Procedure of maintenance of accounts of the firm and the procedure of auditing.
 Procedure of payment of salary and commission to each partner.

REGISTRATION OF PARTNERSHIP
 Registration of partnership is a process which safeguards the rights ad obligation of
partners.
 In India, the registration of partnership firm is not compulsory but in England registration
of partnership is compulsory.

PROCEDURE FOR REGISTRATION

Registration of partnership firm in India is a simple process. The procedure for registration is
divided into two parts. These are as follows
a) Filling an application
b) Certificate
1. Filling an application:
 An application in the prescribed form has to be submitted to the Registrar of Firms of a
locality.
 A statement in prescribed form giving details about the firm duly signed by partners with
a registration fee is submitted to the registrar of firms.
 The statement given to the registrar of the firms contains the following information
o The name of the firm
o Names and addresses of partners in the firm along with their date of joining.
o The principal place of business of the firm
o The names of other places where the business is carried on
o Duration of partnership
o The object of partnership
2. Certificate: The particular submitted to the Registrar are examined. If everything is in order,
then the registrar shall record an entry in the register of firms and issues registration certificate
to the firm.

Patel’s commerce chamber

Regidi street, hinjilicut. Cell no. 8908091200, 8917391876
If the Partnership Deed is silent or where there is no Deed, what will be the treatment in
respect of the followings
a) Remuneration b) Interest on Capital c) Profit Sharing Ratio of Partners
When the Deed is silent on any point, then we have to follow the provisions of Indian
Partnership Act, 1932.
If the Deed is silent on- Provisions of the Partnership Act
Partner’s remuneration/ salary/ commission No remuneration will be allowed to any
partner
Interest on Partners’ capital No Interest on Capital will be allowed to any
partner
Interest on loan given by partner to the firm Maximum 6% p.a. can be allowed on loan
Interest on Partner’s Drawings No interest will be charged on Partner’s
Drawing
Profit Sharing Ratio Profits and Losses will be shared equally.

KINDS OF PARTNERSHIP
Partnership form business is generally of two types. These are general partnership and limited
partnership.
General partnership is a type of partnership where the liability is
unlimited. Limited partnership is a type of partnership where two types of partners are found.
 Partnership at will: This is a type of partnership which is conducted for undefined
period and the continuation of such business depends upon the free will of partners. So
every partnership which is dissolved at will is called partnership at will. General
partnership is termed as partnership at will.
 Partnership for specific purpose: This is type of partnership which is formed for a
specified purpose. This type of partnership is dissolved after the objective is achieved.
 Particular Partnership: This is a type of partnership business which is conducted for a
particular venture or for a particular time. The business comes to an end after
completion of the specified venture or expiry of specified period.
 Ordinary Partnership: It is type of partnership business which is registered under the
Indian Partnership Act, 1932.
 Limited partnership: It is type of partnership where one or more than one partners
have limited liability and others have unlimited liability. This type of partnership has no
existence in India.

RIGHTS, DUTIES OF PARTNERS

The Partnership Deed contains the mutual rights, duties and obligation of the partners. In
certain cases, the Partnership Act also makes a mandatory provision as regards to the rights
and obligation of partners. When there is no Deed or the Deed is silent on any point, the rights
and obligations as provided in Partnership Act shall apply.

Rights of Partners
The following are some of the major rights enjoyed by partners as per provisions of the Indian
Partnership Act, 1932
1. Every partner has a right to take active part in the conduct and management of business
irrespective of capital contribution.

Patel’s commerce chamber

Regidi street, hinjilicut. Cell no. 8908091200, 8917391876
 2. Every partner has a right to express his opinion on matters relating to the firm. In case of
difference in opinions, majority opinion is taken for decision making.
3. Every partner has a right to inspect the books of account and can have a copy of it.
4. Every partner has a right to share profits equally in the absence of deed.
5. If the partner has given loan to the firm, he is entitled to an interest on loan at rate of
6%.p.a.
6. A partner is not liable for any activity before his admission into partnership.
7. A partner has the right to do all such acts which will protect firm from losses.
8. An outgoing partner has a right to carry on similar business without using the firm’s
name.
9. Every partner has a right to retire with the consent of all other partners or according to
the terms of Deed.
10. The outgoing partner has a right to claim for a share of profit up to the date of his
departure from the business.

Duties of Partners
1. Every partner has a duty to work hard and carry on business to the greatest common
advantage of the firm.
2. Every partner should be faithful to each other. The principles of utmost good faith should
be followed during the course of dealing.
3. A partner has a duty not to carry on any business competing with firm’s business.
4. Every partner is bound to render proper books of accounts of the firm.
5. The partner has a duty to share losses of the firm equally in the absence of a partnership
deed.
6. Every partner is required to act with his prescribed authority. When he goes beyond his
authority and as a result of which the firm suffers losses, he will compensate the firm for
the loss.
7. Every partner is required to use the property of the firm only for partnership business.
8. No partner can transfer his interest in the firm without the consent of other partners.
9. When a partner derives some personal profit out of business transactions, he is required
to account for such profit and pay the firm.
10. Every partner has a duty to work for business without remuneration.

DISSOLUION OF FIRM
The word dissolution means termination or complete closure. The Indian Partnership Act, 1932,
makes a distinction between dissolution of partnership and dissolution of firm. Dissolution of
partnership denotes a change in the existing agreement among the partners. The dissolution of
partnership arises in case of expiry of terms partnership or complete a definite venture or death
or insolvency or retirement of a partner whereas dissolution of firm indicates complete closure or
termination of partnership business.
So dissolution of firm includes dissolution of
partnership but dissolution of partnership may or may not include dissolution of firm.

MODES OR PROCEDURE OF DISSOLUTION OF A FRIM

A partnership firm may be dissolved under the following circumstances

Patel’s commerce chamber

Regidi street, hinjilicut. Cell no. 8908091200, 8917391876
1. Dissolution by Agreement: A partnership firm can be dissolved when all partners
agree to dissolve the firm. In this case, the firm may dissolve with the consent of all the
partners or in accordance with the term of agreement.

2. Dissolution by Notice: Where the partnership is at will, the firm may be dissolved by
any partner giving notice in writing of his intention to dissolve the firm. The firm is
dissolved from the date mentioned in the notice as the date of dissolution.

3. Compulsory Dissolution: A firm can go for compulsory dissolution when the business
becomes unlawful or illegal. Compulsory dissolution takes place in the following cases.
>When all the partners or all but one partner becomes insolvent.
>When the business becomes unlawful.

4. Dissolution by the Court: When the partners are having difference opinion regarding
dissolution of the firm, a suit can be filed by a partner in the court to dissolve the firm.
Depending upon the situation, the court may order for dissolution of the firm. Under
section 44 of the act, the court may dissolve the firm on the following grounds
>When a partner becomes unsound mind
>When a partner becomes permanently incapable of performing his duty as a partner
>When a partner commits breach of partnership agreement
>When the business can’t be carried on except at a loss.

Patel’s commerce chamber

Regidi street, hinjilicut. Cell no. 8908091200, 8917391876