Partnership Act.pdf

REENA MEHTA COLLEGE OF COMMERCE AND MANAGEMENT SUBJECT: BUSINESS LAW (INDIAN PARTNERSHIP ACT,1932)

Q.1 What is Partnership and its features? Ans. The Indian Partnership Act, 1932, Section 4, defined partnership as “the relation between persons who have agreed to share the profits of business carried on by all or any of them acting for all”. " Partnership is the relation between persons who have agreed to share profit of business carried on by all or any of them acting for all." Partnership is a mean of bringing together the persons who can contribute capital, skill for the expansion of business. In the ordinary business number of partners shall exceed than twenty. In case of banking business they may not exceed than ten. This type of business organization is very popular in our country. Features: 1.Agreement:-Without agreement partnership can not be formed. The agreement may be written or oral. But it must be written on settle the disputes.

2.Registration:-It is not necessary that a partnership may be registered. But in case of registered firm many problems can be created.

3.Number of Partners :-In a partnership there should be at least two partners. In ordinary business the partners must not exceed the twenty. In case of banking not more ten.

4.Profit and Loss Distribution :-The basic aim of partnership is to earn profit. This profit is distributed among the partners according their agreement. In case of loss also all the partners share in it.

5.Business:-The object of the partnership it to carry on the business. It may be production or trading.

It

should

be

according 1

the

laws

of

the

state.

REENA MEHTA COLLEGE OF COMMERCE AND MANAGEMENT SUBJECT: BUSINESS LAW (INDIAN PARTNERSHIP ACT,1932)

6.Unlimited Liability :-The liability of the partner is not limited to his invested amount. In case of loss the private property of the partner also used to pay the business obligations.

7.Entity :-Law has not granted it any legal entity, it is not independent from the partners. It has not separate entity from its members.

8.Share in Capital :-According to the agreement every partner contributes his share. It is not necessary all the partners should contribute equally. Some people provide only skill and ability to become a partner.

9. Management :-All the partners can participate actively in the business management. Sometimes

only

few

persons

are

allowed

to

handle

the

business

affairs.

10.Payment of Tax :-Every partner pays the tax on his share of profit individually.

11.Co-Operation :-For the successful partnership mutual co-operation and mutual confidence is an important factor.

12.No Audit :-In the partnership there is no restriction for the audit of accounts. So this type of organization may operate freely.

13. Partners are Agent :-Every partner stand as an agent and principal to one another. In the position of an agent one can do contract with other parties on behalf of the firm.

14.Transferability of Shares :-No one partner can transfer his share to any other person without the consent of the existing partners. 2

REENA MEHTA COLLEGE OF COMMERCE AND MANAGEMENT SUBJECT: BUSINESS LAW (INDIAN PARTNERSHIP ACT,1932)

15. Dissolution :-It is a temporary form of business. It operates at the pleasure of the partners. It is dissolved if a partner leaves, dies or declared bankrupt or insane. Partners can also dissolve it by obtaining the degree from the court. Q.2 What are the advantages and dis-advantages of Partnership Firm? Ans. Advantages:

1. Easy Formation: Partnership is a contractual agreement between the partners to run an enterprise. Hence, it is relatively ease to form. Legal formalities associated with formation are minimal. Though, the registration of a partnership is desirable, but not obligatory. 2. More Capital Available: We have just seen that sole proprietorship suffers from the limitation of limited funds. Partnership overcomes this problem, to a great extent, because now there are more than one person who provide funds to the enterprise. It also increases the borrowing capacity of the firm. Moreover, the lending institutions also perceive less risk in granting credit to a partnership than to a proprietorship because the risk of loss is spread over a number of partners rather than only one. . 3. Combined Talent, Judgement and Skill: As there are more than one owners in partnership, all the partners are involved in decision making. Usually, partners are pooled from different specialised areas to complement each other. For example, if there are three partners, one partner might be a specialist in production, another in finance and the third in marketing. This gives the firm an advantage of collective expertise for taking better decisions. Thus, the old maxim of “two heads being better than one” aptly applies to partnership.

3

REENA MEHTA COLLEGE OF COMMERCE AND MANAGEMENT SUBJECT: BUSINESS LAW (INDIAN PARTNERSHIP ACT,1932) 4. Diffusion of Risk: You have just seen that the entire losses are borne by the sole proprietor only but in case of partnership, the losses of the firm are shared by all the partners as per their agreed profit-sharing ratios. Thus, the share of loss in case of each partner will be less than that in case of proprietorship. 5. Flexibility: Like proprietorship, the partnership business is also flexible. The partners can easily appreciate and quickly react to the changing conditions. No giant business organisation can stifle so quick and creative responses to new opportunities. 6. Tax Advantage: Taxation rates applicable to partnership are lower than proprietorship and company forms of business ownership. Disadvantages:

1. Unlimited Liability: In partnership firm, the liability of partners is unlimited. Just as in proprietorship, the partners’ personal assets may be at risk if the business cannot pay its debts. 2. Divided Authority: Sometimes the earlier stated maxim of two heads better than one may turn into “too many cooks spoil the broth.” Each partner can discharge his responsibilities in his concerned individual area. But, in case of areas like policy formulation for the whole enterprise, there are chances for conflicts between the partners. Disagreements between the partners over enterprise matters have destroyed many a partnership. 3. Lack of Continuity: Death or withdrawal of one partner causes the partnership to come to an end. So, there remains uncertainty in continuity of partnership. 4

REENA MEHTA COLLEGE OF COMMERCE AND MANAGEMENT SUBJECT: BUSINESS LAW (INDIAN PARTNERSHIP ACT,1932) 4. Risk of Implied Authority: Each partner is an agent for the partnership business. Hence, the decisions made by him bind all the partners. At times, an incompetent partner may lend the firm into difficulties by taking wrong decisions. Risk involved in decisions taken by one partner is to be borne by other partners also. Choosing a business partner is, therefore, much like choosing a marriage mate life partner. Q.3 Discuss Kinds of Partnership? Ans. There are two factors on the basis of which partnership is classified. One is on the basis of duration and on the basis of liability. On the basis of duration, it is classified into 1. Partnership at will- This kind of partnership can be formed and closed on the will of the partners. It can continue as long as the partners want and can end on the wish of the partners. 2. Particular partnership- There are certain kinds of partnership which come into formation for certain purposes. For example, a particular project for construction of a building is called particular partnership. On the basis of liability, it is classified into 1. General partnership- In this liability of partners is unlimited as well as joint. The partners have right to participate in management and their acts are binding on each other. Registration is optional. 2. Limited partnership- In this liability of at least one partner is unlimited whereas rest has limited liability. The partners don’t have right to participate in the management. Registration is compulsory for this. Q.4 What are the different types of partners? Ans. The different kinds of Partners that are found in Partnership Firms are as follows! 5

REENA MEHTA COLLEGE OF COMMERCE AND MANAGEMENT SUBJECT: BUSINESS LAW (INDIAN PARTNERSHIP ACT,1932) 1. Active or managing partner: A person who takes active interest in the conduct and management of the business of the firm is known as active or managing partner.He carries on business on behalf of the other partners. If he wants to retire, he has to give a public notice of his retirement; otherwise he will continue to be liable for the acts of the firm. 2. Sleeping or dormant partner: A sleeping partner is a partner who ‘sleeps’, that is, he does not take active part in the management of the business. Such a partner only contributes to the share capital of the firm, is bound by the activities of other partners, and shares the profits and losses of the business. A sleeping partner, unlike an active partner, is not required to give a public notice of his retirement. As such, he will not be liable to third parties for the acts done after his retirement. 3. Nominal or ostensible partner: A nominal partner is one who does not have any real interest in the business but lends his name to the firm, without any capital contributions, and doesn’t share the profits of the business. He also does not usually have a voice in the management of the business of the firm, but he is liable to outsiders as an actual partner. 4.Sleeping vs. Nominal Partners: It may be clarified that a nominal partner is not the same as a sleeping partner. A sleeping partner contributes capital shares profits and losses, but is not known to the outsiders.A nominal partner, on the contrary, is admitted with the purpose of taking advantage of his name or reputation. As such, he is known to the outsiders, although he does not share the profits of the firm nor does he take part in its management. Nonetheless, both are liable to third parties for the acts of the firm. 5. Partner by estoppel or holding out: If a person, by his words or conduct, holds out to another that he is a partner, he will be stopped from denying that he is not a partner. The person who thus becomes liable to third parties to pay the debts of the firm is known as a holding out partner. 6

REENA MEHTA COLLEGE OF COMMERCE AND MANAGEMENT SUBJECT: BUSINESS LAW (INDIAN PARTNERSHIP ACT,1932) There are two essential conditions for the principle of holding out : (a) the person to be held out must have made the representation, by words written or spoken or by conduct, that he was a partner ; and (6) the other party must prove that he had knowledge of the representation and acted on it, for instance, gave the credit. 6. Partner in profits only: When a partner agrees with the others that he would only share the profits of the firm and would not be liable for its losses, he is in own as partner in profits only. 7. Minor as a partner: A partnership is created by an agreement. And if a partner is incapable of entering into a contract, he cannot become a partner. Thus, at the time of creation of a firm a minor (i.e., a person who has not attained the age of 18 years) cannot be one of the parties to the contract. But under section 30 of the Indian Partnership Act, 1932, a minor ‘can be admitted to the benefits of partnership’, with the consent of all partners. A minor partner is entitled to his share of profits and to have access to the accounts of the firm for purposes of inspection and copy.He, however, cannot file a suit against the partners of the firm for his share of profit and property as long as he remains with the firm. His liability in the firm will be limited to the extent of his share in the firm, and his private property cannot be attached by creditors.On his attaining majority, he has to decide within six months whether he will become regular partner of withdraw from partnership. The choice in either case is to be intimated through a public notice, failing which he will be treated to have decided to continue as partner, and he becomes personally liable like other partners for all the debts and obligations of the firm from the date of his admission to its benefits (and not from the date of his attaining the age of majority). He also becomes entitled to file a suit against other partners for his share of profit and property. Q.3 What is Registration Process and Effects of Non Registration? Ans. The Indian Partnership Act does not make registration of a firm compulsory nor does it impose any penalty for non-registration. It is optional for the firm to get itself registered or not. However, Section 69 puts down certain disabilities to a non-registered firm which normally 7

REENA MEHTA COLLEGE OF COMMERCE AND MANAGEMENT SUBJECT: BUSINESS LAW (INDIAN PARTNERSHIP ACT,1932) forces the partners the partners to get the firm registered. The effects of non-registration are as follows: (a) No suit by a partner against other partners or firm – a partner of a unregistered firm cannot sue the firm or any partner of the firm to enforce a right arising from the contract or conferred by the Partnership Act. He can do so only if the firm is registered and the person suing is shown as a partner in the register of firms. (b) No suit against any third party – an unregistered firm cannot sue a third party to enforce a right arising from a contract. (c) No right to counter claim or to claim setoff – an unregistered firm or any partner thereof cannot claim setoff in the proceedings instituted against a firm by a third party to enforce a right arising from a contract. Setoff means a claim by the firm which would reduce the amount of money payable to the claimant. (d) Arbitration proceedings – In arbitration proceedings it will be barred if the firm was unregistered. Q.4 Explain rights and duties of partners under Partnership Act 1932? Ans. Rights of Partners: (a) Every partner has a right to take part in the conduct and management of business. (b) Every partner has a right to be consulted and heard in all matters affecting the business of the partnership. (c) Every partner has a right of free access to all records, books and accounts of the business, and also to examine and copy them. (d) Every partner is entitled to share the profits equally. (e) A partner who has contributed more than the agreed share of capital is entitled to interest at the rate of 6 per cent per annum. But no interest can be claimed on capital. 8

REENA MEHTA COLLEGE OF COMMERCE AND MANAGEMENT SUBJECT: BUSINESS LAW (INDIAN PARTNERSHIP ACT,1932) (f) A partner is entitled to be indemnified by the firm for all acts done by him in the course of the partnership business, for all payments made by him in respect of partnership debts or liabilities and for expenses and disbursements made in an emergency for protecting the firm from loss provided he acted as a person of ordinary prudence would have acted in similar circumstances for his own personal business. (g) Every partner is, as a rule, joint owner of the partnership property. He is entitled to have the partnership property used exclusively for the purposes of the partnership. (h) A partner has power to act in an emergency for protecting the firm from loss, but he must act reasonably. (i) Every partner is entitled to prevent the introduction of a new partner into the firm without his consent. (J) Every partner has a right to retire according to the Deed or with the consent of the other partners. If the partnership is at will, he can retire by giving notice to other partners. (k) Every partner has a right to continue in the partnership. (l) A retiring partner or the heirs of a deceased partner are entitled to have a share in the profits earned with the aid of the proportion of assets belonging to such outgoing partner or interest at six per cent per annum at the option of the outgoing partner (or his representative) until the accounts are finally settled. Duties of Partners: (a) Every partner is bound to diligently carry on the business of the firm to the greatest common advantage. Unless the agreement provides, there is no salary. (b) Every partner must be just and faithful to the other partners.

9

REENA MEHTA COLLEGE OF COMMERCE AND MANAGEMENT SUBJECT: BUSINESS LAW (INDIAN PARTNERSHIP ACT,1932) (c) A partner is bound to keep and render true, proper, and correct accounts of the partnership and must permit other partners to inspect and copy such accounts. (d) Every partner is bound to indemnify the firm for any loss caused by his willful neglect or fraud in the conduct of the business. (e) A partner must not carry on competing business, nor use the property of the firm for his private purposes. In both cases, he must hand over to the firm any profit or gain made by him but he must himself suffer any loss that might have occurred. (f) Every partner is bound to share the losses equally with the others. (g) A partner is bound to act within the scope of his authority. (h) No partner can assign or transfer his partnership interest to any other person so as to make him a partner in the business. Q.5 Explain dissolution provisions related to Partnership Act ,1932?

Ans. The dissolution of a firm means discontinuance of its activities. When the working of a firm is stopped and the assets are realised to pay various liabilities it amounts to dissolution of the firm. The dissolution of a firm should not be confused with the dissolution of partnership. When a partner agrees to continue the firm under the same name, even after the retirement or death of a partner, it amounts to dissolution of partnership and not of firm. The remaining partners may purchase the share of the outgoing or deceased partner and continue the business under the same name; it involves only the dissolution of partnership. The dissolution of firm includes the dissolution of partnership too. The partners have a contractual relationship among themselves. When this relationship is terminated it is an end of the firm. A firm may be dissolved under the following circumstances: 10

REENA MEHTA COLLEGE OF COMMERCE AND MANAGEMENT SUBJECT: BUSINESS LAW (INDIAN PARTNERSHIP ACT,1932) (a) Dissolution by Agreement : A partnership firm can be dissolved by an agreement among all the partners. Section 40 of Indian Partnership Act, 1932 allows the dissolution of a partnership firm if all the partners agree to dissolve it. Partnership concern is created by agreement and similarly it can be dissolved by agreement. This type of dissolution is known as voluntary dissolution. (b) Dissolution by Notice : If a partnership is at will, it can be dissolved by any partner giving a notice to other partners. The notice for dissolution must be in writing. The dissolution will be effective from the date of the notice, in case no date is mentioned in the notice, and then it will be dissolved from the date of receipt of notice. A notice once given cannot be withdrawn without the consent of all the partners. (c) Compulsory Dissolution : A firm may be compulsorily dissolved under the following situations: (i) Insolvency of Partners: When all the partners of a firm are declared insolvent or all but one partner are insolvent, then the firm is compulsorily dissolved. (ii) Illegal Business: The activities of the firm may become illegal under the changed circumstances. If government enforces prohibition policy, then all the firms dealing in liquor will have to close down their business because it will be an unlawful activity under the new law. Similarly, a firm may be trading with the businessmen of another country. The trading will be lawful under present conditions.

11

REENA MEHTA COLLEGE OF COMMERCE AND MANAGEMENT SUBJECT: BUSINESS LAW (INDIAN PARTNERSHIP ACT,1932) After some time a war erupts between the two countries, it will become a trading with an alien enemy and further trading with the same parties will be illegal. Under new circumstances the firm will have to be dissolved. In case a firm carries on more than one type of business, then illegality of one work will not amount to dissolution of the firm. The firm can continue with the activities which are lawful. (d) Contingent Dissolution : In case there is no agreement among partners regarding certain contingencies, partnership firm will be dissolved on the happening of any of the situations: (i) Death of a Partner: A partnership firm is dissolved on the death of any of the partner. (ii) Expiry of the Term: A partnership firm may be for a fixed period. On the expiry of that period, the firm will be dissolved. (iii) Completion of Work: A partnership concern may be formed to carry out a specified work. On the completion of that work the firm will be automatically dissolved. If a firm is formed to construct a road, then the moment the road is completed the firm will be dissolved. (iv) Resignation by a Partner: If a partner does not want to continue in the firm, his resignation from the concern will dissolve the partnership. (e) Dissolution through Court : A partner can apply to the court for dissolution of the firm on any of these grounds: 12

REENA MEHTA COLLEGE OF COMMERCE AND MANAGEMENT SUBJECT: BUSINESS LAW (INDIAN PARTNERSHIP ACT,1932) (i) Insanity of a Partner: If a partner goes insane, the partnership firm can be dissolved on the petition of other partners. The firm is not automatically dissolved on the insanity of a partner. The court will act only on the petition of a partner who himself is not insane. (ii) Misconduct by the Partner: When a partner is guilty of misconduct, the other partners can move the court for dissolution of the firm. The misconduct of a partner brings bad name to the firm and it adversely affects the reputation of the concern. The misconduct can be in business or otherwise. If a partner is jailed for committing a theft, it will also affect the good name of the firm though it has nothing to do with the business. (iii) Incapacity of a Partner: If a partner other than the suing partner becomes incapable of performing his duties, then partnership can be dissolved. (iv) Breach of Agreement: When a partner wilfully commits breach of agreement relating to business, it becomes a ground for getting the firm dissolved. Under such a situation it becomes difficult to carry on the business smoothly. (v) Transfer of Share: If a partner sells his share to a third party or transfers his share to another person permanently, other partners can move the court for dissolving the firm. (vi) Regular Losses:

13

REENA MEHTA COLLEGE OF COMMERCE AND MANAGEMENT SUBJECT: BUSINESS LAW (INDIAN PARTNERSHIP ACT,1932) When the firm cannot be carried on profitably, then the firm can be dissolved. Though there may be losses in every type of business but if the firm is incurring losses continuously and it is not possible to run it profitably, then the court can order the dissolution of the firm. (vii) Disputes among Partners: Partnership firm is based on mutual faith. If partners do not trust each other, then it will not be possible to run the business. When the partners quarrel with each other, then the very basis of partnership is lost and it will be better to dissolve it.

Q.6 Distinguish between Limited liability partnership and Partnership firm SR. NO.

PARTICULAR

1.

Governing Law

2 3 4

5 6

7

8

LIMITED LIABILITY PARTNERSHIP FIRM PARTNERSHIP

The Limited Liability Partnership Act, 2008 and various Rules made thereunder Registration Compulsory Creation Created by law Separate Legal It is separate legal entity, Entity separate from its partners\ designated partners. Perpetual It has perpetual succession. succession Purchase of LLP can also purchase movable / Property immovable property in its name

The Indian Partnership Act, 1932 and various Rules made thereunder Optional Created by contract It is not separate legal entity from partners. Partners are collectively referred as firm. It does not have perpetual succession. Partnership firm cannot purchase movable / immoveable property in its name. the same must be purchased in the name of partners. Common Seal It denotes the signature of the Not required Company and LLP may have its own common seal, if it besides to have one. Formalities of Various documents / declarations Partnership deed along with Incorporation executed in prescribed formats form/ affidavit required to be 14

REENA MEHTA COLLEGE OF COMMERCE AND MANAGEMENT SUBJECT: BUSINESS LAW (INDIAN PARTNERSHIP ACT,1932)

9

Time line

10

Expenses formation

11

Legal Proceeding Taxation

12 13

14

15

16

17 18

19

20

21

pre-filled in designated e-forms are required to be filed with ROC along with filing fee. It will take approx. 20 days to incorporate ( inclusive of time taken to obtain DPIN) for Minimum Statutory fee for incorporation of LLP is Rs. 1500/- and Maximum fee for incorporation of LLP is Rs. 7000/- (approx.) LLP can also sue and be sued

filed with Registrar of firms along with requisite filing fees. It will take approx. 7 days to incorporate. Minimum Statutory Fee does not exceed to Rs. 500/- and Maximum Statutory Fee is Rs. 5000/-

Only registered partnership can sue. Its status in unclear, pending It is a separate taxable entity changes in income tax act. Name Suffix ‘LLP’ or Limited No such requirement. Liability Partnership has to be added to the name. Change of name The name of the LLP can be The name of the Partnership changed with the prior approval firm can be changed of Central Government. Ownership of The LLP has ownership of assets Partners have joint ownership Assets and Partners only have capital of all the assets contribution in the LLP Liability Liability of partners is limited Liability of partners is upto their capital contribution unlimited however in case a partners acts with an intension to conduct fraud, they are personally liable. Agency Partners are agents of LLP Partners are agents of the firm Relationship and each other Digital Signature Atleast one designated partner of Not Applicable. Documents the LLP should have their are filed manually. Digital signature. Digital signature is a pre-requisite for efiling. Minimum Minimum two partners Minimum two partner Number of Member Maximum No cap of maximum number of Maximum 10 for banking number of its partners business and 20 for other Member business. Designated Minimum two designated partner No cap on the minimum 15

REENA MEHTA COLLEGE OF COMMERCE AND MANAGEMENT SUBJECT: BUSINESS LAW (INDIAN PARTNERSHIP ACT,1932) partner/ Director/ Managing Partner

number of Managing partner

16