A partnership is the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting or all. In India it is governed by the Indian Partnership Act, 1932, which extends to the whole of India except the State of Jammu and Kashmir. It came into force on 1st October 1932.
A partnership agreement can be entered into between persons who are competent to contract. Every person who is of the age of majority according to the law to which he is subject and who is of sound mind and is not disqualified from contracting by any law to which he is subject can enter into a partnership.
The following can enter into a partnership
- HINDU UNDIVIDED FAMILY
- INDIVIDUAL: An individual, who is competent to contract, can become a partner in the partnership firm. If there are more than two partners in a firm, an individual can be a partner in his individual capacity as well as in a representative capacity as Karta of the Hindu undivided family.
- FIRM: A partnership firm is not a person and therefore a firm can not enter into partnership with any firm or individual. But a partner of the partnership firm can enter into partnership with other persons and he can share the profits of the said firm with his other co-partners of the parent firm.
- HINDU UNDIVIDED FAMILY: A Karta of the Hindu undivided family can become a partner in a partnership in his individual capacity, provided the member has contributed his self acquired or personal skill and labour.
- COMPANY: A company is a juristic person and therefore can become a partner in a partnership firm, if it is authorised to do so by its objects.
- TRUSTEES: Trustees of private religious trust, family trust and trustees of Hindu mutts or other religious endowments are juristic persons and can therefore enter into partnership, unless their constitution or objects forbid.
NUMBER OF PARTNERS
The number of partners in a firm shall not exceed 20 and a partnership having more than 20 persons is illegal. When there is partnership between two firms, all the partners of each firm will be taken into account. If the partnership is between the karta or member of Hindu undivided family the members of the joint Hindu family will not be taken into account.
- Essentials of Partnership
- AGREEMENT- The relationship between partners arises from contract and not status. If after the death of sole proprietor of a firm, his heirs inherit firm they do not become partners, as there is no agreement between them.
- SHARING OF PROFITS- The partners may agree to share profits out of partnership business, but not share the losses. Sharing of losses is not necessary to constitute the partnership. The partners may agree to share the profits of the business in any way they like.
- BUSINESS- Business includes every trade, occupation, or profession. There must be course of dealings either actually continued or contemplated to be continued with a profit motive and not for sport or pleasure.
- RELATION BETWEEN PARTNERS- The partner while carrying on the business of the partnership acts a principle and an agent. He is a principal because he acts for himself, and he is an agent as he simultaneously acts for the rest of the partners.
General duties of a partner
- Subject to a contract to the contrary between the partners the following are the duties of a partner.
- To carry on the business of the firm to the greatest common advantage. Good faith requires that a partner shall not obtain a private advantage at the expense of the firm. Where a partner carries on a rival business in competition with the partnership, the other partners are entitled to restrain him.
- To be just and faithful. Partnership as a rule is presumed to be based on mutual trust and confidence of each partner, not only in the skill and knowledge, but also in the integrity, of each other partner
- To render true accounts and full information of all things done by them to their co-partners.
- To indemnify for loss caused by fraud. Every partner shall indemnify the firm for loss caused to it by his fraud in the conduct of the business of the firm.
- Not to carry on business competing with the firm. If a partner carries on any business of the same nature as and competing with that of the firm, he shall account for and pay to the firm all profits made by him in that business.
- To indemnify the firm for wilful neglect of a partner. A partner shall indemnify the firm for any loss caused to it by his wilful neglect in the conduct of the business of the firm.
- To carry out the duties created by the contract. The partners are bound to perform all the duties created by the agreement between the partners.
Rights of the partnersSubject to a contract to the contrary a partner has the following rights.
- To take part in the conduct and management of the business
- To express opinion in matters connected with the business. He has a right to be consulted and heard in all matters affecting the business of the firm
- To have free access to all the records, books of account of the firm and take copy from them.
- To share in the profits of the business. Every partner is entitled to share in the profits in proportion agreed to between the parties.
- To get interest on the payment of advance. Where a partner makes for he purpose of the business, any payment or advance beyond the amount of capital he has agreed to subscribe, he is entitled to interest thereon at the rate of 6% per annum.
- To be indemnified by the firm against losses or expenses incurred by him for the benefit of the firm.
Restrictions on authority of partnerRestrictions are governed by Contract and by the Partnership Act The partners may by contract extend or restrict the implied authority of any partner.Under the Partnership Act in the absence of any usage of trade to the contrary, the implied authority of a partner does not empower him to do the following acts:
- Submit a dispute relating to the business of a firm to arbitration
- Open a bank account in his own name
- Compromise or relinquish any claim of the firm
- Withdraw a suit or proceeding on behalf of the firm
- Admit any liability in a suit or proceeding against the firm
- Acquire immovable property on behalf of the firm
- Transfer immovable property belonging to the firm, or
- Enter into partnership on behalf of the firm.
Rights of a Minor
Dissolution of a firmA firm may be dissolved in the following manner
- Dissolution by Court
- Dissolution by agreement
- Dissolution by operation of law
- Dissolution on the happening of certain contingencies
- Dissolution by notice
DISSOLUTION BY COURTThe court may dissolve a firm at the suit of any partners on any of the following grounds namely:
- INSANITY OF A PARTNER: that a partner has become of unsound mind. The insanity of a partner does not ipso facto dissolve the firm and the next friend or continuing partners has to file suit foe dissolution.
- PERMANENT INCAPACITY OF A PARTNER: that a partner has become permanently incapable of performing his duties as partner.
- CONDUCT AFFECTING PREJUDICIALLY THE BUSINESS: that a partner is guilty of conduct, which is likely to affect prejudicially the carrying on the business of the firm.
- BREACH OF PARTNERSHIP AGREEMENT:that a partner wilfully or persistently commits breach of agreements relating to the management of the affairs of the firm or the conduct of it's business or otherwise conducts himself in matters relating to the business, that it is not reasonably practical for the other partners to carry on the business with him.
- TRANSFER OF INTEREST OF A PARTNER: that a partner has in any way transferred the whole of his interest in the firm to a third party.
- LOSS: that the business of the firm cannot be carried on save at a loss
- JUST AND EQUITABLE: on any other ground that renders it just an equitable that the firm should be dissolved.
DISSOLUTION BY AGREEMENT
A firm may be dissolved with the consent of all the partners or in accordance with the contract between the partners. The partnership agreement may contain a proviso that the firm will be dissolved on the happening of certain contingency.
DISSOLUTION BY OPERATION OF LAW
- A firm is compulsorily dissolved on the following grounds
- Insolvency of partners
- By the happening of any event which makes it unlawful for the business of the firm to e carried on.
DISSOLUTION ON THE HAPPENING OF CERTAIN CONTINGENCIES
Subject to contract between the partners a firm is dissolved on the happening of the following contingencies.
- If constituted for a fixed term, by the expiry of that term
- If constituted to carry out one or more adventures or undertakings, by its completion.
- By the death of a partner
- On insolvency of a partner
DISSOLUTION BY NOTICE
If the partnership is at will, the same may be dissolved by service of a notice by one partner to dissolve the firm.
It is not compulsory to register the firm. However there are serious effects of non-registration.
No suit to enforce a right arising from a contract or conferred by the Indian Partnership Act shall be instituted in any court by or on behalf of any person suing as partner in a firm against the firm or any person suing as a partner in a firm against the firm or any person alleged to be or to have been a partner in the firm, unless the firm is registered and the person suing is or has been shown on the Register of firms as a partner in the firm.
Similarly, no suit to enforce a right rising from a contract shall be instituted in any court by or on behalf of a firm against any third party unless the firm is registered.
PROCEDURE FOR REGISTRATION
The registration of a firm may be effected at any time by sending by post or delivering to the Registrar of Firms of the area in which any place of business of the firm is situated or proposed to be situated, a statement in the prescribed form and accompanied by the prescribed fee, stating:
the firm name;
- the place or principal place of business of the firm;
- the names of any other places where the firm carries on business;
- the date when each partner joined the firm;
- the names in full and permanent addresses of the partners; and
- the duration of the firm.
behalf. Each person signing the statement shall also verify in the manner prescribed.
A firm name shall not contain any of the following words viz. "Crown", "Emperor", "Empress", "Empire", "Imperial", "King", "Queen", "Royal", or words expressing or implying the sanction, approval or patronage of Government, except when the State Government signifies its consent to the use of such words as part of the firm name by order in writing.
All the States have framed rules prescribing the forms, fee for registration and verification of the statement. The application for registration has to be made to the Registrar of Firms in the prescribed form.
When the Registrar is satisfied that the provisions have been complied with, he shall record and entry of the statement in a register called the Register of Firms and shall file the statement. The Registrar is the competent authority and if he acts bona fide and follows the procedure, his satisfaction cannot be challenged.
CHECKLIST FOR DRAFTING A PARTNERSHIP DEED
A partnership deed should contain the following clauses
- Name of the parties
- Nature of business
- Duration of partnership
- Name of the firm
- Share of partners in profits and losses
- Banking, Account firm
- Books of account
- Powers of partners
- Retirement and expulsion of partners
- Death of partner
- Dissolution of firm
- Settlement of disputes
- How to draft a Partnership Deed