Partnership Definition
According to section 4 of the Indian Partnership Act, 1932, a partnership is an agreement between two or more people to share the profits of a business. The people who form a partnership are called partners, and the business is called a firm.
Can Partnership be formed from Status?
According to Section 5 of the Indian Partnership Act 1932, the relation of partnership arises from contract and not from status. Thus, the members of a Hindu Joint Family carrying on a business, or the co-owners of a business are not ‘partners’ because HUF and co-ownership are created by operation of law and not by contract. The agreement of partnership may be expressed or implied.
Partnership can be formed only for the purpose of carrying on some business. Section 2(b) of Partnership Act says that the term ‘business’ includes every trade, occupation or profession.
Minor as a Partner in a Partnership Firm
Section 30 of the Indian Partnership Act 1932 states that
(1) A minor may not be a partner in a firm, but, with the consent of all the partners for the time being, he may be admitted to the benefits of partnership.
Rights and liabilities of Minor in a Partnership Firm
(2) The minor has right to share of the profit and property of the firm as per the agreement. The minor partner also has access to and inspect and copy any of the accounts of the firm.
(3) The minor partner's share is liable for the acts of the firm, but the minor is not personally liable for any such act.
(4) Such minor may not sue the partners for an account or payment of his share of the property or profits of the firm.
(5) Upon attaining majority the partner may choose to become a partner or may opt out of the partnership firm with a written notice within 6 months of attaining majority.
Effect of non registration of a partnership firm
Section 69 of the Indian Partnership Act, 1932 offers a detailed explanation of the consequences of not opting for firm registration. These are:
(1) An unregistered firm cannot bring any suit in a civil court against any third party for breach of contract. Further, the person filing the suit on behalf of the firm should be in the register of the firm as a partner.
(2) An unregistered firm or its partners cannot set-off an action having a value equal to or greater than Rs. 100 brought in by any third party.
(3) No partner can bring legal action against other partners or the firm if the firm is not registered.
(4) A third party can sue the firm even if it is not registered as per the act.
Types (Modes) of Partnerships
A partnership may be of different types depending on the state where the business operates. Few most common types of partnerships are discussed below:
General Partnership
A partnership firm comprising of two or more partners having equal rights and liabilities, is called general partnership. All partners can participate in management activities, decision making, and have the right to control the business. Similarly, profits, debts, and liabilities are equally shared and divided equally.
Limited Partnership
Limited partnership is formed with both general and limited partners. The limited partner has limited share of profit and liabilities. Limited partners have limited control over the business (limited to his investment). They are not associated with the day to day operations of the firm. In most of the cases, the limited partners only invest and take a profit share. They do not have any interest in participating in management or decision making.
Different modes of reconstitution of Partnership Firm
Limited Liability Partnership
A limited liability partnership (LLP) is a flexible legal entity where every partner has a limited personal liability for the debts or claims of the partnership. Each partner is guarded against other partners legal and financial mistakes. A limited liability partnership is almost similar to a Limited Liability Company (LLC) but different from a limited partnership or a general partnership.
Partnership at Will
Partnership at Will can be defined as when there is no clause mentioned about the expiration of a partnership firm. Under section 7 of the Indian Partnership Act 1932, the two conditions that have to be fulfilled by a firm to become a Partnership at Will are:
(i) The partnership agreement should not have any fixed expiration date.
(ii) No particular determination of the partnership should be mentioned.
Difference between Partnership and Company
Dissolution of a Partnership Firm
Section 39 of Indian Partnership Act, 1932 provides methods of dissolution of partnership among all the partners of a firm. Dissolution involves winding up of business, disposal of assets and paying off the liabilities and distribution of any surplus or loss by the partners of the firm. As per the Act, a partnership firm may be dissolved in the following ways:
(1) Dissolution by Agreement
A firm may be dissolved with:
a) the consent of all the partners, or
b) the contract between the partners
(2) Compulsory Dissolution
A firm may be dissolved by:
a) the adjudication of all the partners or of all partners but one as insolvent
b) happening of an event or change in government policies that make the business unlawful.
(3) Dissolution on the happening of Certain Contingencies
Subject to the contract between the partners, a firm is dissolved
a) if formed for a specific period then on the expiry of the period
b) if formed for a specific purpose then on completion of the purpose
c) on the death of partner/partners
d) on insolvency of a partner/partners
(4) Dissolution by Notice
If partnership is at will then the partnership firm is dissolved if any partner giving notice in writing to all the other partners expressing his/her intention to dissolve the firm.
(5) Dissolution by Court
The court may order to dissolve a partnership firm when:
a) a partner becomes insane or lunatic.
b) a partner becomes permanently incapable of performing the duties.
c) a partner is guilty of misconduct and affects the business activities.
d) a partner repeatedly breaks the terms of agreement .
e) a partner transfers his interest to a third party without the consent of other partners.
f) a business persistently incurs losses.
Rights of Outgoing Partner
A partner who leaves a running partnership firm is an outgoing partner. Rights of such outgoing partner is discussed below:
(1) Right to Carry on a Competing Business
Section 36 (1) of the Indian Partnership Act, 1932 (Partnership law), imposes certain restrictions but allows an outgoing partner to carry on a business and advertise it, which competes with the partnership firm. However, it restricts him from:
- Using the name of the partnership firm
- Representing himself as a partner of the firm
- Soliciting the custom of persons who were dealing with the firm before he ceased to be a partner.
(2) Right to Share Subsequent Profits
According to Section 37, of the Partnership Law, if a member of the firm dies or otherwise ceases to be a partner of the firm, and the remaining partners carry on the business without any final settlement of accounts between them and the outgoing partner, then the outgoing partner or his estate is entitled to share of the profits made by the firm since he ceased to be a partner.
The surviving partners also have an option of purchasing the interest of the deceased or outgoing partner. If the surviving partners choose to purchase the interest, then the outgoing partner is not entitled to any further share in profits of the firm.
Q. Can partnership be created from status? [4 marks - 2015]
Q. Partnership is created from a contract and not from status.” Discuss. [10 marks - 2015]
Q. Can a Minor be admitted in Partnership firm? If yes, explain his rights and duties. [20 marks - 2015]
Q. Distinguish between a partnership and a company. [4 marks - 2016]
Q. Write down the effect of non-registration of a partnership firm. [10 marks - 2016]
Q. Under what circumstances a minor can be admitted in a partnership business? Discuss his rights and liabilities. [20 marks - 2016]
Q. Partnership at will. [4 marks - 2017]
Q. “Partnership is created by contract not by status”. Discuss. [10 marks - 2017]
Q. Define partnership [4 marks - 2022]
Q. Limited Liability Partnership. [4 marks - 2022]
Q. Elaborate the right of outgoing partner. [10 marks - 2022]
Q. What are various modes of dissolution of partnership firm? What are the consequences of dissolution? [20 marks - 2022]
Q. What are the effect of non-registration of a firm? [2022 - 4 marks - BA LLB]
Q. Define Partnership. Discuss different modes for determining existence of a partnership. [2022- 20 marks - BA LLB]
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