Partnership Act is known as the extended version of Indian Contract Act as originally partnership act was part of the contract act, but there were many parts which needed attention and the provisions stated in the contract act were not sufficient, thus it was repealed from contract act and a new act, Indian Partnership Act, 1932 was enacted. Some of the basic concepts of the Act are still governed by the contract act where the Partnership Act is silent. Further, it was also explicitly mentioned that the provisions which were not repealed in the prior act will still be applicable on partnership act, unless there is some section in Partnership Act which is in contradiction to the same.
Some of the common provisions of Contract that are relevant to partnership are capacity to contract, offer, acceptance of agreement and many more. But there are variations with regard to benefits availed by a minor as there is specific section in Partnership Act which talks about the position of minor as a partner.
Partnership can be known as a business organization where there are two or more people who come together to carry out a business in order to make profits. Partnership can be regarded as extension of sole proprietorship and this is better than sole proprietorship as business is not carried out by just one person and more capital is invested as compared to sole proprietorship. In partnership there are two or more persons joining hands to invest their capital to run a business by forming a partnership agreement between them.
Partnership is defined under section 4 of the Partnership Act, 1932 where it is stated that “Partnership is the relation between persons who have agreed to share the profits of a business carried out by all or anyone of them acting on behalf of all.”
Let’s learn about the essential elements of a partnership, which are necessary to make a partnership legal and carry out business.
Elements of Partnership
Partnership can be known as an official relation between two or more persons, who are agreeing to share the profits of business run by all of them or one of them acting on behalf of all of them. One must be aware of the elements of a partnership which are as follows-
1. Contract for partnership
There has to be contract signed to confirm partnership as it is clearly mentioned that partnership involves association of two or more persons and no partnership arises from operation of law or is hereditary in nature. It is voluntary agreement between two or more persons through legal contract. The agreement between the parties can be written or oral and sometimes continuous actions and mutual understanding between the parties can also be implied as an agreement.
2. Association of two or more person
As said above there has to be association of two or more person to form a partnership agreement, and the law explicitly states that it can be only persons (individuals) and not any firm. The legislation has also prohibited minors from being partners, but as per the partnership act, the minors can be admitted as the beneficiary of partnership.
Even though partnership act doesn’t mention the total or maximum numbers of partners but this aspect has been covered in the companies act 2013, where it is stated that partnership in a banking firm can have upto 10 partners and partnership in other kinds of firm can have upto 20 partners.
3. Ongoing business
As per this essential the partnership should be based on an ongoing business which the partners are continuing to earn profits and business may include any kind of trade, profession or occupation where the partners are involved for carrying out that business. In short there should be some business being carried out or in existence.
The business should also be running on profit motive and the ultimate aim of the business should be to make profits and gains from the business which will be distributed between the partners. Thus, if there is a firm carrying out some charity or social work then it cannot be a partnership firm as there is no intention to earn profits from their business.
4. Sharing of profits
After earning profits from the business, it needs to be distributed among the partners accordingly as this is the whole objective behind forming the partnership and running a business to earn profits and share them accordingly. The ratio of the profits may differ from partner to partner as their involvement in the business decides what share they are entitled to or as per stated in the agreement.
However, one thing should be kept in mind that profits need to be shared but sharing losses is not necessary and it depends on the partners whether their losses needs to be shared by all partners or as stated by the agreement or it will be borne by the partner who is responsible for the loss. In case there is no mention of sharing of losses then it will be implied that it will be shared between all the partners just like the profits.
5. Mutual agency between the partners
As per the definition of partnership, the business will be carried out by all the partners or by any one of them acting on behalf of all the partners which means that it is a contract of mutual agency. Mutual agency basically means that every partner is a principle as well as an agent acting on part of all the partners of the firm.
Any act done by one of them will be binding on all the partners and the firm, it follows the policy of “one by all, all by one” and this is the most significant elements of a partnership which brings forward the truest test of a partnership.
Kinds of Partnership and Partners
Firstly, we will understand the various kinds of partnership that exists and is recognized by the Partnership Act, 1932. Majorly, there are only 2 kinds of partnership i.e.
1. On the basis of time period
- Voluntary partnership- in this kind of partnership, there is no time limit for the expiration of the partnership and it can be ended as per the will of the partners. It is mentioned in section 7 of the Act which specifies two conditions to call is partnership at will
- The agreement between the partners should not determine the expiration of the partnership or stating the period of partnership
- There should be no clause with respect to determination of partnership
- Partnership for a fixed time period- when the partnership is agreed for a fixed period of time and once the duration expires, the partnership comes to an end. If the partners decide that they want to continue the partnership even after the expiration, then it converts into partnership at will.
2. On the basis of extent of business carried out by the partnership firm –
- Particular partnership- as per section 8 of the Act, when the partnership is specifically created just to complete a particular project or undertaking, it is called particular partnership, once the work or project gets done, then the partnership comes to an end. Although, the partners have the option to continue the firm.
- General partnership- where the partnership is mainly created for carrying out a business and earn profits out of the business, there is no particular task or project which needs to be done. The work in general based and depends on the nature of business.
Kinds of Partnership –
The parties to a partnership or members of partnership are known as “partners”. And it should be noted that not all partners have the same set of job or have equal involvement in the conduct of the business. Even their share of profits and losses are distributed as per their decided ratios. There are various kinds of partners depending upon their nature of work, their extent of liability, investment etc. Thus, the various kinds of partners are as follows-
- Active Partner – This is one of the most participating partner who is involved in the conduct and working of the business on a daily basis. He is also called the ostensible partner.
- Dormant Partner – This partner is also known as sleeping partner as he doesn’t actively participate in the operation of the business, but is equally bound by the conduct of all the other partners.
- Partner in profit only – This partner is the one who agrees to share the profits but not the losses and liabilities incurred against the third party.
- Minor Partner– As per the eligibility criteria mentioned in the contract act, a minor cannot be a partner but as per the partnership act the minor can get the benefits of the business, if all the partners consent to it. Although, the losses and liabilities of the minor will be limited whereas the profits will be shared equally.
- Nominal Partner – “Nominal” the name suggests that the person is a partner only by his name and there is no real involvement of the person in the business or interest in the firm.
- Partner by estoppel – This is a peculiar partner, wherein the person is not a partner but he represented himself by his words, gesture or conduct to another person that he was partner, then the person cannot be denied from the partnership, and even if he was not a partner, he will be called a partner by estoppel or holding out.
Registration of Partnership Firm –
Section 58 of the Act, states the procedure for registration of a partnership firm, it can be divided into two parts- Making of application to registrar and verification of partner
- Making application to Registrar- any one of the partners can send the application along with the specified fee and a copy of partnership deed to the registrar of place where the business is being carried out or is proposed to be carried out. The statement has to be signed by all the partners. The statement should comprise of-
- Name of the firm
- Official address of the business
- Any other place where the business is being carried out
- Duration of the partnership
- Name and address of all the partners
- Date on which each of the partner joined the firm
- Verification of partner- All the partners who have signed the statements need to be verified by the registrar. The name of the firm cannot include any of the words like, crown, emperor, Royal, King etc. which signifies that the government is associated with the firm or sanctions the firm.
Further, when the registrar has verified the statement submitted by the partners and the Registrar is satisfied with all the conditions mentioned under section 58, then he shall make a record of entry of the statement of the firm in the register which is called the “Register of Firms” and file the statement as per Section 59 of the Act.
Rights of Partners –
There are various rights every partner has which are stated in the Partnership Act, 1932. Some of the essential rights of a partner are-
- Section 12(a) states the Right to participate in the conduct or working of business– As per this right every partner has the right to be involved in the operations of the business and this right is curtailed only when it has been explicitly stated in the partnership deed for some of the partners such as for nominal partners.
- Right to be indemnified– The partners have a right to be indemnified for any decision which is taken in the course of the business but on the condition that the decision taken by the partner was due to the emergency situation and it should be of such nature that any reasonable person would have done so.
- Right to access and inspect the books of accounts– Section 12(d) of the Act, states this right which is given to the active as well as dormant partner. This is a right which is available to all the partners. In case, any partner dies then the legal heir of the deceased partner can inspect the copies of the books and accounts.
- Right to express opinion– Section 12(c) of the Act, states that every partner has right to express his/her opinion over the business matters and they all have right to participate in the decision-making process of the business.
- Right to share profits and losses– As stated above in the elements of partnership, partners have the right to share their profits and losses equally in case there is no explicit clause stating the division of profits and losses among the partners. But where the ratio of profit and losses are prescribed in the partnership deed, it has to be shared accordingly.
- Right to get interest on capital or advances made– Usually, when the partners invest their capital, they are not entitled to any interest but in case when they agree to give interest, then the interest would be given from the capital. The partners are also authorized to get 6% interest on the advances made by them towards their business.
Duties of Partners –
There are some duties which need to be performed by the partners as well along with exercising their rights. The duties are-
- Duty to act diligently– Section 12(b) of the Act, states that it is duty of the partners to act with due care and diligence as their actions will be affecting the other partners too, due to the mutual agency element. In case, a wrongful act is committed by a partner which causes loss or injury to other partners then he is liable to pay the rest of partners compensation for the loss.
- Duty to use the property only for purpose of business– Section 15 of the Act, states that property purchased for purpose of business cannot be used by the partners for their personal use. The property should be used in proper manner and not to earn any personal gains from it.
- Duty to indemnify fraud– Section 10 of the Act, states that whenever any fraud is committed by any partner or partners, then every partner is responsible to indemnify the firm for the losses incurred because of the fraud committed by the partners. If loss is caused to other partners, then he shall indemnify them also.
- Duty to hand over personal gains– Section 16 of the Act, states that all partners should be working for a common goal i.e., earning profits from business and should not engage in other profession or business venture. And if any of the partner earns personal gains from operation of the business then it is his duty to distribute it with the other partners.
- General duties– Section 9 of the Act, mentions the general duties of the partners where they should work together to accomplish a common objective and offer a true account of their business activities which gives all data with regard to firm and partners or his representative.
Benefits available to Minor (Under Section 30)
As per section 11 of the Indian Contract Act, 1872 it is mentioned that no person below the age of 18 years can enter into a contract where it is stated that only major person can enter into contract or else it will be void ab initio. But section 30 of the Partnership Act, 1932 states that even though a minor cannot be partner in a partnership firm but they can avail the benefits from the partnership firm, and the minor won’t be liable for any losses or liabilities. But the minor can be added to the partnership only if all the other partners consent to it. Some of the rights and liabilities of minor as a partner are as follows-
- Rights of Minor
- Right to share profits of the firm
- Right to inspect and check the books and accounts
- Right to sue any partner or all of them for not giving him, his share of profits
- Right to become a permanent partner on attaining the age of 18 years
- Liabilities of Minor
- Minor has limited set of liabilities and he is not personally liable to pay of the debt or losses incurred
- After attaining the age of 18 years, if the minor wishes to be permanent partner of the firm then a public notice has to be given within 6 months of his attaining the age of 18 years. If the notice is not served within 6 months, then he will be automatically liable for the acts of all other partners.
- Once he becomes full time partner, he will be considered as a normal partner and will be having similar duties as of a normal partner and can participate in working of business also.
Dissolution of Partnership –
Section 39 to 44 of the Partnership Act, 1932 deals with the dissolution of a partnership firm, wherein it is discussed that there are certain conditions or situation where firm is dissolved voluntarily or by the order of the court. The different modes through which a firm can opt for dissolution is as follows-
- Dissolution by court- The Court can dissolve a partnership firm, if a suit is filed against any of the partners on the following grounds-
- If one of the partners, becomes person of unsound mind then it would not render the firm dissolved, as the continuing partners will have to file a suit for dissolution.
- If the partner permanently becomes incapable of performing his duties then the court can decide to dissolve the firm
- Any of the partners conduct or behaviour is likely to affect the working of the business
- If a partner willingly or insistently commits a particular fraud or breach of agreement which is related to the affairs of the firm or affects the conduct of the business, or the partner conducts himself in particular way that is not reasonable and impractical as per the other partners to carrying on business further.
- If the business has encountered a heavy loss or debt which they won’t be able to payback, then the court must dissolve the firm
- Apart from the above reasons, if the Court finds any other ground that is just and equitable for the dissolution of firm.
- Dissolution by agreement- If the firm decides voluntarily that they want to dissolve the firm through an agreement with the consent of all the partners or as per the contract signed between the partners, then the firm can be dissolved. The agreement may also have some proviso that on the happening of some future contingent event, the partnership may come to an end.
- Dissolution by operation of law- A firm has to be mandatorily dissolved on two main grounds that if the partners go insolvent or by the happening of an event which would make the business of the firm unlawful and couldn’t be carried forward.
- Dissolution on happening of certain contingencies- The firm has to be dissolved on the happening of certain contingencies which has been already mentioned in the contract, stating that the firm will be dissolved on happening of any one of the those. The contingencies are-
- The agreement is constituted for fixed duration and as the term expires, the firm shall be dissolved
- The agreement states the purpose of partnership is to complete one or more project or undertakings and on the completion of project, the firm shall be dissolved
- Due to death or insolvency of a partner
- Dissolution by notice- if the partnership formed is “partnership at will” with on fixed duration, the firm can be dissolved by placing a notice by any one of the partners of the firm.
Thus, partnership is the most common form of carrying out business and the registration procedure not being too complex, many people often go for a partnership firm than a full-fledged company. The Partnership Act, 1932 is a complete act and it covers all the important aspects of partnership within the act such as the rights and duties of partner, kinds of partner in a firm, how dissolution of firm can take place. One must have got a brief outline of the important aspects of the Act that need to be kept in mind while entering into partnership deed.
Refer – Indian Partnership Act, 1932
Read – All you need to know about Companies Act
This Article is authored by Rhea Banerjee, Pursuing B.A.LL.B from Indore Institute of Law.