Partnership Laws in the 21st Century

A comparison between US, British and Indian situation.

Objective of Study
To

find the position of partnership laws in US, UK and India. To discuss the recent developments in partnership laws in US, UK and India. To do a comparative study of partnership laws amongst the three counties.

Research Methodology
We

have adopted the comparative method of research. We have done a comparative analysis of the partnership laws in US, UK and India.

Chapters
1. 2. 3. 4. 5. 6. 7. 8. The need for partnership laws. History and origin of partnership laws. Partnerships and its types. Partnership laws in India. Partnership laws in UK. Partnership laws in US. Recent developments in partnership laws. Similarities and differences betweenPartnerships and LLP. Company and LLP. 9. Taxation of partnership firms

Chapter 1 Need For Partnership Laws

Need For Partnership Laws
 Development

of trade and commerce around the world necessitated a separate and an exhaustive law.  A more exhaustive statute was required to help the members of the business community who intended to form partnerships.  To set out clearly the terms and conditions of a any partnership firm.  To set out the duties and liabilities of the partners.  Resolving conflict between partners.  Smooth running of the partnership firm.

Chapter 2 History And Origin of Partnership Laws

History And Origin Of Partnership Laws.
Partnership

Bill, 1879.(UK). Partnership Act, 1890.(UK). The Indian Contract Act, 1872.(Sec.239-266). Limited Partnership Act, 1907.(UK). Indian Partnership Act, 1932. Limited Liability Partnership Bill, 2008.(India) Uniform Partnership Act, 1914.(US) Revised uniform Partnership Act, 1996.(US)

Chapter 3 Partnerships And Its Types

Types of Partnerships
Partnerships General partnerships  Limited partnerships  Limited liability partnerships Types of Partners Active partners  Dormant partners  Nominal partners  Minor as a partner Types of liabilities Joint liability  Several liability  Joint and several liability

General Partnerships
 A general

partnership or simply a partnership, refers to an association of persons or an unincorporated company with the following major features:

 Created

by agreement, proof of existence and estoppel.  Formed by two or more persons  The owners are all personally liable for any legal actions and debts the company may face  It is a partnership in which partners share equally in both responsibility and liability.  General partnerships are not legal entities.

Advantages And Disadvantages of General Partnerships
Advantages Spreading of business risk.  Different partners can develop special skills because each partner can focus on one skill.  Some partners have more ability to invest capital resources than other partners Disadvantages Disputes between partners on business matters  All are ‘jointly and severally liable’ for his partners. If one partner incurs a liability, then the others will also share it.

Limited Partnerships
Limited

liability Act 1907. A limited partnership is a form of partnership similar to a general partnership, except that in addition to one or more general partners (GPs), there are one or more limited partners (LPs). It is a partnership in which only one partner is required to be a general partner.

Limited Liability Partnerships
 The

word “partnership” in LLPs is a misnomer, as the entity is not merely a collective coming together of two persons: ◦ Results into creation of a new entity with its own existence  LLPs are a hybrid between a company and a partnership: ◦ Externally, they have all features of a company ◦ Internally, they are run and managed by the members, hence they are like partnerships ◦ The idea is to clothe a partnership with Limited liability personality of its own.

Types of Partners
 Active

partners: The partners who actively participate in the day-today operations of the business are known as active partners. They contribute capital and are also entitled to share the profits of the business. They also share the losses that the business faces.  Dormant partners: Those partners who do not participate in the day-today activities of the partnership firm are known as dormant or “sleeping partners”. They only contribute capital and share the profits or bear the losses, if any.

Types of Partners
 Nominal

partners: These partners “only” allow the firm to use their “name” as a partner. They “do not” have any real interest in the business of the firm. They do not invest any capital, or share profits and also do not take part in the business of the firm. However, they do remain liable to third parties for the acts of the firm. a partner: In special cases a minor can be admitted as partner with certain conditions. A minor can only share the profit of the business. In case of loss his liability is limited to the extent of his capital contribution for the business.

 Minor as

Liability of Partners
Joint

liability. Several liability. Joint and several liability.

Joint Liability
If

parties have joint liability, then they are each liable up to the full amount of the relevant obligation. If one party dies, disappears or is declared bankrupt, the other remains fully liable. Accordingly, the creditor can sue one, or other, or both, for the full amount. However, in suing, the creditor only has one course of action, i.e., the creditor can only sue for each debt once.

Example of Joint Liability
If

there are three partners, and the creditor only sues two of them for the outstanding loan amount and cannot recover the full amount, he cannot recover the remaining amount from the partner who is left out of the lawsuit.

Several Liability
The

parties are liable for only their respective individual obligations. A common example of several liability is in syndicated loan agreements, which will normally provide that each bank is severally liable for its own part of the loan. If one bank fails to advance its agreed part of the loan to the borrower, then the borrower can only sue that bank, and the other banks in the syndicate have no liability.

Joint And Several Liability
Under

joint and several liability, a claimant may pursue an obligation against any one party as if they were jointly liable and it becomes the responsibility of the defendants to sort out their respective proportions of liability and payment.

Disadvantages of Joint And Several Liabilities.
Its

use (instead of proportionate responsibility) has led to cases in which a party with a very minor part of the responsibility unfairly shoulders the burden of damages. One of the plaintiff's lawyer's statements that, “I only need to establish that the state is 1 % at fault and I can recover all of my economic damages.”

Chapter 4 Partnership Laws In India

Partnership Laws In India
Indian

Partnership Act, 1932. Definition and Purpose. Legislative competence.

Indian Partnership Act, 1932 (Act 9 of 1932)
Received

the assent of the GovernorGeneral on 8th April 1932. into force on the 1st day of October, 1932, except section 69, which case came into force on the 1st day of October 1933.

Came

Definition of Partnership
According to sec. 4 of the Indian Partnership Act, 1932“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. Persons who have entered into partnership with one another are called “partners” and collectively “a firm”, and the name under which their business is carried out is called the “firm name”.

Legislative competence
The

subject of partnership is included in item 7 of the Concurrent List in the Seventh Schedule to the Constitution. The Parliament and the State legislature has the power to make laws in this respect as provided in Art. 246 of the Constitution.

The Deed of Partnership

 

Partners in a partnership are largely free to make whatever agreements between themselves that they wish to cover their mutual relationships. The powers and rights of the partners between themselves are governed by any written agreement they may make. This is referred to as the articles or deed of partnership. The deed of partnership is prepared to avoid misunderstanding between partners.

The Deed of Partnership States The Following.
 The

capital to be contributed by each partner  The ratio in which profits or losses are to be shared  The rate of interest, if any, to be paid on capital before the profits are shared  The rate of interest, if any, to be charged on partners’ drawing  Salaries to be paid to partners  Arrangements for the admission of new partners  Procedures to be carried out when a partner retires or dies.

The 7 Items In The Partnership Act Regarding Partnership
 Each

partner has unlimited liability.  Every partner is entitled to take part in the management of the business  Every partner is entitled to access to the books and accounts of the partnership  Voting powers, each partner has one vote.  Each partner is an agent of the other.  A new partner can only be admitted to the partnership if all existing partners give their consent.  A partnership will be dissolved by: 8. any partner giving notice to the other partner(s) of his or her intention to leave the partnership 9. the death, insanity or bankruptcy of a partner.

Chapter 5 Partnership Laws in the UK

Partnership Laws in the UK
 Partnership

bill was passed in 1879.  It became the Partnership Act, 1890.  Sec 1 clause 1of the UK Partnership Act, 1890 defines partnership as “partnership is the relation which subsists between persons carrying on business in common with a view of profit.”  Under English law partners are agents of each other, but the partnership does not exist as a legal entity.  The partners share unlimited liability.  Firm is dissolved whenever there is a change of partner.

Chapter 6 Partnership Laws In The US

Partnership Laws In The US
The

federal government of the United States does not have specific statutory law governing the establishment of partnerships. In the absence of applicable federal law, the National Conference of Commissioners on Uniform State Laws has issued non-binding models laws (called uniform act) to encourage the adoption of uniformity of partnership law into the states by their respective legislatures. This includes the Uniform Partnership Act and the Uniform Limited Partnership Act.

Uniform Partnership Act
 The

Uniform Partnership Act (UPA), is a uniform act (similar to a model statute), proposed by the National Conference of Commissioners on Uniform State Laws (NCCUSL) for the governance of business partnerships by U.S. States.  Several versions of UPA have been promulgated by the NCCUSL, the earliest having been put forth in 1914, and the most recent in 1997.  Uniform Limited Liability Partnerships were added to the UPA in 1996 under the revised RUPA.

Revised Uniform Partnership Act(RUPA)
The

NCCUSL's first revision of UPA was promulgated in 1992 and amended in 1993 and 1994. The 1994 revision was often referred to as the Revised Uniform Partnership Act (RUPA).

Chapter 7 Recent Developments In Partnership Laws

Concept Paper On LLPs In India
Based

on the recommendations of the NC Gupta committee, and the Irani committee, the Govt had come out with a concept paper and a draft of the LLP bill in late 2005. LLP Bill has been placed before
The

Constitution (entry 44, List 1 of Seventh Schedule) has put “corporations law” in the Union List:

◦ Lok Sabha on 7th Dec 2006 ◦ Rajya Sabha on 15th Dec 2006.

◦ As LLPs are to be given an incorporated status, they will fall under this list.

Need for LLPs
It

combines the flexibility of a partnership and the advantages of limited liability of a company. This format would be quite useful for small and medium enterprises in general and for the enterprises in services sector in particular. An LLP is similar in some ways to a general Partnership, except that the individual members have lower liabilities to any debts which may arise from running the business.

Key Features of LLP
 An

LLP is a corporate body which exists as a legal ‘person’ independently from its members. In this respect it is just like a LLC.  LLP membership combines both ownership and the right to manage the business.  Members have considerable freedom to agree whatever terms they wish  Members of an LLP are taxed in the same way as partners in a partnership  It has perpetual succession  An LLP is fully liable for its own debts and obligations but the liability of the members is limited to the capital they have contributed or committed.

Salient Features of The LLP Bill Constitution
 Indian law seems based on the Singapore law  LLP is a body corporate, separate entity, perpetual

succession: ◦ To ensure perpetuality, transferability of membership is a must  Members constituting it are members: ◦ Individuals and corporates may be members: Since body corporate will include an LLP, an LLP may also be a member ◦ At least 2, maximum unlimited  Existing firms and Companies may convert themselves in LLPs – Schedule 2 and 3 provide for the same: ◦ Eligibility in case of a company – no security interest on the assets of the company ◦ No such eligibility condition in case of firms

LLP Legislation In Other Countries
In UK, LLP law was passed in 2000 The argument was first rejected by the

Commission After a series of consultations, the Bill was passed in 2000; with tax clarity, the structure got into offing in April 2001 The UK move set the ball rolling in other countries too: ◦ Canada (Ontario) introduced LLP law in 1998 ◦ Singapore issued consultation paper in 2002, enacted the law in 2005 In UK, the LLP model is available for all businesses; in New York, it is open only for selected professions.

Law

Overview of the UK LLP law
 The

law is very short, very simple: ◦ Just 19 sections, no schedules  The law could afford to be simple, as chunk of the corporate law provisions arise from separation of ownership and management  Owners and managers are the same: one member designated as “designated member” ◦ May be a founding member or may change  Unlimited business capacity  Principle of agency/principalcy applicable: ◦ Every member is an agent of the LLP  Limited liability must always come with protected capital: ◦ The law provides for capital of each partner, but does not restrict drawing  Capital or liability not mentioned in incorporation documents

Distinguishing Features of LLP
 Every

partner of the LLP shall be agent of the LLP for the purpose of the business of the LLP but he shall not be an agent of other partners like traditional partnerships.  A LLP is not liable to third person for the act of a partner who has no authority to do a particular act and the person dealing with such partner has knowledge about it.  An obligation of the LLP arising out of any contract or otherwise shall be the sole liability of the LLP.  The Partners of the LLP shall not be personally liable for the obligations arising out any contract, but only for their wrongful acts.

Advantages of LLPs
• Very cheap to incorporate • Lot of flexibility, very little accountability • All benefits of a partnership business, though with a new entity • Taxation as general partnerships

Chapter 8 Similarities and Differences

Partnerships And LLPs-similarities

Partnership

V

LLP

Cont…………

Company and LLP-Similarities

Company

V

LLP

Chapter 9 Partnership Taxation

Partnership Taxation
USThe entity does not pay taxes on its income. Instead, the owners of the entity pay tax on their "distributive share" of the entity's taxable income. UKA partnership is not a legal entity, the partners are assessed to either UK corporation tax or UK income tax on their share of the profits and losses of the partnership. IndiaFor taxation purposes a partnership is considered as a separate legal entity. Hence the entity pays the taxes.

The End….Thank you for your endless patience.

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