The Indian Partnership Act,1932

Partnership, Partners & Firm

• Partnership : The relation between persons who have agreed to share the profits of business carried on by all or any of them acting for all.

• Partners & Firms : Persons who have entered into partnership with one another are called individually “partners’ and collectively a firm.

Characteristics of Partnership

• At least two competent persons and no restriction on maximum numbers of partners.

• Section 11 of Companies Act prohibits partnership consisting more than 10 in case of banking business and 20 in case of other business unless it is registered becomes an illegal association;

• Written agreement is required if the firm wants to be assessed as “Partnership firm’ under Income Tax Act;

• Formed only with intention to share profits of business;

• The business of firm can be carried on by all or any of them for all;

• There is unlimited liability of partners for the debts and liabilities of the firm.

True Test of partnership

• The real test of partnership firm is ‘ mutual agency’, i.e whether a partner can bind the firm by his act i.e whether he can act as agent of all other partners.

Types of Partners• Active partner – Actively participates in the conduct of the

business

• Sleeping Partner – Doesn’t take active part

• Nominal Partner – A partner who lends his name to the firm without having any real interest in it.

• Sub – Partner – When a partner agrees to share his profits derived from the firm with a third person, a sub – partnership may arise. The third person is called as sub partner.

Partnership at will

• ‘If no provision is made by contract between the partners for the duration of their partnership or for the determination of their partnership’.

Partnership & Companies

Applicable Law Partnership Act, 1932 Companies Act, 1956

Entity Not a separate legal entity Separate legal entity

No .of Members Minimum – 2 & Maximum -20, Bank - 10

Public: Min–7 Max–No Limit

Private: Min-2 Max-50

Capital No Restrictions Cannot have more than its authorized capital

Liability Unlimited Limited to the amount due on the shares held by members

Remuneration No restrictions Restricted by Companies Act

Management Vested with the partners Vested with the Board of Directors

Property Joint estate of all the partners

It is separate from its members

Payment of debt

• Where there are joint debts due from the firm and also separate debts due from any partner the property of the firm shall be applied in the first instance of payment of the debts of the firm and if there is any surplus then the share of each partner shall be applied in payment of his separate debts.

Property of the Firm

• Section 14 provides that, subject to contract between the partners, the property of the firm includes– All property originally brought into the stock of

the firm; or– All rights and interest in property originally

brought into the stock of the firm; or– All property acquired by purchase or otherwise by

or for the firm or for the purposes and in the course of the business of the firm; and

– Includes the goodwill of the business of the firm.

Settlement of accounts on dissolution

• The payment of amounts of loss will be settled out of the profits of the firm thereafter from the capital and lastly from the partners in their profit sharing ratio;

• For making payments all the assets of the firm will be used in the following sequence– Outside liabilities

– Partner’s loans and advances to the firm

– Partners capital and

– If any balance is left over after above payments the same shall be distributed among the partners in their profit sharing ratio.

Relationship of Partners (Rights of a partner)

• Right to take part in the conduct of the business;• Right to express his opinion• Right to have access to and to inspect and have copy

of any of the books of the firm;• Right to share equally in the profits earned, and

shall contribute equally to the losses sustained by the firm;

• Entitled to interest on the capital subscribed;• Right to be indemnified• No partner is entitled to receive any remuneration in

addition to his share of profits of the firm for taking part in the business of the firm unless otherwise an express agreement is there.

Relationship with third parties

• Section 18 mention that a partner is the agent of the firm for the purpose of the business of the firm.

Implied Authority of a Partner

• Section 19 : In the absence of any usage or custom of trade to the contrary, the implied authority of a partner does not empower him / her to –– Submit a dispute relating to the business of the firm to

arbitration– Open a banking account on behalf of the firm in his own

name;– Compromise or relinquish any claim or portion of a claim

by the firm– Withdraw a suit or proceedings filed on behalf of the firm– Admit any liability in a suit or proceedings 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

Incoming partners

• Subject to contract between the partners and to the provisions of section 30 (Minor Partner) no person shall be introduced as a partner into a firm without the consent of all the existing partners.

• Subject to the provision of section 30 a person who is introduced as a partner into a firm does not thereby become liable for any act of the firm done before he becomes partner.

Outgoing partners

• A partner may retire

• With the consent of all the other partners• In accordance with an express agreements by

the partners or• Where the partnership is at will by giving

notice in writing to all the other partners of his intention to retire.

Dissolution of a firm

• Dissolution on happening of certain contingencies– If constituted for a fixed term by the expiry of that term ;

– If constituted to carry out one or more adventures or undertaking by the completion thereof ;

– By the death of a partner ; and

– By the adjudication of a partner as an insolvent.

• Dissolution by notice of partnership at will– If any of the partner gives notice in writing to all the

other partners of his intention to dissolve ;

Registration & Effects of Non - registration

• Registration of firm is not compulsory ;

• Effects of Non-Registration• A partner cannot file a suit against the firm or other

partners, for enforcement of a contractual right ;

• A Firm cannot file a suit against a third party for enforcement of rights arising from contracts