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PROGRESSIVE EDUCATION SOCIETYS

Modern Law Collage


Department OF LL.M

Ganeshkhind, University circle, Pune-411016

SAVITRIBAI PHULE PUNE UNIVERSITY

Submission of Dissertation

In Partial fulfilment of Post Graduate Degree in Law

ON

A COMPARATIVE STUDY OF PARTNERSHIP LAWS IN


INDIA AND USA

SUBMITTED BY

PUJA KUMARI

LL.M. II YEAR, Roll No. 1

UNDER GUIDANCE OF

PROF. Mr. Satyajit Lonkar

2016-2017

[1]
DECLARATION BY THE STUDENT

I declare that the dissertation entitled A COMPARETIVE STUDY OF


PARTNERSHIP LAWS IN INDIA AND USA submitted by me for the degree
of LL.M is the record of work carried out by me during the period from 2016-
2017 under the guidance of Prof. Satyajit Lonker and has not formed the basis
for the award of any degree, diploma, associate ship, fellowship, titles in this or
any other University or other institution of Higher learning.

I further declare that the material obtained from other sources has been duly
acknowledged in the dissertation.

Signature of the candidate Date:

[2]
Acknowledgment

I express my gratitude, respect and appreciation to my research guide Prof. Mr.


Satyajit Lonkar and other teaching faculty for their untiring efforts and advices
coupled with in-depth knowledge and expertise in guiding me throughout this
research.

I would like to thank all library staff for making available all necessary research
material at all the time. Words fail to express my gratitude to my college
Principle Dr. Sunita Adhav and Co-ordinator adv. Chintamani Ghate, for her
continuous guidance and supervision. I will also acknowledge all non-teaching
staff for their kind co-operation.

And with profound gratitude I am grateful to my class mates, friends, well-


wishers and my loving family members who directly and indirectly supported
me.

Date: Miss. Puja Kumari

Place: Pune LL.M II year

[3]
Modern Law College, Pune

Affiliated to Savitribai Phule Pune University

CERTIFICATE OF THE GUIED

CERTIFIED that the work incorporated in the dissertation, A


COMPARATIVE STUDY OF PARTNERSHIP LAW IN INDIA AND
USA. Submitted by Miss. PUJA KUMARI was carried out by the candidate
under my supervision/guidance. Such material as has been obtained from other
sources has been duly acknowledged in the dissertation.

Supervisor Research Guide

[4]
Index
Title Page No.

Declaration by student 2
Acknowledgment 3
Certificate 4

CHAPTER 1 7
INTRODUCTION

A. Introduction 8
B. Rationale and Significance of study 10
C. Statement of Problem 11
D. Aim and Objective of Research 11
E. Hypothesis 11
F. Methodology of Research, Scope and Limitation 11

CHAPTER 2 13
PARTNERSHIP

2.1 Introduction 14
2.2 Meaning and Definition of Partnership 19
2.3 Formation of Partnership 26
2.4 Nature or essential features of Partnership 30
2.5 Types of Partnership and Partner 37
2.6 Factor of Partnership 47
2.7 Why Partnership today? 48

CHAPTER 3 50
HISTORY AND ORIGIN OF PARTNERSHIP LAW

3.1 Introduction 51

[5]
3.2 Common Law 51
3.3 History of partnership law 54
3.4 Partnership Act 1890(UK) 56
3.5 The India Limited Liability Partnership Law 58
3.6 Indian Partnership Act,1932 67
3.7 The Indian Contract Act,1872(Sec.239-266) 76
3.8 Uniform Partnership Act,1914(US) 77
3.9 Revised Uniform Partnership Act,1996(US) 80

CHAPTER 4 83
A COMPARATIVE STUDY OF PARTNERSHIP LAW IN INDIA AND
USA

4.1 Partnership Law In India 84


4.2 Partnership Law in USA 86
4.3 Similarities and Differences Between India and USA Partnership Law 90
Concept paper on Limited Liability Partnership
Partnership Taxation
India USA Treaty
Indias strategic partners: A comparative assessment

CHAPTER 5 99
CONCLUSIONS AND SUGGESTIONS

5.1 Conclusion 100


5.2 Suggestions 104

BIBLIOGRAPHY 105

[6]
CHAPTER 1

INTRODUCTION

[7]
A. Introduction

This dissertation is mainly concerned with the expansion of Partnership Law in the USA and
India. In this thesis we discuss detail information about partnership law: their history &
origin, meaning, definition, nature, types, why its required, there function, factor,
comparative study of India and USA Partnership law, Uniformed Partnership law, Limited
Liability Partnership law etc.

In this fast changing climate there are growing opportunities for the sector to develop new
international collaborations and partnerships. This guide is intended to bring together all the
practical issues that need to be considered to ensure a partnership is correctly established and
maintained.

When we planning to commence a business or want to expand the existing one we have to
take an important decision here, regarding the selection of the form of business organisation.
The most suitable form of business organisation can be chosen by weighing the merits and
demerits of each form against your needs. Sole Proprietorship, Partnership, LLP, Cooperative
Society, Joint Stock Company is some common forms.1

In many ways, the partnership structure represents a mid-point between a corporate vehicle
and a collaboration agreement. A legal partnership does not involve the establishment of a
separate legal entity as such (although it can sue and be sued in the partnership name). A
partnership has an added benefit that the partners, and not the partnership, are liable to tax on
their share of the partnership profits; this may be useful if the partners have differing tax
status or are based in different jurisdictions. A partnership does not have the benefit of
limited liability and each of the partners will be jointly and separately fully liable for the
partnerships activities.2

LLP is also a form of partnership, where the liability of partners are limited as well as any
partner will not be held liable for the acts of other partners. General Partnership, on the

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[8]
other hand, brings unlimited liabilities to the partners concerned and so they are jointly or
severally liable for the debts.3

The limited liability partnership (LLP) is a form of legal entity which was established under
the Limited Liability Partnership Act 2000 and which is similar to a partnership, but with
limited liability for the partners. As an LLP must be operated with a view to profit, it is
unlikely to be relevant here.4

It would be difficult to conceive of a complex society that did not operate its businesses
through organizations. In this chapter we study partnerships, limited partnerships, and limited
liability companies, and we touch on joint ventures and business trusts.

When two or more people form their own business or professional practice, they usually
consider becoming partners. Partnership law defines a partnership as the association of two
or more persons to carry on as co-owners a business for profitwhether or not the persons
intend to form a partnership. Revised Uniform Partnership Act, Section 202(a). In 2011,
there were more than three million business firms in the United States as partnerships
(see Table 11.1 "Selected Data: Number of US Partnerships, Limited Partnerships, and
Limited Liability Companies", showing data to 2006), and partnerships are a common form
of organization among accountants, lawyers, doctors, and other professionals. When we use
the word partnership, we are referring to the general business partnership.

Table 11.1 Selected Data: Number of US Partnerships, Limited Partnerships, and Limited
Liability Companies

2003 2004 2005 2006

Total number of active partnerships 2,375,375 2,546,877 2,763,625 2,947,116

Number of partners 14,108,458 15,556,553 16,211,908 16,727,803

Number of limited partnerships 378,921 402,238 413,712 432,550

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2003 2004 2005 2006

Number of partners 6,262,103 7,023,921 6,946,986 6,738,737

Number of limited liability companies 1,091,502 1,270,236 1,465,223 1,630,161

Number of partners 4,226,099 4,949,808 5,640,146 6,361,958

Partnerships are also popular as investment vehicles. Partnership law and tax law permit an
investor to put capital into a limited partnership and realize tax benefits without liability for
the acts of the general partners.

Even if you do not plan to work within a partnership, it can be important to understand the
law that governs it. Why? Because it is possible to become someones partner without
intending to or even realizing that a partnership has been created. Knowledge of the law can
help you avoid partnership liability.5

Partnerships are a key part of any business and a vital consideration for those just setting out.
You will need to think about how you will build solid and productive relationships with your
clients, your suppliers and your regulators to name but a few. But it can be the key
partnership that underlies your new business, the relationship with those with whom you have
started this venture, that might cause you the biggest problem down the line as your business
expands, diversifies and gets more successful. It is really important to understand the legal
status of your business partnership from the outset and lay down some ground rules to protect
everyones interests.6

B. Rationale and Significance of Study


Development of trade and commerce around the world necessitated a separate and
an exhaustive law.

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partnerships-a.html 15/2/2017 1:38
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https://www.enterprisesupport.org/setting-up-a-partnership-the-importance-of-a-formal-agreement/15/2/2017-
2:05pm

[10]
A more exhaustive statute was required to help the members of the business
community who intended to form Partnership.
To set out clearly the term and condition of a partnership firm.
To set out the duties and liabilities of the partners.
Resolving conflict between partners.
Smooth running of the partnership firm.

C. Statement of Problem

To find out the reason for the growth of Partnership Law in India and to compare the
Partnership Law between both countries. It is difficult to collect the up to date data, analysis
the depth study of partnership law of both the countries and in selecting best authors book,
article etc.

D. Aim and Objective of Research


To find the position of Partnership law in India and USA
To discuss the recent development in Partnership Laws in India and USA
To do a comparative study of Partnership Law of India and USA

E. Hypothesis of Research

A Partnership is a valuable instrument or organisational model to overcome weaknesses of


the policy and control framework.

F. Methodology of Research, Scope and Limitation

"The analysis of the principles of methods, rules and postulates employed by a discipline "the
systematic study of the methods that are, can be, or have been applied within a discipline", "a
particular procedure or set of procedures". This research is based on the Doctrinal research.
Doctrinal research means a research that has been carried out of legal proposition or
propositions by way of analyzing the existing statutory provisions and cases by applying the
reasoning power. According to SN Jain, doctrinal research involves analysis of case law,
arranging, ordering and systematizing legal propositions and study of legal institution through
legal reasoning and rational deduction.

[11]
The methodologies for this research are Analytical, Critical, Explanatory, Doctrinal methods.
Analytical research method deals with primarily with the study of statues. Through analytical
research, the researcher will find out the effectiveness of existing laws. It is concerned with
doctrines and legal principles. The sources of data are legal and appellate court decisions. It is
concerned not with the people but with the document.
The research is a doctrinal research. The researcher here would like to study only the judicial
viewpoint. The researcher has tried to analysis the topic by studying various authors,
experts, cases of The Indian Apex Court and High courts, articles, etc. Data is collected
through various sources like internet, journals, magazines, text books of various author and
Bare Acts. The researcher has strictly followed the boundary of doctrinal research.

[12]
CHAPTER 2

PARTNERSHIP

[13]
2.1- Introduction

A partnership is a single business where two or more people share ownership.

Each partner contributes to all aspects of the business, including money, property, labour or
skill. In return, each partner shares in the profits and losses of the business. Because
partnerships entail more than one person in the decision-making process, its important to
discuss a wide variety of issues up front and develop a legal partnership agreement. This
agreement should document how future business decisions will be made, including how the
partners will divide profits, resolve disputes, change ownership (bring in new partners or buy
out current partners) and how to dissolve the partnership. Although partnership agreements
are not legally required, they are strongly recommended and it is considered extremely risky
to operate without one.7

Partnership is an arrangement where parties, known as partners, agree to cooperate to


advance their mutual interests. The partner in a partnership may be individual, businesses,
interest-based organizations, schools, governments or combinations. Organizations may
partner together to increase the likelihood of each achieving their mission and to amplify their
reach. A partnership may result in issuing and holding equity or may be only governed by a
contract. Partnership agreements can be formed in the following areas:

Business: two or more companies join forces in a joint venture or a consortium to i) work
on a project (e.g. industrial or research project) which would be too heavy or too risky for
a single entity, ii) join forces to have a stronger position on the market, iii) comply with
specific regulation (e.g. in some emerging countries, foreigners can only invest in the
form of partnerships with local entrepreneurs). In this case, the alliance may be structured
in a process comparable to a Mergers & Acquisitions transaction.
Politics (or geopolitics): In what is usually called an alliance, governments may partner
to achieve their national interests, sometimes against allied governments holding contrary
interests, as occurred during World War II and the Cold War.

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Knowledge: In education, accrediting agencies increasingly evaluate schools, or
universities, by the level and quality of their partnerships with local or international peers
and a variety of other entities across societal sectors.
Individual: Some partnerships occur at personal levels, such as when two or more
individuals agree to domicile together, while other partnerships are not only personal, but
private, known only to the involved parties.

Partnerships present the involved parties with complex negotiation and special challenges
that must be navigated unto agreement. Overarching goals, levels of give-and-take, areas of
responsibility, lines of authority and succession, how success is evaluated and distributed,
and often a variety of other factors must all be negotiated. Once agreement is reached, the
partnership is typically enforceable by civil law, especially if well documented. Partners who
wish to make their agreement affirmatively explicit and enforceable typically draw
up Articles of Partnership. Trust and pragmatism are also essential as it cannot be expected
that everything can be written in the initial partnership agreement, therefore quality
governance and clear communication are critical success factors in the long run. It is common
for information about formally partnered entities to be made public, such as through a press
release, a newspaper ad, or public records laws.

While industrial partnerships stand to amplify mutual interests and accelerate success, some
forms of collaboration may be considered ethically problematic. When a politician, for
example, partners with a corporation to advance the latter's interest in exchange for some
benefit, a conflict of interest results; consequentially, the public good may suffer. While
technically lawful in some jurisdictions, such practice is broadly viewed negatively or
as corruption.

Partnerships recognized by a government body may enjoy special benefits from taxation
policy. Among developed countries, for example, business partnerships are often favoured
over corporations in taxation policy, since dividend taxes only occur on profit before they are
distributed to the partners. However, depending on the partnership structure and
the jurisdiction in which it operates, owners of a partnership may be exposed to
greater personal liability than they would as shareholders of a corporation. In such countries,
partnerships are often regulated via anti-trust laws, so as to inhibit monopolistic practices and

[15]
foster free market competition. Enforcement of the laws, however, varies considerably.
Domestic partnerships recognized by governments typically enjoy tax benefits, as well.8

A partnership in its simplest form may be defined as an agreement or understanding,


between two or more parties, where the parties agree to operate in a manner which
furthers their mutual interests. The parties to such agreement of partnership are termed
as partners of the partnership. Such agreements for partnership may be oral or
written, depending upon the laws of the country under which the partnership is
organised. Another way to define partnerships is as a relationship existing between
two or more persons who join to carry on a specific purpose like trade, business etc.

For a long period of time, partnerships have been popular vehicles for running most
types of businesses in both countries with civil law and common law systems. Over the years,
various countries have developed different variants of partnerships and therefore the
characteristics of a partnership vary depending on the laws under which it is organised
and also the legal system prevalent in the country of their organisation.

In India, the terms partnership was first defined under section 239 of the Indian Contract
Act, 1872. However, subsequently, upon enactment of the Indian Partnership Act, 1932,
the definition under the Indian Contract Act, 1872 was removed and incorporated in section
4 of the Indian Partnership Act, 1932, which defines partnerships as the relation
between persons who have agreed to share the profits of a business carried on by all
or any one of them acting for all. Section 4 of the Indian Partnership Act, 1932
further provides that the persons who have entered into partnership with one another are
called individually partners and collectively a firm and the name under which their
business is carried on is called the firm name.

Therefore, the terms partnership as understood under Indian laws has the following
important characteristics (i) an agreement between partners; (ii) sharing of profits of
business between partners, and (iii) relationship of agency amongst all partners i.e. the
ability of partners to bind all other partners in relation to the partnership business. In
addition to the above basic characteristics, there are several other features inherent in an
Indian partnership, like, absence of a separate legal personality, unlimited liability of each
partner, etc.

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[16]
In addition to the aforementioned general partnerships, the enactment of the Limited
Liability Partnership Act, 2008 introduced a new variant of partnerships in India, i.e.
The limited liability partnership (LLP) wherein the liability of the partners of the
LLP is limited to the extent of their contribution. The mutual rights, duties /
obligations of partners of an LLP inter se and those of the LLP and its partners are
governed by an Agreement (Agreement) between partners or between the LLP and the
partners. As per the LLP Act, 2008, every LLP shall have at least two designated partners
who are individuals and at least one of them shall be a resident in India. In case if
no partner is designated as such, or if at any time there is only one designated
partner, each partner shall be deemed to be a designated partner of the LLP. A
designated partner is responsible for doing of all acts, matters and things as are
required to be done by an LLP in respect of compliance of the provisions of the LLP
Act, 2008, including filing of any document, return, statement and the like report
pursuant to the provisions of the LLP Act, 2008 and as may be specified in the limited
liability partnership agreement; and shall further be liable to all penalties imposed on the
limited liability partnership for any contravention of those provisions. Therefore, the
responsibility of a designated partner is like that of a director of a company.

In simple terms, LLPs are business vehicles which combine the features of a general
partnership and a company. The LLP Act, 2008 defines LLPs as partnerships which
are formed and registered under the LLP Act, 2008. Section 3 of the LLP Act, 2008
specifically provides that an LLP is a body corporate which is formed and
incorporated under the LLP Act, 2008 and is a legal entity separate from its partners.
Further, LLPs have perpetual succession and their existence, rights and liabilities are
independent of the partners, or a change in the partners of the LLP.

Most importantly, the LLP Act, 2008 provides that each partner of an LLP is its
agent. However, the partners of an LLP are not agents of each other. Further, any obligation
of the LLP whether arising in contract or otherwise is an obligation of solely the LLP and
ordinarily would have to be met out of the assets of the LLP itself. The partners of an
LLP are not personally liable for an obligation of the LLP, except in cases where the LLP
and its partners have been found to have acted with intent to defraud creditors or for any
other fraudulent purpose.

[17]
Business organisations with the same elements and characteristics as that of Indian
partnerships are widespread in many other jurisdictions. The following is a brief overview
of the globally known variants of partnerships.

a. General Partnerships

General partnerships are typical partnerships which have only general partners who are
responsible for the management, affairs of the partnership and are responsible for the
liabilities of the partnership and each of the other partners. While the finer characteristics
of each general partnership depend on the specific laws of the concerned
jurisdiction, they may be understood as being akin to the partnerships established
under the Indian Partnership Act, 1932.

b. Limited Partnership

A limited partnership (LP) has both general partners and limited partners. The limited
partners, unlike general partners, typically do not actively participate in the
management of the LP and are comparable to mere investors in a business. While
a general partner in LP typically has unlimited personal liability, a limited partners
liability is limited to the amount of his or her investment in the LP. While the
concept of LPs is relatively unknown in India, they are quite popular in countries such as
USA and UK.

c. Limited Liability Partnerships

An LLP is different from LPs as all of its partners have limited liability. LLPs
are hybrid structured combining the features and, in particular, the advantages of a
company and partnership. In many jurisdictions, like India, Singapore and the UK,
LLPs are in the nature of body corporate. LLPs are thought suitable as business
vehicles where the investors wish to take active role in the management of the business.9

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[18]
2.2 - Meaning and Definition of Partnership

two or more persons, some having capital, others having skill and experience to conduct any
lawful business, forming a business firm and sharing the profits of such a business. Hence the
persons Partnership is a form of business organisation which was born due to the defects of
the sole trading firm. The two great drawbacks of sole proprietorship namely, limited capital
and limited managerial skill have been overcome by the formation of a partnership firm.

Partnership is a combination of who form the partnership are called 'partners' individually and
a 'Firm' collectively. The name in which their business carries on is called the 'firm's name'.

The Partnership is the result of:

a. Need for more capital in the business.

b. Need for more managerial ability.

c. Need for diffusion of risks.

d. Need for greater amount of specialisation.10

A partnership is an association of two or more persons to carry on, as co-owners, a business


and to share its profits and losses. The persons who own the business are individually called
partners and collectively called partnership firm.11

It is an arrangement in which two or more individuals share the profits and liabilities of a
business venture. Various arrangements are possible: all partners might share liabilities and
profits equally, or some partners may have limited liability. Not every partner is necessarily
involved in the management and day-to-day operations of the venture. In some jurisdictions,
partnerships enjoy favourable tax treatment relative to corporations. 12

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[19]
A partnership is the relationship existing between two or more persons who join to carry on a
trade or business. Each person contributes money, property, labour or skill, and expects to
share in the profits and losses of the business.

A partnership must file an annual information return to report the income, deductions, gains,
losses, etc., from its operations, but it does not pay income tax. Instead, it "passes through"
any profits or losses to its partners. Each partner includes his or her share of the partnership's
income or loss on his or her tax return.13
Two or more individuals may form a partnership by making a written or oral agreement that
they will jointly assume full responsibility for the conduct of business.
The need for partnership form of organisation arose from the limitations of sole-
proprietorship. In sole-proprietorship, financial resources and managerial skills were limited
one man could not supervise all the business activities personally.

Moreover, risk bearing capacity of an individual was also limited. When business activities
started expanding the need for more funds arose. More persons were required for supervising
different functions. It was at this stage that a need for associating more persons arose. So
more persons were associated to form groups to carry on business. These persons brought in
to the business their financial resources and are also helpful in business administration.
Meaning:
A partnership is an association of two or more persons to carry on, as co-owners, a business
and to share its profits and losses. The partnership may come into existence either as a result
of the expansion of the sole trading concern or by means of an agreement between two or
more persons desirous of forming a partnership.

When the business expands in size, the proprietor finds it difficult to manage the business and
is forced to take more outsiders who will not only provide additional capital but also assist
him in managing the business on sound lines.

Sometimes the nature of business demands large amount of capital, effective supervision and
greater specialization. It is the ideal form of organisation for the enterprise requiring

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[20]
moderate amount of capital and diversified managerial talent. This form is not suitable for a
business requiring more capital and expert managerial personnel.14

Definition of Partnership

The term partnership is defined as the abstract legal relation between the persons. It is the
form of business operation; wherein the partners agree to pool their capital and resources, to
run a business carried on by all the partners or any one partner on behalf of all the partners
and share profits and losses in the manner prescribed in the agreement called partnership
deed.

In this arrangement, the individuals who have entered into the agreement with each other are
called as individual partners. The material thing symbolising the joint entity for all partners
is called firm and the name under which business is conducted is called the firm name.
Hence, partnership is the invisible bond among partners while the firm is the concrete form of
partners.15

The Indian Partnership Act, 1932

Sec.4 of Indian Partnership Act, 1932 defines Partnership in the following terms:

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

Persons who have entered into partnership with one another are called individually partners
and collectively a firm, and the name under which their business is carried on is called the
firm name. 16

The Uniform Partnership Act of the USA defined a partnership as an association of two
or more persons to carry on as co-owners a business for profit.

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John A, Shubin: Two or more individuals may form a partnership by making a written or
oral agreement that they will jointly assume full responsibility for the conduct of business.

According to Shubin two or more persons join together to share business responsibility. The
liability part is mainly given as a base of partnership.

L.H. Haney: The relationship between persons who agree to carry on a business in common
with a view to private gain.
Haney has given more emphasis on sharing of gains. The coming together of persons to share
the gains of a business is called partnership.

Kimball and Kimball: A partnership firm as it is often called, is then a group of men who
have joined capital or services or the prosecution of some enterprise.
The bringing toherher of financial resources and services by persons for carrying on some
work has been called partnership in this definition. One person may contribute money, the
other may provide service, meant to carry on an enterprise.

Willian R. Spriegal: Partnership has two or more members, each of whom is responsible
for the obligation of the partnership. Each of the partners may bind the others and the assets
of the partners may be taken for debts of partnership.
Spriegal has given a broad-based definition of partnership. Besides relationship of two or
more persons, partnership gives implied authority to partners to bind the firm for their acts.
The business liabilities cannot only be recovered from business property but also form
partners assets. This brings in the unlimited liability aspect of partnership into picture.

English Partnership Act, 1690: Partnership is the relation which subsists between persons
carrying on a business in common with a view of profits.17
According to J. L. Hanson, a partnership is a form of business organisation in which two
or more persons up to a maximum of twenty join together to undertake some form of business
activity. Now, we can define partnership as an association of two or more persons who have
agreed to share the profits of a business which they run together. This business may be
carried on by all or anyone of them acting for all.

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[22]
The persons who own the partnership business are individually called partners and
collectively they are called as firm or partnership firm. The name under which partnership
business is carried on is called Firm Name. In a way, the firm is nothing but an abbreviation
for partners.

Main Features:
Based on the above definitions, we can now list the main features of partnership form of
business ownership/organisation in a more orderly manner as follows:
1. More Persons:
As against proprietorship, there should be at least two persons subject to a maximum of ten
persons for banking business and twenty for non-banking business to form a partnership firm.

2. Profit and Loss Sharing:


There is an agreement among the partners to share the profits earned and losses incurred in
partnership business.

3. Contractual Relationship:
Partnership is formed by an agreement-oral or written-among the partners.

4. Existence of Lawful Business:


Partnership is formed to carry on some lawful business and share its profits or losses. If the
purpose is to carry some charitable works, for example, it is not regarded as partnership.

5. Utmost Good Faith and Honesty:


A partnership business solely rests on utmost good faith and trust among the partners.

6. Unlimited Liability:
Like proprietorship, each partner has unlimited liability in the firm. This means that if the
assets of the partnership firm fall short to meet the firms obligations, the partners private
assets will also be used for the purpose.

7. Restrictions on Transfer of Share:


No partner can transfer his share to any outside person without seeking the consent of all
other partners.

8. Principal-Agent Relationship:

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The partnership firm may be carried on by all partners or any of them acting for all. While
dealing with firms transactions, each partner is entitled to represent the firm and other
partners. In this way, a partner is an agent of the firm and of the other partners.

Advantages:
As an ownership form of business, partnership offers the following 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.

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.

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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:
In spite of above advantages, there are certain drawbacks also associated with the partnership
form of business organisation.

Descriptions of these drawbacks/ disadvantages are as follows:


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. 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

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partners also. Choosing a business partner is, therefore, much like choosing a marriage mate
life partner.18

2.3 Formation of Partnership

A partnership business can be formed by two or more members. The coming together of at-
least two persons for undertaking any business activity brings a partnership into existence.
There is a Partnership Act, 1932 but it does not prescribe any mode of forming a partnership
business. Even the registration of partnership is left to the discretion of partners.

Formation of partnership requires the following steps:


(i) Coming together of two or more persons for setting up a business.

(ii) Creating a relationship among partners where they work under mutual trust.

(iii) In order to avoid or settle disputes amicably, a partnership deed is written. It is a written
document specifying the profit sharing ratio, capital contributions and tasks assigned to
different partners.

Partnership Deed:
Partnership deed forms the basis of partnership. It includes all important clauses like name of
business, contribution of capital, sharing of profits, mode of management, etc. Partnership
deed is a document containing all the matters according to which mutual rights, duties and
liabilities of the partners in the conduct and management of the affairs of the firm are
determined. The deed must be signed by the partners.

The partnership deed can both be oral or in writing. In France and Italy, a written agreement
among partners is essential to bind them lawfully. In India, U.S.A. and Britain, the agreement
may be either oral or in writing, agreement, however, should be preferred because nobody
can dispute the contents. There may be a dispute even about what was agreed if the contents
are not in writing. So written deed should be preferred.

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Contents:
Some of the important clauses to be included in a partnership deed are:
(i) The name of the firm;

(ii) Names and addresses of partners;

(iii) Nature of business proposed to be carried on by the firm;

(iv) The total amount of capital and contributions by each partner;

(v) The extent to which partners are to take part in the management of the business;

(vi) Amount of withdrawals to be allowed to each partner;

(vii) The profit sharing ratio;

(viii) The amount of salary or commission payable to any partner for the services rendered to
the business;

(ix) Rate of interest to be allowed on capital as well as rate of interest to be charged on


drawings;

(x) Division of powers and duties among partners;

(xi) The method of evaluating goodwill at the time of admitting a new partner or at the time
of retirement or death of a partner;

(xii) Procedure for dissolution of the firm and settlement of accounts;

(xiii) Maintenance of books of accounts and audit of accounts; and

(xiv) Arbitration clause for settlement of disputes among the partners.

This is not the exhaustive and final list of clauses which can be inserted in the partnership
deed. Any clause mutually agreed to by the partners can be made a part of partnership deed.
If the partnership deed is silent on some point, then provisions of the partnership act will
apply. If the partnership deed is silent about the distribution of profits, then all the partners

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will be entitled to equal share of profits and losses. If the rate of interest on partners loans is
not given indeed, it should be taken at the rate of 6% p.a.

Reasons for Forming Partnership Business:


Partnership or ownership developed due to certain limitations in sole-trade business and also
to have some benefits of better management and higher services.

Partnership business may be started due to the following reasons:


(i) Better Resources:
A partnership concern may be formed to arrange more funds. A sole-proprietor may not be in
a position to raise more funds because he is to depend on his own resources only. When more
than one person join hands then all of them pool their funds. So a partnership business may
be set up to pool more resources.

(ii) Avoiding competition:


There may be competition among sole traders and both of them may be suffering from it. In
order to avoid competition sole-traders may come together and form a partnership concern.

(iii) Availing Economies:


A bigger business can avail the economies in production and distribution. A success of a
business depends upon the economies it can avail. A sole-trade business is on a very small
scale and a partnership concern can increase its scale of operations. The economies are linked
to the scale of business activities. Some single proprietors may join together to avail the
economies of production and distribution.

(iv) Better Managerial Talent:


A sole-trader can look after the business only upto a level. With the expansion and
diversification of activities it may not be possible for one person to look after every aspect of
business. Moreover, one person may not have the competence to look after every function.
There are a number of partners who can look after different functions in a partnership
concern. So it may be better to form a partnership instead of ignoring certain areas. A
partnership concern has better managerial talent as compared to a sole-trade business.

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(v) Diffused Risk:
In a sole-trade business all risk is born by the single person. In partnership there are more
persons (partners) to share the risk. Partners divide the risk in their profit sharing ratios. The
fear of risk may also bring sole traders together to form a partnership concern.

Suitability of Partnership:
Partnership form of organisation was developed because of certain limitations in sole-trade
form of organisation. The uses of sophisticated machines have necessitated more investment
and a need for expert managerial hands. Partnership form of organisation is suitable under
certain situations.

It is more suitable under the following circumstances:


(i) Managerial and Capital Requirement:
After Industrial Revolution the scale of production increased. The increase in production was
possible only through more investments. Business management also requires the services of
qualified persons. A partnership concern can arrange more funds as compared to a sole-trade
business. The partners can also look after various functional departments.

(ii) Suitable for small and Medium Scale Concerns:


Partnership form of organisation is most suitable for small and medium scale business
concerns. In such concerns the requirement of finances is moderate. The market for their
products is limited. There is a direct relationship between the work and the reward.
Moreover, personal supervision is also an important factor in such concerns.

(iii) Direct Contact with the Consumers:


Sometimes the nature of business is such that a direct contact with the consumers is a
necessity. Professional services like chartered accountants, solicitors, doctors, etc. require
direct contact with the clients. In wholesale and retail trade also accessibility to consumers is
required.19

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2.4 Nature or essential features of Partnership

1. Existence of business:
The objective of partnership must be to do some type of business. Business here means any
activity leading to earn profit persons joining together and agreed to do charitable work or for
formation of any club for entertainment would not be treated as partnership due to absence of
the business.

Even agreement of taking up any business activity in future shall not be treated as partnership
fill the formation of business.

2. Numbers of persons:
There must be at least two or more persons to form a partnership firm. As per Indian
partnership Act, the minimum number of person required is to buy it does not prescribe the
maximum limit for the purpose.

There should be more than one person to form a partnership. But there is restriction for the
maximum number of partners. In case of ordinary business, the partners must not exceed 20
and in case of banking must not exceed 10 (before nationalization).

3. Contractual relationship:
There should be a contractual relationship between the persons forming partnership. Persons
competent to contract can be partners.

They have to mutually agree and jointly decide to go for any business activity as per agreed
terms and conditions. This may be either written or oral form among the partners.

4. Sharing of Profits:

The agreement between the partners must be to share the profits of business. There can be no
partnership without the intention of mutual gain. The profits must be distributed among the
partners in an agreed ratio.

Similarly, losses should be shared among the partners. However, sharing of profits is not a
conclusive proof of partnership. For example, a manager may be given a share in profits of
the firm.

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5. Mutual agency:

Partnership contract is based on principle of agency. Each partner is an agent of other


partners. The business is carried on by all or any one of them acting on behalf of all other
partners.

In other words, every partner is an implied agent of the other partners and of the firm. Each
partner is liable for acts performed by other partners on behalf of the firm.

The above mentioned features are the real tests of partnership. In addition, partnership has the
following characteristics:

6. Utmost good faith:


The partners should have utmost good faith in each other. They should be just and honest.
They should present true accounts and must disclose true information to one another.

The relations between partners are based upon mutual trust and confidence. Every partner is
expected to act in the best interests of other partners and of the firm as a whole.

He must observe utmost good faith in all the dealings with his co-partners. He must render
true accounts and make no secret profits from the business.

7. Unlimited liability:
Like sole proprietorship, every partner has an unlimited liability in respect of debts of the
firm. If the property or the assets of the firm are insufficient to meet the claims of the
creditors, the private property of the partners can be attached to meet the claims of the
creditors.

In other words, every partner is jointly and severally liable to an unlimited extent for the
debts of the partnership firm. In case the assets of the firm are insufficient to pay the debts in
full, the personal property of each partner can be attached to pay the creditors of the firm.

This is the prominent feature of partnership that the liability of each partner is not limited to
the amount invested but his private property is also liable to pay the business obligations.

8. Restriction on transfer of ownership:


A partner cannot transfer his share in business to an outsider without the consent of all other
partners. This is because the partnership agreement is based on contract among individuals.

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No partner can transfer his share in the partnership without the prior consent of all other
partners.

9. Capital contribution:
Each partner contributes his share in the capital of the partnership firm. The capital
contribution need not be equal or in any particular proportion. It must be as per the agreement
each partner is behind to contribute that amount. A partner may be admitted to partnership
without any capital contribution.

10. Duration of the partnership:


The existence of the partnership firm continues at the pleasure of the partners. Legally of
partnership comes to an end, if any partner dies or becomes insolvent or retries.

The remaining partners may agree to continue the business under the original firms name
after settling the claims of the outgoing partner.20

11. Two or more persons:

There must be at least two persons to form a partnership. A person cannot enter into
partnership with himself. The maximum number of persons in a partnership should not
exceed 10 in case of banking business and 20 in other types of business.

If the number of partners exceeds the prescribed maximum, it would become an illegal
association of persons. A firm cannot become a partner of another firm though its partners
can join any other firm as partners.21

12. Agreement:

Partnership is the outcome of an agreement between persons. The relation of partnership


arises from the formation of a contract and not from status or birth.

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If a proprietor gives a share in profits to his employee it will not be called a partnership
unless there is an agreement of partnership between the two. The agreement may be oral or in
writing but it must satisfy all the essentials of a valid contract.

There must be agreement between the parties concerned. This is the most important
characteristics of partnership. Without agreement partnership cannot be formed. "No
agreement no partnership. But only competent persons are entitled to make a contract.

There are some provisions contained in the partnership agreement. These are determined
clearly before the commencement of business. But it differs from business to business. This
documents may be written or oral. But it must be written so that disputes may be settled
according to the provisions of agreement.

13. Lawful business:

A partnership can be formed only for the purpose of carrying on a business. An association of
persons who jointly own a house without carrying on a business is not partnership. Moreover,
the business carried on by the partners must be lawful. Illegal acts such as theft, dacoity,
smuggling, etc., cannot be called partnership.

14. Business:

The object of the formation of partnership is to carryon any type of business. It may be
manufacturing or merchandise type small or large scale business. But it should not be illegal
business in the country concerned.

15. Profit motive:

The basic motive of the formation of partnership is to earn profit. This profit is distributed
among the partners according to agreed proportion. If there is loss it will be sustained by all
partners except the minor.

16. Conduct of Business:

The business of partnership is conducted by all the partners or any of them acting for all. But
each partner is allowed to participate in the management by law.

17. Entity:

It has no separate entity apart from its members. It is not independent of the partners. Law
has not granted it any legal entity.

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18. Investment:

Each partner contributes his share in the capital according to the agreement. Some persons
become partners without investing any capital to the business. But they devote their time,
energy and ability to their business instead of capital and receive profit.

19. Transferability of share:

There is restriction to transfer the share from one partner to another person without the
consent of existing partners. So the investment in the partnership remains confined into few
hands.

20. Position:

One partner is an agent as well as principal to other partner. He can bind the other person by
his act. In the position of an agent he can make contract with another person or parties on
behalf of his concerned firm

21. Mutual Confidence:

The business of the partnership cannot be conducted successfully without the element of
mutual confidence and cooperation of partners. So the members must have trust and
confidence in each other.

22. Free Operation:

There are no strict rules and regulations to control the partnership activities in our country i.e.
no restriction for the audit of accounts, submission of various reports and other copies to any
government authority. So this organization may operate freely without any interference.22

Case law

COX V. HICKMAN

January 23, 2012 by Vivek Kumar Verma in Contract Law, Partnership.

Cox v. Hickman
Facts
Benjamin Smith and Josiah Timmis Smith carried on business as iron workers and corn
merchants under the name of B Smith & Son. They owed a lot of money to the creditors and

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a meeting took place, amongst whom were Cox and Wheatcroft. A deed of arrangement was
executed by more than six-sevenths in number and value of the creditors. The trusts were
enumerated and the lease was fixed at 21 years. They were to carry on business under the
name of The Stanton Iron Company.

The deed also contained a clause which prevented them from suing the Smiths for existing
debts. Cox never acted as trustee, and Wheatcroft resigned after six weeks after which no
trustee was appointed.

The goods for the business were provided by Hickman who drew 3 bills of exchange, which
the business accepted but did not honour.

The suit was first tried in front of Lord Jervis who ruled in favour of the defendants. The
action was then taken to the Exchequer Chamber wherein three judges wanted to uphold the
judgement and the other three were for reversing it.

Issues
Whether there is a partnership between the traders who were in essence the creditors of the
firm.

Contentions
The counsel for Wheatcroft contended that:

1. There was no action against the appellant, as if Hickman had heard that Cox and
Wheatcroft were the trustees, he would have realized that Cox had never been a
trustee and Wheatcroft had resigned.
2. The ownership of the partnership never changed and was still owned by the Smiths.
3. A qualified benefit derived from a trade does not make a person a partner in it. Here,
unless the profits are taken, there exists no partnership.
The counsel for Cox contended that:

1. The defendant can be held liable only if:


1.1 He put his name on the bill

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1.2 Authorised someone else to put their name on the bill

1.3 Held himself to have given the authority

1. As to the first and third points he is not liable. As far as the second is concerned, the
defendant cannot be held liable unless an agency is proved.
2. It is up to the defendant to show that the plaintiff is a partner.
The counsel for Hickman contended that:

1. There was a contract of partnership under which business was to be carried out for the
benefit of creditors
2. The scheduled creditors are allowed to participate in the profits of the firm thereby
making them partners
3. Any one of the partners may bind all the others by the acceptance of the bills in the
regular course of business

Judgement
The deed gave special powers to the creditors. They were given the choice by majority
regarding whether or not the trade should be continued and making rules and regulations as to
the carrying out of that trade, which are the powers that partners have.

The creditors, however, did not carry out the business of the trade when they could have but
let the trustees do the same. By this act of theirs, they did not make themselves partners of the
trade.

If they had carried out they business they could have made sure none of the trustees accepted
the bill of exchange as they would be the principals.

The deed in this case is merely an arrangement between the creditors and the Smiths, to repay
the creditors out of existing and future profits.

This relationship between the creditors and debtors is not enough to constitute a relationship
between a principal and agent.

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Trustees are liable as they are the agent by the contract but the creditors are not the principals
of the trustees.

Held
The decision of the Court of Common Pleas was reversed and the defendants were not held
liable.23

2.5 Types of Partnership and Partner

Types of Partnerships:

For the purpose of this discussion, the most important types of partnerships to consider are
general partnerships, limited partnerships, joint liability partnerships, several liability
partnerships, and limited liability partnerships

A partnership is a business with several individuals, each of whom owns part of the business.
The relationship between the partners and the duties of partners are clarified in
the partnership agreement.

In any partnership, each partner must "buy in" or invest in the partnership. Usually, each
partner's share of the partnership profits and losses is based on his or her percentage share of
ownership.

The term "partnership" has changed over the years, as business people have come to add new
features to the old business form. These new partnership types are intended to help mitigate
the liability issues with partnerships. The three most used partnership types are listed here,
with their features, to help you decide which type you might want to use.

1. General Partnership:

A general partnership is a partnership with only general partners. Each general partner takes
part in the management of the business and also takes responsibility for the liabilities of the

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business. If one partner is sued, all partners are held liable. General partnerships are the least
desirable for this reason.

This represents a default version of a partnership, which governs the relationships between
the individual partners as well as between the partnership and the outside world. Each partner
in the organization is considered an agent of the partnership, which means each partner
represents the organization when dealing with external parties. Similarly, each partner has
equal right to participate in the management, decision-making, and control (unless otherwise
stated). Under most formats, adding a new partner requires the complete support and consent
of all existing partners.
In terms of risks and returns (or liabilities and profits), the default assumption is that profits
are distributed equally, and that liability is shared jointly and severally. Any debt or liability
impacting the organization can be distributed equally (or via allocated responsibility) across
the partners' personal assets.

2. Limited Partnerships:
A limited partnership includes both general partners and limited partners. A limited partner
does not participate in the day-to-day management of the partnership and his/her liability is
limited.
In many cases, the limited partners are merely investors who do not wish to participate in the
partnership other than to provide an investment and to receive a share of the profits.

In a limited partnership, a general partner may collaborate with a limited partner. A limited
partner has no managerial authority, nor in most situations would they earn equal returns.
However, the limited partner is protected by limited liability in legal situations regarding debt
or other costs that may impact the general partner's personal assets. Along similar lines,
limited partners are not considered agents of the organization from a legal perspective. It is
also important to understand that this is not the same as a limited liability partnership (LLP),
in which all partners have limited liability.

The chief characteristics of a limited partnership are as follows:

1. There must be at least one partner with unlimited liability. The liability of the remaining
partners is limited to their capitals in the firm. Thus, a limited partnership consists of two
types of partners, general partner and limited partner.

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2. The limited partner cannot take part in the management of the firm. He has no implied
authority to represent and bind the firm. However, he is allowed to inspect the books of
accounts of the firm.

3. The limited or special partner cannot assign his share to an outsider without the consent of
the general partner.

4. The limited partner cannot withdraw any part of his capital.

5. A limited partnership must be registered.

Advantages:

Limited partnership offers the following benefits:

i. It enables people to invest in a business without assuming unlimited risk and without
devoting much time and attention in management of business.

ii. It permits the mobilisation of larger financial resources from cautious and conservative
investors.

iii. It provides an opportunity to able and experienced persons to manage the business without
any interference from other partners. Complete control and personal supervision help to
ensure prompt decisions and uniform actions.

iv. It is more stable than general partnership because it is not dissolved by the insolvency,
retirement, incapacity or death of limited partner.

Disadvantages:

Limited partnership suffers from the following drawbacks:

(i) The limited partners are deprived of the right to manage. They remain at the mercy of the
general partner.

(ii) The general partner may misuse his power to exploit the limited partners.

(iii) A limited partnership enjoys little credit standing as the liability of some partners is
limited. It has to be registered.

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3. Limited Liability Partnerships:

A limited liability partnership (LLP) is different from a limited partnership or a general


partnership but is closer to a limited liability company (LLC). In the LLP, all partners have
limited liability. An LLP combines characteristics of partnerships and corporations. As in a
corporation, all partners in an LLP have limited liability, from errors, omissions, negligence,
incompetence, or malpractice committed by other partners or by employees. Of course, any
partners involved in wrongful or negligent acts are still personally liable, but other partners
are protected from liability for those acts.

Finally, there are limited liability partnerships (LLPs). In this situation, some or all partners
have limited liability, which grants it some similarity with a corporation. LLPs do not hold
each partner responsible for the financial and legal mistakes of the other partners. In some
countries, LLPs must have a central GP with unlimited liability to put this risk somewhere
(see limited partnerships). This format is quite popular among certain high-end services, such
as law and accounting. It allows collaborative work while maintaining independence in
regards to liability. Like most legally complex concepts, in the United States in particular,
LLP rulings can vary significantly from area to area. Understanding which liabilities are
limited and which are not is important information to have before entering into a partnership.
4. LLC or Partnership?

In recent years, the limited liability company has supplanted the general partnership and the
limited partnership, because of the limits of liability. But there are still cases in professional
practices in which some partners want to be limited in scope of duties and they just want to
invest, having the liability protection.

You might have also considered setting up your multiple-person business as an LLC. While a
multiple-member (owner) LLC is taxed like a partnership, there are differences in liability
and in other ownership provisions. Read more about the differences between an LLC and
partnership.

5. Joint Ventures as Partnerships:

The Small Business Administration lists a joint venture as a type of partnership. A joint
venture is typically a partnership of different businesses formed for a specific purpose (like
making a movie or building a structure) or for a specified time period.

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6. Qualified Joint Ventures as Partnerships:

A qualified joint venture is a special kind of partnership in which two spouses who jointly
own a business can elect to file separately to avoid having a file a complicated partnership tax
return. You can read more about how a qualified joint venture works, and the restrictions.24

7. Joint Liability Partnerships:

Exactly as it sounds, a joint liability partnership holds all partners equally liable for any
financial and legal issues.
As opposed to a several liability concept, in which liability may be distributed based on
certain proportionate responsibility, joint liability partnerships are equal across the board.
Picture a married couple purchasing a home.
A joint liability on that loan would stipulate that both parties are equally responsible for
repayment as well as equally in possession of the asset (i.e. the home).

8. Several Liability Partnerships:

Several liability is the converse to joint liability, in which the involved parties will settle
liability disputes based on respective obligations. This is easiest to demonstrate via an
example. Assume two partners create a business, let's say exporting wine.
Partner A is in charge of sourcing, getting great wine from around the world. Partner B is
responsible for the buyer side, and ensuring legality with the countries they are selling too.
While selling to a more conservative country, it turns out Partner B accidentally overlooked
some legal steps in the importing process.
As alcohol can be legally complex with costly mistakes, and it was partner B's responsibility,
it could be argued in a several liability case that partner B owes 80% of the cost for that
mistake. To say 100% would likely be a little unfair, considering Partner A should be aware
of the full channel. But how much liability does each party deserve?
These are difficult questions, making this type of partnership slightly more complex.25

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9. Partnership at will:

It is a partnership formed for an indefinite period. The time period or the purpose of the firm
is not mentioned at the time of its formation.

It can continue for any length of time depending upon the will of the partners. It can be
dissolved by any partner by giving a notice to the other partners of his desire to quit the firm.

10. Particular partnership:

It is a partnership formed for a specific time period or to achieve a specified objective. It is


automatically dissolved on the expiry of the specified period or on the completion of the
specific purpose for which it was formed.

Types of Partners:

There can be the following types of partners:

1. Active or working partner:

Such a partner contributes capital and also takes active part in the management of the firm.
He bears an unlimited liability for the firm's debts. He is known to outsiders. He shares
profits of the firm. He is a full-fledged partner.

2. Sleeping or dormant partner:

A sleeping or inactive partner simply contributes capital. He does not take active part in the
management of the firm. He shares in the profits or losses of the firm. His liability for the
firm's debts is unlimited. He is not known to the outside world.

3. Secret partner:

This type of partner contributes capital and takes active part in the management of the firm's
business. He shares in the profits and losses of firm and his liability is unlimited. However,
his connection with the firm is not known to the outside world.

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4. Limited partner:

The liability of such a partner is limited to the extent of his share in the capital and profits of
the firm. He is not entitled to take active part in the management of the firm's business. The
firm is not dissolved in the event of his death, lunacy or bankruptcy.

5. Partner in profits only:

He shares in the profits of the firm but not in the losses. But his liability for the firm's debts is
unlimited. He is not allowed to take part in the management of the firm. Such a partner is
associated for his money and goodwill.

6. Nominal or ostensible or quasi partner:

Such a partner neither contributes capital nor takes part in the management of business. He
does not share in the profits or losses of the firm. He only lends his name and reputation for
the benefit of the firm.

He represents himself or knowingly allows himself to be represented as a partner. He


becomes liable to outsiders for the debts of the firm. A nominal partner can be of two types:

(a) Partner by estoppels:

A person who by his words (spoken or written) or conduct represents himself as a partner
becomes liable to those who advance money to the firm on the basis of such representation.

He cannot avoid the consequences of his previous act. Suppose a rich man, Mohan, is not a
partner but he tells Sohan that he is a partner in a firm called Shipra Enterprises.

On this impression, Sohan sells good worth Rs. 20,000 to the firm. Later on the firm is unable
to pay the amount. Sohan can recover the amount from Mohan. Here, Mohan is a partner by
estoppels.

(b) Partner by holding out:

When a person is declared as a partner and he does not deny this even after becoming aware
of it, he becomes liable to third parties who lent money or credit to the firm on the basis of
such a declaration. Suppose, Shipra tells Sohan in the presence of Mohan that Mohan is a
partner in the firm of Shipra Enterprises. Mohan does not deny it. Later on Sohan gives a loan

[43]
of Rs. 20,000 to Shipra Enterprises on the basis of the impression that Mohan is a partner in
the firm. The firm fails to repay the loan to Sohan. Mohan is liable to pay Rs. 20,000 to
Sohan. Here, Mohan is a partner by holding out.

7. Minor as a partner:

A minor is a person who has not completed 18 years of age. A minor cannot become a
partner because he is not qualified to enter into a contract. But he may be admitted to the
benefits of partnership with the mutual consent of all the partners.

On being so admitted, a minor becomes entitled to a share in the profits of the firm. He can
inspect and copy the books of account of the firm but he cannot take active part in the firm's
management.

His liability is limited to the extent of his share in the capital and profits of the firm. He
cannot file a suit against the firm or its partners to get his share except when he wants to
disassociate himself from the firm.

After becoming a major, the minor must give a public notice within six months if he wants to
break off his connections with the partnership firm.

If he does not give such a notice within six months or if he decides to remain in the firm, he
becomes liable to an unlimited extent for the debts of the firm from the date he was admitted
to the benefits of partnership. He also becomes entitled to take active part in the management
of the firm's business.

A minor has the following rights and liabilities under the Partnership Act:
(a) A minor has a right to such share of property and of profits of the firm as may be agreed
upon by all the partners.

(b) A minor may inspect the accounts of the firm or take note of the accounts.

(c) The personal property of the minor is not liable for the debts of the firm. But his share in
property of the firm and profits is liable for the debts and obligations of the firm.

(d) So long as a minor remains a partner he cannot file a suit against other partners for the
accounts or for the payment of his share in the property or profits of the firm. He can do this
only when he wants to severe his relations with the partnership firm.

[44]
(e) At any time within 6 months of his attaining majority (i.e., completing 18 years of age)
the minor may give public notice of the fact that he has decided to become or not to become a
partner in the firm. In case he does not give any such notice within six months, it shall be
presumed that he has opted to become a partner.

(f) In case minor decides to become a partner, he will be personally liable to third parties for
all acts of the firm, since he was admitted to the benefits of the firm.

(g) If a minor decides not to become a partner, his rights and liabilities continue to be those of
a minor up to the date on which he gives public notice. His share will not be liable for any
acts of the firm done after the date of the notice.

8. Sub partner:

He is a third person with whom a partner agrees to share his profits desired from the firm. He
does not take part in the management of the firm. He is not liable for the firm's debts.

9. Salaried Partner:

An individual who does not bring anything i.e. amount or goods in the firm but has right to
receive salary or share in the profit or both is named as salaried partner. He is known to the
outside world as a partner and is liable for all the acts of the firm like other partners.

10. Incoming Partner:

A person who is newly admitted to the firm with the consent of all the parties is called
incoming partner. He is not liable for any act of the firm done before he became a partner
unless he agrees;

11. Retired Partner (Outgoing Partner):

A person who goes out of a firm due to certain event or reason is known as retired or
outgoing partner. In this situation the remaining partners continue to carry on the business.
Retiring partner is liable for all the obligations and debts incurred before the retirement.

But he will also be liable to third parties even for future transaction, if he does not give public
notice of his retirement.

[45]
12. Senior Partner:

A person who brings large portion of capital in the business is called senior partner. He has
prominent position in the firm due to his experience, skill, energy, age and other abilities.

13. Junior Partner:

He invests minor portion of capital in the business and so he has small share in the profits. He
is junior to another partner in the firm due to his age, experience and other factors.

Rights and Obligations of Partners

The rights and obligations of partners are generally laid down in the partnership deed.

In case the partnership deed does not specify them, then the partners will have rights and
obligations prescribed in the Partnership Act. These are given below:

Rights of Partners

1. Every partner has a right to take part in the conduct and management of the firm's business.

2. Every partner has a right to be consulted and express his opinion on any matter related to
the firm. In case of difference of opinion, the decision has ordinarily to be taken by a
majority.

But vital issues like admission of a new partner, change in the firm's business, alteration of
profit- sharing ratio, etc., must be decided by unanimous consent of all the partners.

3. Every partner has a right to have access to, inspect and copy any books of accounts and
records of the firm.

4. Every partner has the right to an equal share in the profits of the firm, unless otherwise
agreed by the partners.

5. Every partner has the right to receive interest on loans and advances made by him to the
firm. The rate of interest should be 6 per cent unless otherwise agreed by the partners.

6. Every partner has the right to be indemnified for the expenses incurred and losses sustained
by him in the ordinary conduct of the firm's business.

[46]
7. Every partner has a right to continue in the firm unless expelled in accordance with the
terms of the partnership agreement.

8. Every partner has a right to retire in accordance with the terms of the partnership agree-
ment or with the consent of other partners.26

2.6 Factor of Partnership

In order to be successful, it is extremely important for business managers and owners to work
in accordance with others and to form partnerships that are capable of flourishing. In a
partnership, business objectives and goals can be achieved through mutual understanding and
cooperation. Not only are managers and owners supposed to be skilled at negotiating, but
they should also be equipped to set up mutually satisfying and positive goals with their
partners. This would enable them to build their own, as well as their partners capacity, skills
and capabilities.

Factors that enhance successful business partnerships are:

1. Understanding the purpose behind the partnership-In the world of business,


successful partnerships can be developed and maintained by focusing on mutually
beneficial goals and objectives. However, compatibility between the partners is of utmost
importance. Compatibility can be predetermined by creating a common value base. This
value base must be thoroughly explored in an open and honest manner and it must be
understood and documented by the all the parties. Partnerships can be successful if the
partners share a common value base and vision.

2. Creating commitments for the partnership-Commitments and agreements form the


basis for any successful alliance or partnership. Agreements should be created by employing
a shared or joint effort and to target mutually profitable schemes. Once an understanding has
been reached at the initial stage, plans must then be developed to allocate roles,
accountability, responsibility and primary objectives. A time frame should be set, for the
completion of all the tasks.

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3. Having Realistic expectations- Communication is extremely important in any kind of
partnership. Partners, by talking openly and honestly with each other, can manage the
relationship in most profitable way. Expectations should be spelt out so that issues could be
ironed out in advance, before they disrupt the business operations. By openly sharing skills
and knowledge, partners can benefit the interests of each other.

4. Managing risks- Risk management and business development are two extremely
important issues to be considered, when indulging in a partnership venture. There should be
an effective dispute resolution process, by which partners can master the art of resolving
conflicts and managing risks that are bound to result from the partnership. By recognizing
these risks and their probable causes, business partners can prevent them from recurring.

5. Establishing the partnerships shelf life- It is very important for successful business
partners and good leaders to evaluate and review the progress of the partnership. By setting
dates for meeting targets and achieving results, the partnership can prove to be very
profitable. However, it is very important for partners to know when to withdraw from the
partnership and part ways, for mutual benefit. Defining a shelf life for the partnership is
crucial. There is no point in being part of a partnership that is no longer beneficial.

Nevertheless, the principle objective needs to focus on managing and sustaining the
partnership. A communication and conflict resolution system must be established, along with
an efficient decision making mechanism. Successful partnerships are always founded on
trust. A trusting relationship is one of the biggest trademarks of a successful partnership
management and governance. Developing successful partnerships requires a trained mindset,
by both parties.27

2.7 Why Partnership today?

We are living in complex societies where the policy frameworks in place often seem to be fall
short of providing satisfying solutions to a growing number of problems. But this does not
necessarily mean that the frameworks as such are to be changed, as a) existing frameworks

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[48]
are a result of historic development and reflect a balance of different interest groups within
the society; they are therefore not easy to alter, and b) it is hard to predict whether changing a
policy framework will lead to a higher level of satisfaction. So naturally there is some
resistance to large scale reforms. But while we may have to live with given policy settings,
partnerships can be a great help in improving their performance: area based partnerships
provide a mechanism for local organisations, in particular, to work together and adapt their
policies to better reflect the needs of people and the economy at the local level. Partnerships
are thus a key instrument of local governance.

[49]
CHAPTER 3

HISTORY AND ORIGIN


OF PARTNERSHIP LAW

[50]
3.1- Introduction

Frederich Pollock drafted English Partnership Act was passed in 1890.


In India prior to 1932 it was chapter-11 of Indian Contract Act.
Special Committee drafted the bill enacted as Indian Partnership Act in 1932 taking in to
account the difficulties of the English Act and Indian conditions between 1890 and 1931.
American Uniform Partnership Act is also Uniform Partnership Act is also based on
English Act.28

3.1-Common law

Under common law legal systems, the basic form of partnership is a general partnership, in
which all partners manage the business and are personally liable for its debts. Two other
forms which have developed in most countries are the limited partnership (LP), in which
certain limited partners relinquish their ability to manage the business in exchange for limited
liability for the partnership's debts, and the limited liability partnership (LLP), in which all
partners have some degree of limited liability.

There are two types of partners. General partners have an obligation of strict liability to third
parties injured by the Partnership. General partners may have joint liability or joint and
several liability depending upon circumstances. The liability of limited partners is limited to
their investment in the partnership.

A silent partner is one who still shares in the profits and losses of the business, but who is
not involved in its management, and/or whose association with the business is not publicly
known; these partners usually provide capital in the expectation of a return on their
investment.

India

According to section 4 of the Partnership Act of 1932,"Partnership is defined as the relation


between two or more persons who have agreed to share the profits of a business run by all or
any one of them acting for all". This definition superseded the previous definition given in
section 239 of Indian Contract Act 1872 as Partnership is the relation which subsists
between persons who have agreed to combine their property, labour, skill in some business,

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and to share the profits thereof between them. The 1932 definition added the concept of
mutual agency. The Indian Partnerships have the following common characteristics:

1) A partnership firm is not a legal entity apart from the partners constituting it. It has
limited identity for the purpose of tax law as per section 4 of the Partnership Act of 1932.

2) Partnership is a concurrent subject. Contracts of partnerships are included in the Entry


no.7 of List III of The Constitution of India (the list constitutes the subjects on which both the
State government and Central (National) Government can legislate i.e. pass laws on).

3) Unlimited Liability. The major disadvantage of partnership is the unlimited liability of


partners for the debts and liabilities of the firm. Any partner can bind the firm and the firm is
liable for all liabilities incurred by any firm on behalf of the firm. If property of partnership
firm is insufficient to meet liabilities, personal property of any partner can be attached to pay
the debts of the firm.

4) Partners are Mutual Agents. The business of firm can be carried on by all or any of them
for all. Any partner has authority to bind the firm. Act of any one partner is binding on all the
partners. Thus, each partner is agent of all the remaining partners. Hence, partners are
mutual agents. Section 18 of the Partnership Act, 1932 says "Subject to the provisions of
this Act, a partner is the agent of the firm for the purpose of the business of the firm"

5) Oral or Written Agreements. The Partnership Act, 1932 nowhere mentions that the
Partnership Agreement is to be in written or oral format. Thus the general rule of the Contract
Act applies that the contract can be in be 'oral' or 'written' as long as it satisfies the basic
conditions of being a contract i.e. the agreement between partners is legally enforceable. A
written agreement is advisable to establish existence of partnership and to prove rights and
liabilities of each partner, as it is difficult to prove an oral agreement.

6) Number of Partners is minimum 2 and maximum 50 in any kind of business


activities. Since partnership is agreement there must be minimum two partners. The
Partnership Act does not put any restrictions on maximum number of partners. However,
section 464 of Companies Act 2013, and Rule 10 of Companies (Miscellaneous) Rules, 2014
prohibits partnership consisting of more than 50 for any businesses, unless it is registered as
a company under Companies Act, 2013 or formed in pursuance of some other law. Some
other law means companies and corporations formed via some other law passed
by Parliament of India.

[52]
7) Mutual agency is the real test. The real test of partnership firm is mutual agency set
by the Courts of India, i.e. whether a partner can bind the firm by his act, i.e. whether he can
act as agent of all other partners.

United Kingdom limited partnership


Main article: UK partnership law

A limited partnership in the United Kingdom consists of:

One or more people called general partners, who are liable for all debts and obligations of
the firm; and
One or of the firm beyond the amount contributed.

Limited partners may not:

Draw out or receive back any part of their contributions to the partnership during its
lifetime; or
Take part in the management of the business or have power to bind the firm.

If they do, they become liable for all the debts and obligations of the firm up to the amount
drawn out or received back or incurred while taking part in the management, as the case may
be.

United States

The federal government of the United States does not have specific statutory law governing
the establishment of partnerships. Instead, each of the fifty states as well as the District of
Columbia has its own statutes and common law that govern partnerships. These states largely
follow general common law principles of partnerships whether a general partnership,
a limited partnership or a limited liability partnership. In the absence of applicable federal
law, the National Conference of Commissioners on Uniform State Laws has issued non-
binding model laws (called uniform act) in which to encourage the adoption of uniformity of
partnership law into the states by their respective legislatures. This includes the Uniform
Partnership Act and the Uniform Limited Partnership Act. Although the federal government
does not have specific statutory law for establishing partnerships, it has an extensive and
hyper detailed statutory scheme for the taxation of partnerships in the Internal Revenue Code.
The IRC is Title 26 of the United States Code wherein Subchapter K of Chapter 1 creates tax

[53]
consequences of such great scale and scope that it effectively serves as a federal statutory
scheme for governing partnerships.

3.3-History of Partnership Law

Partnerships have a long history; they were already in use in medieval times in Europe and in
the Middle East. In Europe, the partnerships contributed to the Commercial Revolution which
started in the 13th century. In the 15th, century the cities member of the Hanseatic League,
would mutually strengthen each other; a ship from Hamburg to Danzig, would not only carry
its own cargo but was also commissioned to transport freight for other members of the
league. This practice not only saved time and money; but also constituted a first step toward
partnership. This capacity to join forces in reciprocal services became a distinctive feature,
and a long lasting success factor, of the hanseatic team spirit.

A close examination of medieval trade in Europe shows that numerous significant credit
based trades were not bearing interest. Hence, pragmatism and common sense called for a fair
compensation for the risk of lending money, and a compensation for the opportunity cost of
lending money without using it for other fruitful purposes. In order to circumvent the usury
laws edicted by the Church, other forms of reward were created, in particular through the
widespread form of partnership called commenda, very popular with Italian merchant
bankers. Florentine merchant banks were almost sure to make a positive return on their loans,
but this would be before taking into account solvency risks.

In the Middle East, the Qirad and Mudarabas institutions developed when trade with the
Levant, namely the Ottoman Empire and the Muslim Near East, flourished and when
early trading companies, contracts, bills of exchange and long-distance international
trade were established. After the fall of the Roman Empire, the Levant trade revived in the
tenth to eleventh centuries in Byzantine Italy. The eastern and western Mediterranean formed
part of a single commercial civilization in the Middle Ages, and the two regions were
economically interdependent through trade (in varying degrees).29

History of Partnership Law-Through the Twentieth Century

Partnership is an ancient form of business enterprise, and special laws governing partnerships
date as far back as 2300 BC, when the Code of Hammurabi explicitly regulated the relations

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[54]
between partners. Partnership was an important part of Roman law, and it played a significant
role in the law merchant, the international commercial law of the middle Ages.

In the nineteenth century, in both England and the United States, partnership was a popular
vehicle for business enterprise. But the law governing it was jumbled. Common-law
principles were mixed with equitable standards, and the result was considerable confusion.
Parliament moved to reduce the uncertainty by adopting the Partnership Act of 1890, but
codification took longer in the United States. The Commissioners on Uniform State Laws
undertook the task at the turn of the twentieth century. The Uniform Partnership Act (UPA),
completed in 1914, and the Uniform Limited Partnership Act (ULPA), completed in 1916,
was the basis of partnership law for many decades. UPA and ULPA were adopted by all
states except Louisiana.

The Current State of Partnership Law

Despite its name, UPA was not enacted uniformly among the states; moreover, it had some
shortcomings. So the states tinkered with it, and by the 1980s, the National Conference of
Commissioners on Uniform Laws (NCCUL) determined that a revised version was in order.
An amended UPA appeared in 1992, and further amendments were promulgated in 1993,
1994, 1996, and 1997. The NCCUL reports that thirty-nine states have adopted some version
of the revised act. This chapter will discuss the Revised Uniform Partnership Act (RUPA) as
promulgated in 1997, but because not all jurisdictions have not adopted it, where RUPA
makes significant changes, the original 1914 UPA will also be considered. NCCUSL,
Uniform law commission, Acts: Partnership Act, The following states have adopted the
RUPA: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Delaware, District of
Columbia, Florida, Hawaii, Idaho, Illinois, Iowa, Kansas, Kentucky, Maine, Maryland,
Minnesota, Mississippi, Montana, Nebraska, Nevada, New Jersey, New Mexico, North
Dakota, Oklahoma, Oregon, Puerto Rico, South Dakota (substantially similar), Tennessee,
Texas (substantially similar), US Virgin Islands, Vermont, Virginia, and Washington.
Connecticut, West Virginia, and Wyoming adopted the 1992 or 1994 version. Here are the
states that have not adopted RUPA (Louisiana never adopted UPA at all): Georgia, Indiana,
Massachusetts, Michigan, Mississippi, New Hampshire, New York, North Carolina, Ohio,
Pennsylvania, Rhode Island, and Wisconsin. The NCCUL observes in its prefatory note to
the 1997 act: The Revised Act is largely a series of default rules that govern the relations
among partners in situations they have not addressed in a partnership agreement. The primary

[55]
focus of RUPA is the small, often informal, partnership. Larger partnerships generally have a
partnership agreement addressing, and often modifying, many of the provisions of the
partnership act.University of Pennsylvania Law School, Biddle Law Library, Uniform
Partnership Act (1997),30

Partnership is an ancient form of business enterprise, and special laws governing partnerships
date as far back as 2300 BC, when the Code of Hammurabi explicitly regulated the relations
between partners. Partnership was an important part of Roman law, and it played a significant
role in the law merchant, the international commercial law of the middle Ages.

In the nineteenth century, in both England and the United States, partnership was a popular
vehicle for business enterprise. But the law governing it was jumbled. Common-law
principles were mixed with equitable standards, and the result was considerable confusion.
Parliament moved to reduce the uncertainty by adopting the Partnership Act of 1890, but
codification took longer in the United States. The Commissioners on Uniform State Laws
undertook the task at the turn of the twentieth century. The Uniform Partnership Act (UPA),
completed in 1914, and the Uniform Limited Partnership Act (ULPA), completed in 1916,
was the basis of partnership law for many decades. UPA and ULPA were adopted by all
states except Louisiana.31

3.4 Partnership Act 1890

The Partnership Act 1890 (c. 39) is an Act of the Parliament of the United Kingdom which
governs the rights and duties of people or corporate entities conducting business in
partnership. A partnership is defined in the act as 'the relation which subsists between persons
carrying on a business in common with a view of profit.32

There is no such thing as United Kingdom partnership law the law governing Partnerships
in the UK is either English law or Scots law depending upon where the Partnership was
formed. There are many common acts relating to Partnerships in both legal systems but there
are also many differences for example under Scots Law a Partnership is considered to be a
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distinct legal entity and therefore can borrow money from a bank in the name of the
Partnership. Under English law a Partnership is not a distinct legal entity and therefore
borrowing would be in the names of the individual partners. Partnerships are a form of
business association, which arises automatically when people carry on business with a view
to a profit. Partners are jointly and severally liable, just as they own the property in common.
A limited partnership, under the Limited Partnerships Act 1907 may have sleeping partners,
who if they do not partake in any business management will not be liable beyond their
investments (s 6). A partnership under the Limited Liability Partnerships Act 2000 is now
considered a separate legal person (s 11) with limited liability (ss 1 and 14), though it is
treated as a partnership for tax, and is not subject to so much regulation as would be a
company. There must, however, be at least two partners.

Section one of the 1890 Act defines partnership as the relationship which subsists between
persons carrying on a business in common with a view of profit. This can come about by
oral agreement, written document or conduct. The minimum membership is two and the
maximum since 2002 is unlimited. The provisions of the Partnership Act 1890 apply unless
expressly or impliedly excluded by agreement of the partners. Each partner is entitled to
participate in management, get an equal share of profit, an indemnity in respect of liabilities
assumed in the course of business and the right to not be expelled by other partners. A
partnership ends on the death of a partner. A partner is jointly and severally liable for others
debts; there is no limited liability.33

Main provisions

A partnership can arise through conduct, oral agreement, or a written contract known as a
partnership agreement. The minimum membership is two and the maximum is unlimited
since 2002. The provisions of the Partnership Act 1890 apply unless expressly or impliedly
excluded by agreement of the partners.

Each partner is entitled to participate in management, get an equal share of profit, an


indemnity in respect of liabilities assumed in the course of business and the right to not be
expelled by other partners. A partnership ends on the death of a partner, unless an agreement
is made prior to the deaths.

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Liability of partners

In England partners are jointly liable for the debts and obligations of the firm whilst he is a
partner. Where a partner has died, his estate also becomes severally liable. In Scotland
partners are both jointly and severally liable. Where there has been a wrongful act or
omission, or a misapplication of money or property in receipt, every partner is jointly and
severally liable.34

Only sleeping partners may have limited liability, and it must consist of at least one general
partner and one limited partner.

Under the 2000 Act, such partnerships are deemed to have legal personality. It allows limited
liability for general trading debts, but individual partners cannot limit personal liability for
negligence. It was introduced to allow some protection against large negligence actions,
where the risks were felt to be excessive.35

3.5 The India Limited Liability Partnership Law

Limited Liability Partnership entities, the world wide recognized form of business
organization has been introduced in India by way of Limited Liability Partnership Act, 2008.
A hybrid model of business that embraces to cover the flexibility of partnership along with
the advantages of the limited liability of a company at a low compliance cost. Such Limited
Liability Partnerships are intended to be created for the purpose of supporting the small scale
industries and service sector enterprises. The paper attempts to introduce to the concept of
Limited Liability Partnerships in India along with the need of setting up the Limited Liability
Partnerships in place of partnerships and limited companies. The paper covers various
taxation aspects in view of Limited Liability Partnerships that covers Income Tax, Wealth
Tax, Service Tax and Sales Tax/Value Added Tax. The paper also attempts to highlight the
issues pertaining to them that need to be addressed in order to effectively implement the
Limited Liability Partnerships in India. The researcher also took note of various Possible
Business Structures in Limited Liability Partnerships along with few suggestions. The paper
concluded that in near future, more Limited Liability Partnerships will come into existence
given its advantages over the partnership and company form of organization in India.36

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[58]
INTRODUCTION

Partnership constitutes the oldest-known legally-accepted model of business organization


involving more than one person. In the crudest (and, indeed, oldest) sense, it reflects
any sort of association between persons who pool their resources with a view to
carrying on business and participating in its profits and/or losses. With growth in human
civilization, business organization complicated and, this, in turn, required law to respond,
sometimes by mere recognition and sometimes by creation of newer business
forms. Capitalistic nature of their economies particularly motivated some States to have
a responsive regulatory regime in place. A companyor, a corporation in the
American sensebest illustrates this responsiveness. While the most successful, a
company does not reflect all regulatory innovation in this area. There are several
other business forms which are purely the result of such innovation. A limited
liability partnershipwhich, simply put, is a form of business organisation in which the
liability of the partners is limited to the extent of their interest in the
partnership, owing to its company-type separate legal personality and yet having the
organizational suppleness and tax treatment of a partnershipconstitutes the most recent
epitomization of such regulatory tendency.37

Partnerships has been one of the most oldest forms of business relationships and this can be
evidenced that in terms of complex business, partnerships have been replaced by limited
liability companies concept, but it is still a preferred form for small trading and business
enterprises, especially for the professionals worldwide. But gradually, this form has lost its
demand because of inherent demerits in it, the primarily being the unlimited liability of
partners. So, a need was felt to develop a format that would combine the flexibility of
partnership and the advantages of limited liability of a limited liability company at a low
compliance cost. With respect to India, Limited Liability Partnership (LLP) entities have
been introduced in India by way of LLP Act, 2008 that was notified with effect from March
2009. The importance of the subject of LLP has been growing since then day by day with the
upward moving trend in LLP registrations and conversion of traditional unlimited
partnerships to the LLP status. One can experience the increasing level of interest in recent
years in the formation of LLP.

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So, LLP is a hybrid model of business organization in India that combines the positive
aspects of both the company and the partnership. As the name suggests, it pervades the
benefits of Limited Liability and allows its members the flexibility of organizing their
internal structure as a partnership based on mutual agreement. LLP is managed as per the
LLP Agreement, however in the absence of such agreement the LLP would be governed by
the framework provided in Schedule 1 of LLP Act, 2008 which describes the matters relating
to mutual rights and duties of partners of the LLP and of the LLP and its partners. Many
smaller professional firms are taking the interest in such concept as they are attracted by the
lower compliance cost, better control and management, greater flexibility in operations and
limited liability of members of the LLP.

In an LLP, one partner is not responsible or liable for another partner's misconduct or
negligence; this is an important difference from that of an unlimited partnership. In an LLP,
all partners have a form of limited liability for each individual's protection within the
partnership, similar to that of the shareholders of a corporation.

However, unlike corporate shareholders, the partners have the right to manage the business
directly. An LLP also limits the personal liability of a partner for the errors, omissions,
incompetence, or negligence of the LLP's employees or other agents. This form would be
quite useful for small and medium enterprises in general and for the enterprises in services
sector in particular, including professionals and knowledge based enterprises.

One of the major advantages of the LLP is that it enables the professional/technical expertise
and initiative to combine with financial risk taking capacity in an innovative and efficient
manner.

LLPs formed and registered under the LLP Act, 2008 shall have the features of Perpetual
Succession, Power to sue and get sued, Capacity to buy and sell security in its own name and
Common Seal.38

HISTORICAL ACCOUNT AND OBJECTIVES OF LLP

The concept of a limited liability partnership surfaced in response to the great real
estate and energy prices crumple in 1980s and the consequent impact it had on the banks
and other financial institutions. Since not much could be recovered from these failed financial

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institutions, attention soon shifted to the lawyers and accountants who had represented the
failed financial institutions before their collapse. The plausibility of recovery came across
owing to the backing of these professionals by rich and moneyful partnerships and
insurers. The saga of the partners who had not been involved in advising the financial
institutions in any capacity or sense but who were proceeded against in respect of their
personal assets also, sympathetically attracted the consideration of the legislature.

The United States, which was the epicenter of that financial crunchas it has been
for most other, including the present sub-prime credit crunchspearheaded the process
of legislating the concept of LLPs. The initial hesitationboth in the academic and
legislative circlesin disturbing the long-settled principles of unlimited liability of
the partners of a partnership firm on the grounds of its moralistically weak foundations and
its discriminatory nature, was soon overcome by the commercial expediency of its
legislation. Thus, came on the statute book, the first law on LLP with Texas enacting the
Texas House Bill 278 on 26 August 1991. The other states of the US soon followed.

The objective of the LLP law, if understood in this milieu, is quite clear. It seeks to achieve
the principal benefits of both partnership and company as forms of business organization.
Primarily, it aims at freeing the mind of a professional from the fear that his personal assets
may be attached for the negligent and other wrongful acts of his co-partners, over whom
he has no control. This, the law does, by providing the shield of limited liability by
way of a separate legal personality. In other words, it enables
professional/technical expertise and initiative to combine with financial risk taking
capacity in an innovative and efficient manner. The other objective is to allow to the
LLP the same organization litheness and freedom from compliances as are available to a
general partnership, thus calling for a new form of corporate governance. Additionally, an
LLP is also conferred the same status as a general partnership for tax purposes, by
following the flow-through system, so that the tax incidence does not act as a
disincentive against this form of organization.

DISTINGUISHING AN LLP FROM OTHER SIMILAR BUSINESS FORMS

Before we proceed to visit the provisions of the recently concluded Indian LLP Act and
address some of the concerns that the Act seems to have failed to address, we must first

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distinguish an LLP from certain other forms of business organisation in order to best
appreciate the choice of an LLP over other similar forms.

We first distinguish an LLP from its parent concept: a general partnership. A general
partnership enjoys no legal status or existence separate from the partners who constitute it.
An LLP, on the other hand, is a legal entity, separate from its partners. This constitutes the
foundational distinction between the two entities; the others, being its derivatives. In
terms precisely of the extent of liability, an LLP is different from a general partnership in the
following sense : in a general partnership, all partners are personally liable for all
business debts to the extent they exceed the assets of the partnership. Vis --vis a third
party, the liability is joint and several, i.e. each partner may be sued for the full amount of any
claim. The basis for this sort of liability is perhaps the entitlement of each partner to represent
as an agent, supervise as a principal, and take decisions for the partnership business as well as
other partners. In an LLP, on the other hand, no partner is liable for the actions of any other
partner beyond the extent of his share in the LLP.

An LLP is different also from a Limited Partnership in that unlike the former, at least
one of the partners of the latter is a general partner who is in the ordinary control of
day to day business of the firm and has unlimited personal liability. Besides the general
partner, there is also at least one partner who has limited liability for debts and claims
arising out of business decisions and activities. An LLP has no general partner.

It may, at this point, also be appropriate to distinguish an LLP from a Limited Liability
Company. (for short LLC). The precise distinction between the two concepts is
not very well defined. The reason , perhaps, is that since LLC is a peculiarly US
concept, where the legislative competence , in this regard, is vested in the provincial states
and due to the differences in the needs of different states, the regime providing for the
formation of LLCs is different from state to state.

CURRENT STATUS OF THE LLP LAW IN INDIA

Pursuant to the recommendations of the J.J. Irani Committee and the Naresh Chandra
Committee-II and the feedback received on the Ministry of Company Affairs Concept Paper
on LLP, a draft LLP Bill was prepared. The news about the drafting of the LLP Bill first
became official around the mid of September 2006. The first version of the Bill was
approved by the Cabinet on December 7, 2006 and was introduced in the Rajya Sabha

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on December 15, 2006. Subsequently, the Bill was referred to the Department Related
Parliamentary Standing Committee on Finance. The Committee submitted its Report to both
the Houses of Parliament on November 27, 2007, recommending some changes in the draft
LLP Bill, 2006. The Standing Committee (Finance and Corporate Affairs) then submitted the
final version of the Limited Liability Partnership Bill to the Ministry for Corporate Affairs.

The Cabinet on 1 May 2008 approved the introduction of a Limited Liability Partnership
(LLP) Bill, 2008 in Parliament by replacing the Limited Partnership Bill, 2006. On 21
October 2008, the Bill was introduced in the Rajya Sabha. This Bill was introduced first
in the Rajya Sabha since the Union Minister of Corporate Affairs, Shri Prem Chand
Gupta, is a member of the Rajya Sabha. After being passed in the Rajya Sabha on 24 October
2008, the Bill was tabled in the Lok Sabha, which also passed the Bill without any changes.
The Bill received the assent of the President of India on 7th January, 2009. The Limited
Liability Partnership Act, 2008 was thereafter notified in the Official Gazette of India dated
9th January 2009.

In terms of Section 1(2) of the Act, the Act was to come into force on a date appointed by the
Central Government by notification in the Official Gazette. Vide Notification No. S.O.
891(E), dated 31.03.2009, the Central Government has appointed the 31st day of March,
2009 as the date on which the majority of the provisions of the Act have been brought
into force. Similarly, the Central Government has also notified the LLP Rules which are
effective from 1 April 2009.39

NEED FOR LLPs IN INDIA

The two primary reasons for introducing LLP were the Risk Factor and the enhanced global
competitive advantage to the Indian professionals.

In the event of business failure, the liability would be limited to the partner responsible.
There would be no recourse to attach the personal assets of the other members. This lowers
the risk factor associated with unlimited liability in a partnership and introduced the limited
liability concept of company law to make such bodies more adaptive to international
competition. In the years to come, it may be possible that the various useful services will be
provided by a large pool of Indian professionals to the International clientele. But, in an

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increasingly litigious environment, it is really very risky to be a member of partnership firm
with unlimited liability. So, a need was felt that there should be a new corporate entity as an
alternative to the traditional partnership with limited liability and flexible business
environment to operate efficiently to give competition to the International market.

Many professionals in India, such as advocates/lawyers, chartered accountants and doctors


are precluded from practicing through companies. The LLP structure would be particularly
advantageous for providing such professional services in the era of satisfying the global
customers with utmost sincerity. Hence it would be a suitable vehicle for partnership among
professionals who are already regulated such as company Secretaries, Chartered Accountants,
Cost Accountants, Lawyers, and Architects, Engineers and Doctors etc., particularly
accountants and auditors who are not legally permitted to operate as company.

Further, as India is attracting FDI in entrepreneurial projects carried through the LLP format,
the same would encourage the small entrepreneurs in India to explore business ventures with
foreign investment. Also, foreign entities having project offices in India consider reducing
risk by using the LLP structure. Any structure where different members want to control
different segments and also bear full responsibility for their acts could conveniently use the
LLP structure that includes infrastructure project SPVs where different partners bring in
different expertise into the project.

The disadvantages of the traditional form of business organization as that of traditional


partnership firms and limited companies make it a dire necessity to have a hybrid model of
LLP.

Some of the major disadvantages of traditional partnership firm are as follows:

Unlimited Liability of partners This has proved to be an unattractive prospect as this


is not only too risky but at time not feasible. It does not recognize the distinction between
partnership and its members.

Limited membership- In a general Partnership firm registered under Indian Partnership


Act cannot be formed with more than 20 partners preventing the growth of professional firms
to large entities. This can have a depressing effect on the developmental aspects of the firm as
ideally firm need to grow continuously to satisfy its clientele. This restriction would not
apply if the partnership is registered as LLP.

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Some of the major disadvantages of limited companies are as follows:

Statute governed structure of the company - The internal governance of a company is


regulated by Companies Act, 1956 whereas for a LLP it would be by a contractual agreement
between partners. There will flexibility of a partnership in LLP while allowing the owners to
adopt any form of internal organization, and limitation to the owners liability.

The Dichotomy of Management-Ownership - There is no dichotomy of management-


ownership in LLP as prevalent in a company. There are lesser requirements for compliance in
LLP which makes it more flexible.

While, relatively major advantages of LLP are:

Separate Legal Entity Right to sue and right hold property in its own name.

Flexibility - It is not required to maintain statutory records except the Books of Accounts.

No requirement of minimum capital contribution.

Its dissolution or winding-up is rather easy.

The LLP is also free from complicated procedures applicable to companies, such as
minutes, annual meetings, etc.

The partners have a right to directly manage the business of the LLP, unlike a company
where the business must be managed through the directors.

Perpetual Existence - There is no perpetual existence in case of the general partnership.

No limit on maximum number of partners.

TAXATION ASPECTS OF LLPs

Income Tax

Definition of firm, partner and partnership amended to include LLP & its partners.
LLP will be treated as Partnership Firm for the purposes of Income Tax. Consequently, all
provisions applicable to firm apply to LLP.

Residential Status of an LLP - LLP is a resident of India except where control and
management situated wholly outside India.

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Treated as opaque entity - Rate similar to that of partnership firm @ 30.90%.

Profits exempt in the hands of partners Section 10(2A) of the Income-Tax Act, 1961 (IT
Act).

No Minimum Alternate Tax payable.

No Dividend Distribution Tax (DDT) payable.

No surcharge applicable.

LLP is also subject to Alternate Minimum Tax (AMT), calculated based on the adjusted
total income.

Remuneration to partners will be treated as Income from Business & Profession and the
LLP is allowed to get deduction of remuneration paid to the partners subject to maximum of
the limit under section- 40(b).

Currently, there are no tax implications on conversion of a partnership firm to an LLP as for
the tax purposes; LLP and a general partnership firm is considered as equivalent. Conversion
endorses the premise that conversion does not involve any transfer but a mere internal
organization taking place.

Wealth Tax

LLP not included in any definition in Wealth tax Act. Hence, LLP not covered under persons
liable to pay wealth tax.

Service Tax

For the purposes of Service Tax also, an LLP will be treated as partnership firm only. Service
Tax Rules, 1994 has been amended by the Service Tax (Amendment) Rules, 2012 to consider
LLP as a partnership firm.

Sales Tax/Vat

Under Sales Tax, LLP is treated as a body corporate. The definition of the dealer under the
Central Sales Tax, 1956 includes body corporate also. There is no dissimilarity in partnership
firm, company, body corporate etc. Under sales tax. Provisions for different kinds of dealers

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are distinguished based on the volume/size or turnover of the dealer and not on the status of
the dealer.

CONCLUSION

After globalization, Indian professionals are able to serve worldwide. They cannot serve
inform of company because of professional restrictions and moreover they hesitate to form
Partnerships due to number of reasons. In the wake of same, LLP would be a suitable vehicle
for partnership among professionals who are already regulated such as company secretaries,
chartered accountants, cost accountants, lawyers, architects, engineers, doctors. So, we can
say that LLP is a format that attempts to fill up the vacuum that existed between partnership
law and company law. It is a marriage of principles of company law and partnership law in
order to address the deficiencies in both the areas for small scale business and professional
firms. LLP promises a rosy future in the future for the small scale industries and the
professionals alike. Moreover, the possible Business Structures can convert into reality if the
concerns that matters relating to the same are contained. LLPs can be seen as a corporate
business vehicle that enables professional expertise and entrepreneurial initiative to combine
and operate in flexible, innovative and efficient manner, providing benefits of limited liability
while allowing its members the flexibility for organizing their internal structure as a
partnership. This set up is useful for small and medium enterprises in general and for the
enterprises in service sector. Hence, there is a large scope of LLPs in future given that the
issues relating to them are timely and properly addressed to ensure their working the best
possible and efficient manner. With its inherent flexible structure, it remains a viable form of
business in the long run.40

3.6 Indian Partnership Act, 1932

An Act to define and amend the law relating to partnership. 1 October 1932 except section
69 which came into force on the 1st day of October 1933, extends to the whole
of India except for Jammu and Kashmir. The Indian Partnership Act, 1932 was enacted
in India in 1932.41

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History of India Partnership Act, 1932

The Indian Partnership Act was enacted in 1932 and it came into force on 1st day of October,
1932. The present Act superseded the earlier law relating to Partnership, which was relating
to Partnership, which was contained in chapter XI of the Indian contract Act, 1872. The Act
is not exhaustive. It purports to define and amend the law relating to Partnership.

A Partnership arises from a contract, and therefore, such a contract is governed not only by
the provisions of the Partnership Act in that regard, but also by the general law of contract in
such matters, where the Partnership Act does not specifically make any provision. It has been
expressly provided in the Partnership Act that unrepeated provisions of the Indian Contract
Act, 1872, save in so far as they are inconsistent with the express provisions of this act, shall
continue to apply. Thus, the rules relating to offer and acceptance, consideration, free
consent, legality of object etc, as contained in the Indian Contract Act are applicable to a
contract of Partnership also. On the other hand, regarding the position of minor, since there is
specific provision contained in Section 30 of the Indian Partnership Act, the minors position
is governed by the provision of the Partnership Act.

Nature of Partnership:

Partnership is a form of business organization, where two or more persons join together for
jointly carrying on some business. It is an improvement over the Sole trade business ,
where one single individual with his own resources, skill and effort carries on his own
business. Due to the limitation of resources of only a single person being involved in the sole-
trade business, a larger business requiring more investments and resources than available to a
sole-trader, cannot be thought of in such a form of business organisation.

In partnership, on the other hand, a number of persons could pool their resources and efforts
and could start a much larger business, than could be afforded by any of these partners
individually. In case of loss the burden gets divided amongst various partners in a
Partnership.

Criteria of Partnership:

Any two or more than two persons can join together for creating Partnership. Section 11 of
the Companies Act, 1956 imposes limit as to maximum number of persons in a partnership
for the purpose of carrying:

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Banking Business There can be maximum of 10 persons
Any other purpose There can be maximum of 20 persons.

If the number of members in any association exceeds the above stated limit, that must be
registered as a company under Companies Act, 1956 otherwise that will be considered to be
an illegal association. As against partnership, where the maximum number of partners can be
10 or 20, depending on the nature of partnership business, there could be possibly much
larger number of members in a company.

In Private Company Here there can be maximum of 50 members


In Public Company - Here there is no such limit to the maximum number.

Therefore, if a much larger business than could be afforded by only 10 or 20 persons is


sought to be carried on, a company works out to be better form of business organization than
partnership.

For instance , there could be a public company having 1,00,000 members , each one of them
having contributed just Rs.10 , and thus having a capital of Rs. 10,00,000 for its business. A
Company, as a form of business organization may be better than a partnership in another way
also. It is an artificial person, distinct from its members, and has much longer life than that of
a partnership, whereas the partnership being nothing but an aggregate of all the partners,
partnership has much smaller span of life than a company.

In the case of a Company, the liability of a member (shareholder) is limited to the extent of
the amount of shares purchased by him, whereas in case of Partnership, the liability of every
partner in unlimited, and this factor is of great advantage in case of a Company, from the
point of view of risk of investors in the business.

Advantage Of Partnership over A Company:

For the creation of partnership just an agreement between various persons is all what you
require. In case of a company a lot of procedural formalities which have to be gone
through before a company are created.
The partners are their own masters for regulating their affair. A company is subject to a
lot of statutory control.

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For dissolution of partnership, a mere agreement between the partners is enough but that is
not the case of a company which can be wound up by only after certain set of procedure is
followed.
Since all the profits are to be pocketed by the partners in a partnership firm, there is a
great incentive for the partners to make business successful but that is not in case of a
company.
In a Partnership the persons who have entered into are individually called partners and
collectively a firm. A partnership firm does not have a separate legal personality. A
company is a legal entity different from its members.
A partnership firm means all the partners put together, if all the partners cease to be
partners, e.g., all of them die or become insolvent, the partnership firm gets dissolved. A
company being a person different from the members, the members may come and go but
the companys life is not affected thereby.
The shareholder of a company can transfer his share to anybody he likes but a partner
cannot substitute another person in his place unless all the other partners agree to the
same.
Similarly, on the death of a member of a company his legal representatives will step into
his shoes for the purpose of the rights in the company, but on the death of a partner his
legal representatives do not get substituted in his place of partnership.
The minimum number of members in partnership in two and maximum in case of
partnership carrying on banking business is 10 and in case of any other business is 20.In
the case of a private company the minimum number is 2 and the maximum is 50 whereas
in the case of a public company the minimum number should be 7 but there is no limit to
the maximum number and therefore, any number of persons can hold shares in a public
company.
The liability of the members of a company is limited but the liability of the partners is
unlimited.

PreambleScope and Purpose:

The preamble is an admissible aid to construction. It throws light on the intent and design of
the legislature and indicates the scope and purpose of the legislation itself. But it cannot be
used to control or qualify precise and unambiguous language of the enactment. It is only

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when there is a doubt as to the meaning of a provision, that recourse may be had to the
preamble to ascertain the reasons for the enactment and hence, the intention of Parliament.

Scope:

The scope of a partnership is primarily a question of the intention of the partners. There is no
restriction on the exercise of such powers as it chooses at any time to exercise, except such
prohibitions on illegal, immoral or fraudulent conduct as apply equally to individuals.
1- A partnership may itself be a member of another firm if the partners of the constituent firm
consent thereto.

2- If it appears that all the partners have either authorized or ratified the contract, no further
question as to its validity ordinarily remains. The case where the question of the validity of
partnership contract arises is where one partner has made the contract without specific
authority from his co-partners. As to their implied scope partnerships may be divided into the
classes of the non-trading and the trading. Some powers can be exercised by partners in
partnership of either type. Thus a partner may retain an attorney protect the interests of the
firm.

Definition of Partnership:

Section 4 of the Indian Partnership Act, 1932 defines Partnership as under:


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

Essentials of Partnership:

According to Section 4, the following essentials are necessary to constitute a Partnership.


1. There should be an agreement between the persons who wants to be partners.
2. The purpose of creating partnership should be carrying on of business
3. The motive for the creation partnership should be earning and sharing profits.
4. The business of the firm should be carried on by all of them or any of them acting for all,
i.e., in mutual agency.

When all the above elements are present in certain relationship that is known as partnership.
Persons who have entered into partnership with one another are called individually partners
and collectively a firm and the name under which their business is carried on is called the
firm name.

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Elements of Partnership:

The definition of partnership contains three elements:

1. There must be an agreement entered into by all the persons concerned.


2. The agreement must be to share the profits of business; and
3. The business must be carried on by all or any of the persons concerned, acting for all.

Illustrations:

A) A and B buy 100 bales of cotton, which they agree to sell for their joint account. A and B
are partners in respect of such cotton.

B) A and B buy 100 bales of cotton, agreeing to share it between them. A and B are not
partners.
C) A agrees with B, a goldsmith, to buy and furnish gold to B , to be worked on by him and
sold , and that they shall share in the resulting profit or loss. A and B are partners.

Partnership Agreement Oral, Written Or By Conduct

The Supreme Court has, construing the provisions of section 4, observed that a partnership
agreement is the source of a partnership, and it also gives expression to the other ingredients
defining the partnership, specifying the business agreed to be carried on, the persons who will
actually carry on the business, the shares in which the profits will be divided, and several
other considerations which constitute such an organic relationship. A partnership agreement
therefore, identifies the firm and each partnership agreement may constitute a distinct and
separate partnership. That is not to say that a firm is corporate entity or enjoys a juristic
personality in that sense. However, each partnership is a distinct relationship. The partners
may be different and yet the nature of the business may be the same, the business may be
different and yet the partners may be the same. The intention may be to constitute two
separate partnerships and therefore, two distinct firms, or to extend merely a partnership,
originally constituted to carry on one business, to the carrying on of another business. The
intention of the partners will have to be decided with reference to the terms of the agreement
and all the surrounding circumstances, including evidence as to the interlacing or interlocking
of management, finance and, other incidents of the respective business.

Agreement of partnership need not to be express , but can be inferred from the course of
conduct of the parties to the agreement. The firm rule is that once the parties entering into the

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partnership are clearly described in the instrument , there is no scope for further inquiry to
find out by some process or casuistry , if any of the parties has got obligation to others for the
purpose of inducting those others to whom any of the parties may be accountable in law , into
the arena of partnership and for treating them as partners under the law.[11] If , the parties to
an agreement have not agreed on the date of commencement of the partnership , it cannot be
said that they have become partners.

The Supreme Court, in Tarsem Singh v Sukhminder Singh, has held that it is not necessary
under the ;aw that every contract must be in writing. There can be an equally binding contract
between the parties on the basis of oral agreement, unless there is a law which requires the
agreement to be in writing.

The relations inter se , among the promoters of a company , are not the same as the relations
between partners. Persons entering into contract are not, on the authority of Keth Spicer Ltd v
Mansell, necessarily to be viewed as partners. However, if they perform a large number of
acts as part of the promotion, the court might come to a different conclusion.

Construction Of Partnership Agreements:

It is settled canon of construction that a contract of partnership must be read as a whole and
the intention f the parties must be gathered from the language used in the contract by
adopting harmonious construction of all the clauses contained therein. The cardinal principle
is to ascertain the intention of the parties to the contract through the words they have used,
which are key to open the mind of the makers. It is seldom that any technical r pedantic rule
of construction can be brought to bear on their construction. The guiding rule really is to
ascertain the natural ad ordinary sensible meaning to the language through which the parties
have expressed themselves, unless the meaning leads to absurdity. A partnership deed must
be constructed reasonably.

Determining the Existence of Partnership:

In Ross v. Parkyns[13] Jessel ,M.R., stated the law as follows : It is said (and that there is
no doubt ) that the mere partcipation in profit inters se affords cogent evidence of partnership.
But it is now settled by the case of Cox v. Hickman ,Buller v. Sharp that although a right to
participate in profits is a strong test of partnership , and there may be cases where upon a
single presumption , not of law , but of fact , that there is a partnership , yet whether the
relation of partnership does or does not exists must depend upon the whole contract between

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the parties , and that circumstances is not conclusive. . The law as stated above has been
restated in this section. The section also indicates the manner in which the general principle
to be applied to a particular circumstances. The question whether the relation of partnership
does or does not exist must depend on the real intention and contract of the parties.

Explanation I - The mere fact that a person is entitled to a share in the profits does not make
him a partner, because the real relationship may be one of debtor and creditor.

Importance of Partnership:

A Partnership Agreement is a voluntary contract between two or more persons to enter into a
business relationship between or among one another with the intention of carrying out the
said business and sharing its profits/losses among themselves as agreed to in the document.
The parties to the agreement are referred to as Partners. The Partners agree to put all their
capital, labour and skills towards achieving maximum gains from the venture. A Partnership
Agreement will also spell out the manner in which it may be dissolved and must be signed
and followed by each of the Partners.

A Partnership Agreement is defined as being an arrangement that is agreed to by all parties to


the transaction and is an effectual method of helping each of the partners to:

Agree to share a vision to collaborate together


Set up mutually acceptable goals
Specify the basis on which to begin working together
Make sure that each of the partners are clear about what needs to be achieved
Assess the effectiveness of the agreement
Bring out issues related to accountability and responsibility
Lay a strong foundation that can sail through difficulties and testing times ahead

A partnership should begin small and slowly expand. It should be growing from year to year
with annual reviews along the way to continuously improve it. There is no hard and fast way
of writing out a Partnership Agreement but face to face discussions among partners,
specifying special issues and setting these down in writing before actually drafting them into
the document are some worthwhile preliminary steps worth following. The document and any
changes thereto, should be formally approved and signed by all the partners and dated.
The Partnership Agreement should begin with the name of the business as well as the nature

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of the business. The principle place of business should be to the address of the place of
business. The date when the arrangement was made between the Partners and the term of its
operation need to be expressly laid down in the agreement.

The amount of capital that the Partners will invest in the business will be held in a separate
capital account and neither of the Partners will be able to withdraw any money from it. And,
finally each individual capital account will be maintained in accordance with the profit
sharing capabilities of the Partners as set forth in the agreement.

The income statement of the partnership shall be made individually in the names of each
Partner and the profits/losses will be shared in accordance with the terms agreed to by each
individual. Partnership profits or losses will be charged to the individual income accounts of
the Partners. Partners are not entitled to draw any salary, but may draw upon their income
accounts for any monies needed as defined in the partnership agreement.
The partnership may be voluntarily dissolved at any time with the mutual consent of the
partners. In such an eventuality, the withdrawing partner should move reasonably swiftly to
facilitate the liquidation. In case a partner was to die, the remaining partners will have the
option to either liquidate the partnership or to buy out the share of the deceased partner.

Conclusion & Suggestion:

In my opinion Partnership is very important because in day to day activities we enter into
partnership agreements and by making partners big goals are achieved with the help of joint
and more number of people. The joint efforts of all the member results in successful
accomplishment of tasks and that task or job can be easily afforded. Division of work leads to
increase in efficiency at work among different partners.

When some job is done by consent of all the members and if some profit is earned then it is
shared among the different partners. And similar is the case when some loss occurs then that
is also beard among all the members and its not that only one has to take responsibility or
give compensation. So in my view Partnership is a good form of doing business than a
company which is owned by a single person.

Partnership is one of the oldest forms of business relationships. Though limited liability
companies have replaced partnership firms in complex businesses, partnerships are still
preferred by professionals and small trading and business enterprises in India and abroad.

[75]
The Indian partnership act of 1932 provides for a general form of partnership which is the
most prevalent form in India, but, over time the general form of partnership has lost its charm
because of the inherent disadvantages in it, the most important is the unlimited liability of all
partners for business debts and legal consequences, regardless of their holding, as the firm is
not a legal entity.

General partners are also jointly and severally liable for tortuous acts of co-partners. Each
partner has the exposure of their personal assets being appropriated and liquidated to meet
partnership dues. These are statutory position, which cannot be altered by contract inter-se,
though at times subterfuges are resorted to by unscrupulous partners to avoid personal
liability.
General partnership holdings are not easy to transfer; typically all other partners have to
agree. Yet partnership is preferred in India, because of the ease of formation and lack of
compliances involved.42

3.7 The Indian Contract Act, 1872(Sec.239-266)

Sec. 239-266 of chapter XI from Indian Contract Act, 1872 are repealed by the Indian
Partnership Act, 1932.

Partnership as a concept has evolved over a period of centuries now. In the nascent stages of
the concept, faith and trust amongst the partners was the corner-stone of the partnership and
need for a written instrument was not felt necessary. However, with the passing times and
changing values, even the written instruments were being flouted with impunity. This is
borne out from the fact that initially the law with regard to partnership was contained in
Sections 239-266 of the Indian Contract Act, 1872, but the same proved to be insufficient and
defective to meet the exigencies thrown by changing times, values and needs. The business
community was not satisfied with the provisions, which impelled the legislature to enact a
separate law relating to partnership. This led to the enactment of the Indian Partnership Act,
1932. The English law, on which the provisions of the Indian Contract Act were founded,
also underwent changes, leading to the English Partnership Act, 1890. The author has
extensively and comprehensively covered the various aspects dealing in the Partnership Law.

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[76]
Salient Features:

Contains exhaustive notes, commentary on case-law, Indian & Foreign, and State
Amendments on the Indian Partnership Act, 1932 (Act 9 of 1932).

The book also incorporates full text of the Limited Liability Partnership Act, 2008 and
Limited Liability Partnership Rules, 2009.

Case law, both Indian and foreign, as well as excerpts from commentaries of celebrated
authors have been included in the book.

Each Section has been divided into various heads along with a critical analysis of various
provisions of the Act for the facility of the readers.43

3.8 Uniform Partnership Act, 1914(US)

The subject of a uniform law on partnership was taken up by the Conference of


Commissioners on Uniform State Laws in 1902, and the Committee on Commercial Law was
instructed to employ an expert and prepare a draft to be submitted to the next annual
Conference.

At the meeting in 1903 the committee reported that it had secured the services of James Barr
Ames, Dean of the Law School of Harvard University, as expert to draft the act.

In 1905 the Committee on Commercial Law reported progress on this subject, and a
resolution was passed by the Conference, directing that a draft be prepared upon the
mercantile theory. And in 1906 the committee reported that it had in its hands a draft of an
act on this subject, which draft was recommitted to the committee for revision and
amendment, with directions to report to the next Conference for discussion and action.

In 1907 the matter was brought before the Conference and postponed until the 1908 meeting.
In 1908 the matter was discussed by the Conference. And in 1909 the Second Tentative Draft
of the Partnership Act was introduced and discussed.

In 1910 the committee reported that on account of the death of Dean Ames no progress had
been made, but that Dr. Wm. Draper Lewis, then Dean and now Professor of Law at the Law
School of the University of Pennsylvania, and Mr. James B. Lichtenberger, of the

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[77]
Philadelphia Bar, had prepared a draft of a partnership act on the so-called entity idea, with
the aid of the various drafts and notes of Dean Ames, and that they had also submitted a draft
of a proposed uniform act, embodying the theory that a partnership is an aggregate of
individuals associated in business, which is that at present accepted in nearly all the states of
the Union.

Dean Lewis expressed his belief that with certain modifications the aggregate or common law
theory should be adopted.

A resolution was passed by the Conference that any action that might have theretofore been
adopted by it, tending to limit the Committee on Commercial Law in its consideration of the
partnership law to what is known as the entity theory, be rescinded and that the committee be
allowed and directed to consider the subject of partnership at large as though no such
resolution had been adopted by the Conference.

In the fall of 1910 the committee invited to a Conference, held in Philadelphia, all the
teachers of, and writers on, partnerships, besides several other lawyers known to have made a
special study of the subject.

There was a large attendance. For two days the members of the committee and their guests
discussed the theory on which the proposed act should be drawn.

At the conclusion of the discussion the experts present recommended that the act be drawn on
the aggregate or common law theory, with the modification that the partners be treated as
owners of partnership property holding by a special tenancy which should be called tenancy
in partnership.

Accordingly, at the meeting of the Conference in the summer of 1911, the committee
reported that, after hearing the discussion of experts, it had voted that Dean Lewis be
requested to prepare a draft of a partnership act on the so-called common law theory.

The committee reported another draft of the act to the Conference at its session in 1912,
drawn on the aggregate or common law theory, with the modification referred to.

At this session the Conference spent several days in the discussion of the act, again referring
it to the Committee on Commercial Law for their further consideration.

[78]
The Committee on Commercial Law held a meeting in New York on March 29, 1913, and
took up the draft of the act referred back to it by the Conference, and after careful
consideration of the amendments suggested by the Conference, prepared their seventh draft,
which was, at their annual session in the summer of 1913, submitted to the Conference. The
Conference again spent several days in discussing the act and again referred it to the
Committee on Commercial Law, this time mainly for protection in form.

The Committee on Commercial Law assembled in the City of New York, September 21,
1914, and had before them a new draft of the act, which had been carefully prepared by Dr.
Wm. Draper Lewis with valuable suggestions submitted by Charles E. Shepard, Esq., one of
the commissioners from the

State of Washington, and others interested in the subject. The committee reported the Eighth
Draft to the Conference which, on October 14, 1914, passed a resolution recommending the
act for adoption to the legislatures of all the States.

Uniformity of the law of partnerships is constantly becoming more important, as the number
of firms increases which not only carry on business in more than one state, but have among
the members residents of different states.

It is however, proper here to emphasize the fact that there are other reasons, in addition to the
advantages which will result from uniformity, for the adoption of the act now issued by the
Commissioners.

There is probably no other subject connected with our business law in which a greater
number of instances can be found where, in matters of almost daily occurrence, the law is
uncertain. This uncertainty is due, not only to conflict between the decisions of different
states, but more to the general lack of consistency in legal theory.

In several of the sections, but especially in those which relate to the rights of the partner and
his separate creditors in partnership property, and to the rights of firm creditors where the
personnel of the partnership has been changed without liquidation of partnership affairs, there
exists an almost hopeless confusion of theory and practice, making the actual administration
of the law difficult and often inequitable.

Another difficulty of the present partnership law is the scarcity of authority on matters of
considerable importance in the daily conduct and in the winding up of partnership affairs.

[79]
In any one state it is often impossible to find an authority on a matter of comparatively
frequent occurrence, while not infrequently an exhaustive research of the reports of the
decisions of all the states and the federal courts fails to reveal a single authority throwing
light on the question.

The existence of a statute stating in detail the rights of the partners inter se during the
carrying on of the partnership business, and on the winding up of partnership affairs, will be a
real practical advantage of moment to the business world.44

3.9 Revised Uniform Partnership Act, 1996(US)

Meaning of Revised Uniform Partnership Act

The Revised Uniform Partnership Act (RUPA) is a model statute that dictates how
partnership should be set up and organised, as well as what the right and duties of each of the
partners should be. It is, as the name suggests, a revision of the Uniform Partnership Act
(UPA), and has been adopted by almost every state.

RUPA gives partners much more discretion in determining how their partnership will operate
than the UPA did, by allowing the partnership agreement to be the main authority over each
of the partners.

RUPA also provides fall-back rules for any provisions that are left out of the partnership
agreement.45

The Uniform Partnership Act (UPA), which includes revisions that are sometimes called
the Revised Uniform Partnership Act (RUPA), is a uniform act (similar to a model statute),
proposed by the National Conference of Commissioners on Uniform State
Laws ("NCCUSL") for the governance of business partnerships by U.S. States.

Several versions of UPA have been promulgated by the NCCUSL, the earliest having been
put forth in 1914, and the most recent in 1997.

44
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[80]
The NCCUSL's first revision of UPA was promulgated in 1992 and amended in 1993 and
1994. The 1994 revision was often referred to as the Revised Uniform Partnership Act
(RUPA). Confusion arose when the 1996 and 1997 versions were also called RUPA.

Because of this confusion, the NCCUSL now officially refers to each UPA version as
"Uniform Partnership Act (year)," where "year" is replaced by the actual year that NCCUSL
approved it. Many people still use the term "RUPA" to mean any version from 1994 forward.
Thus, "RUPA" may actually imply any version of UPA except the 1914 version.

UPA and RUPA differences

The UPA and RUPA provide rules as to many aspects of a partnership relationship including
formation, the ownership of partnership assets, the assessment of fiduciary duties, the
settlement of partnership disputes, and termination. Each allows modification of these rules in
the individual agreement among the partners.

RUPA is significantly more detailed than is the UPA as to the degree to which the partnership
agreement may modify the default rules set forth in the statute.

RUPA also clarifies the nature of a partnership itself by clearly defining it as an entity rather
than an aggregation of individuals. There are also a number of other important differences
between UPA (1914) and subsequent versions.

Enactment by states

The 1914 version of the UPA was enacted into law in every state except Louisiana. The most
recent revision has been enacted into law by 37 states.

The NCCUSL website lists the states that it considers to have adopted these and other
uniform acts. However, due to state variations it is not appropriate to rely upon this listing.

The NCCUSL website lists these states as having adopted UPA (1997):

Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, District


of
Columbia, Florida, Hawaii, Idaho, Illinois, Iowa, Kansas, Kentucky, Maine, Maryland, Minn
esota, Mississippi, Montana, Nebraska, Nevada, New Jersey,

New Mexico, North Dakota, Ohio, Oklahoma, Oregon,

South Dakota (substantially similar), Tennessee, Texas (substantially similar),

[81]
U.S. Virgin Islands, Utah, Vermont, Virginia, Washington, West Virginia, and Wyoming. 46

What kinds of partnership does RUPA Govern?

RUPA governs limited liability partnerships (LLPs) and general partnerships, but not limited
partnerships. This is because limited partnerships, also known as LPs, are not considered real
partnerships under RUPA, so they are not subject to any of RUPAs restrictions.

What are some of the Revisions Included in RPUA?

RUPA made a number of changes to the old rules governing partnerships. It created partner
dissociations, which allow a partner to withdraw from the partnership without causing
dissolution of the remaining partnership.

Most importantly, RUPA says that the partnership agreement (not partnership law) creates
the rights and duties of the partners. The partners are free to include or exclude various rights
in their agreement, although they are prohibited from doing the following:

Restricting a partners access to the books and records of the company,


Eliminating or unreasonably reducing the partners duty of care to one another,
Eliminating the partners duty of loyalty or obligation of good faith and fair dealing,
Denying a partner the right to withdraw from the partnership.47

46
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[82]
CHAPTER 4

A COMPARATIVE STUDY
OF PARTNERSHIP LAW
IN INDIA AND USA

[83]
4.1 Partnership Law in India

Indian Partnership Act, 1932


Legislative competence
The deed of partnership
The 7th item in the Partnership Act regarding partnership

Indian Partnership Act, 1932

Received the assent of the governor general on 8th April, 1932.


Come into force on the 1st day of October 1932, except section 69, which case came into
force on the 1st day of October 1933.

Legislative competence

The subject of partnership is included in item 7 of the concurrent list in the seventh
schedule to the constitution.
The parliament and the state legislature have the power to make laws in this respect as
provided in Art. 246 of the constitution.

The deed of partnership

Partners in a partnership are largely free to make whatever agreement between themselves
that they wish to cover their mutual relationships.
The power and right of the partners between themselves are governed by any written
agreement they may make.
This is referred to as the articles as deed of partnership.
The deed of partnership is prepared to avoid misunderstanding between partners.

The deed of Partnership states the following:

The capital to be contributed by each partner.


The ratio in which profits or losses are to be shared.
The rate of interest, if any, to be paid on capital before the profits are shared.
The rate of interest, if any, to be charged on partners drawing.
Salaries to be paid to partners.
Arrangement for the admission of new partners.

[84]
Procedures to be carried out when a partner retire as dies.

The 7th item in the Partnership Act regarding partnership

Each partner has unlimited liability.


Every partner is entitled to take part in the management of the business.
Every partner is entitled to access to the book and accounts of the partnership.
Voting partners, each partner has one vote.
Each partner is an agent of the other.
A new partner can only be admitted to the partnership if all existing partners give their
consent.
A partnership dissolved by any partner giving notice to the other partner(s) of his or her
intention to leave the partnership.48

You might be aware that one of the forms in which business can be carried on is partnership,
where two or more persons join together to from the partnership and run the business. In
order to govern and guide partnership, the Indian Partnership Act, 1932, was enacted. In
human relations often misunderstandings crop up. If any misunderstanding crops up in a
partnership amongst its partners, the continuity of the partnership may become doubtful.
Since, public at large would be dealing with the partnership as customer, suppliers, creditors,
lenders, employees or in any other capacity, it is also very important for them to know the
legal consequences of their transactions and other action in relation with the partnership
where no one person in the owner of the business and, therefore, exclusively responsible.

The law relating to partnership in India which is contained in Indian Partnership Act (IX of
1932) is concerned partly with the rights and duties of partners between themselves and
partly with the legal relations between partners and third persons, which flow or are
incidental to the formation of a partnership. Thus the Act not only determines the rights and
duties of a partner in relation to the partnership business but also against other partners, it
clearly establishes the position of a partners as well as partnership firm vis--vis third parties,
in legal and contractual relationship arising out of and in the course of business of the form. It

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[85]
may be described as a branch of law relating to principal and agent since every partner is in
contemplation of law the general and accredited agent of the partnership.49

4.2 Partnership Law in USA

Key points:

The federal government of the United State does not have Specific Statutory Law
governing the established of partnerships.
In the absence of applicable Federal Law the National Conference of Commissioners on
Uniform State Laws has issued non-building models laws (called uniform act) to
encourage the adoption of uniformity of Partnership Law into the states by their
respective legislatures.
This includes the Uniform Partnership Act and the Uniform Limited Partnership Act.

Uniform Partnership Act

The uniform Partnership Act (UPA), is a uniform act (similar to a model statute),
proposed by the National Conference of Commissioners on Uniform State Laws
(NCCUSL) for the governance of business partnerships by U.S. states.
Several versions of UPA have been promulgated by the NCCUSL, the earliest having
been put forth in 1914, and the most recent in 1997.
Uniform Limited Liability Partnership were added to the UPA in 1996 under the revised
RUPA.

Revised Uniform Partnership Act (RUPA)

The NCCUSLs first revision of UPA was promulgated in 1992 and amended in 1993 and
1994.
The 1994 revision was after referred to as the Revised Uniform Partnership Act
(RUPA).50

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[86]
The Uniform Partnership Act was amended in 1997 to provide limited liability for partners in
a limited liability partnership. Over half the states, including District of Columbia, Puerto
Rico, and the U.S. Virgin Islands, has adopted this latest version of the UPA.

A proposed state law drafted by the National Conference of Commissioners on Uniform State
Laws (NCCUSL) regarding the governance of business partnerships residing in any state
within the United States. The UPA also offers regulations governing the dissolution of
a partnership when a partner dissociates.

The Uniform Partnership Act provides that a majority interest of the remaining partners can
agree to continue the partnership within 90 days of the dissociation. The Uniform Partnership
Act effectively saved partnerships from dissolution following a partner's dissociation. In
addition, the UPA provides rules regarding partnership formation, fiduciary duties and the
ownership of partnership assets. The initial Uniform Partnership Act was adopted in every
state except Louisiana.

The first Uniform Partnership Act was drafted in 1914. It has been revised and amended
multiple times since, most recently in 1997. In 1996, the Limited Liability Partnership
Amendments to the Uniform Partnership Act were promulgated and combined into the
Uniform Partnership Act. Under the 1997 amendment, a partner's disassociation does not
trigger dissolution unless a majority interest agrees to dissolution. The partnership
automatically continues unless partners take action to dissolve the partnership within 90 days
of the dissociation.51

Brief history of Uniform Partnership law

The National Conference of Commissioners on Uniform State Laws first considered a


uniform law of partnership in 1902. Although early drafts had proceeded along the mercantile
or "entity" theory of partnerships, later drafts were based on the common-law aggregate
theory. The resulting Uniform Partnership Act ("UPA"), which embodied certain aspects of
each theory, was finally approved by the Conference in 1914.The UPA governs general
partnerships, and also governs limited partnerships except where the limited partnership

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[87]
statute is inconsistent. The UPA has been adopted in every State other than Louisiana and has
been the subject of remarkably few amendments in those States over the past 80 years.

In January of 1986, an American Bar Association subcommittee issued a detailed report that
recommended extensive revisions to the UPA. The ABA Report recommended that the entity
theory "should be incorporated into any revision of the UPA whenever possible."

In 1987, the Conference appointed a Drafting Committee to Revise the Uniform Partnership
Act and named a Reporter. The Committee held its initial meeting in January of 1988 and a
first reading of the Committee's draft was begun at the Conference's 1989 Annual Meeting in
Kauai, Hawaii. The first reading was completed at the 1990 Annual Meeting in Milwaukee.
The second reading was begun at Naples, Florida, in 1991 and completed at San Francisco in
1992. The Revised Uniform Partnership Act (1992) was adopted unanimously by a vote of
the States on August 6, 1992. The following year, in response to suggestions from various
groups, including an American Bar Association subcommittee and several state bar
associations, the Drafting Committee recommended numerous revisions to the Act. Those
were adopted at the Charleston, South Carolina, Annual Meeting in 1993, and the Act was
restyled as the Uniform Partnership Act (1993). Subsequently, a final round of changes was
incorporated, and the Conference unanimously adopted the Uniform Partnership Act (1994)
at its 1994 Annual Meeting in Chicago. The Revised Act was approved by the American Bar
Association House of Delegates in August, 1994.

The Uniform Partnership Act (1994) ("Revised Act" or "RUPA") gives supremacy to the
partnership agreement in almost all situations. The Revised Act is, therefore, largely a series
of "default rules" that govern the relations among partners in situations they have not
addressed in a partnership agreement. The primary focus of RUPA is the small, often
informal, partnership. Larger partnerships generally have a partnership agreement addressing,
and often modifying, many of the provisions of the partnership act.

The Revised Act enhances the entity treatment of partnerships to achieve simplicity for state
law purposes, particularly in matters concerning title to partnership property. RUPA does not,
however, relentlessly apply the entity approach. The aggregate approach is retained for some
purposes, such as partners' joint and several liabilities.

[88]
The Drafting Committee spent significant effort on the rules governing partnership breakups.
RUPA's basic thrust is to provide stability for partnerships that have continuation agreements.
Under the UPA, a partnership is dissolved every time a member leaves. The Revised Act
provides that there are many departures or "dissociations" that do not result in dissolution.

Under the Revised Act, the withdrawal of a partner is a "dissociation" that results in
dissolution of the partnership only in certain limited circumstances. Many dissociations result
merely in a buyout of the withdrawing partner's interest rather than a winding up of the
partnership's business. RUPA defines both the substance and procedure of the buyout right.

Article 6 of the Revised Act covers partner dissociations; Article 7 covers buyouts; and
Article 8 covers dissolution and the winding up of the partnership business.

The Revised Act also includes a more extensive treatment of the fiduciary duties of partners.
Although RUPA continues the traditional rule that a partner is a fiduciary, it also makes clear
that a partner is not required to be a disinterested trustee. Provision is made for the legitimate
pursuit of self-interest, with a counter balancing irreducible core of fiduciary duties.

Another significant change introduced by RUPA is provision for the public filing of
statements containing basic information about a partnership, such as the agency authority of
its partners. Because of the informality of many partnerships, and the in advertence of some,
mandatory filings were eschewed in favour of a voluntary regime. It was the Drafting
Committee's belief, however, that filings would become routine for sophisticated partnerships
and would be required by lenders and others for major transactions.

Another innovation is found in Article 9. For the first time, the merger of two or more
partnerships and the conversion of partnerships to limited partnerships (and the reverse) is
expressly authorized, and a "safe harbour" procedure for effecting such transactions is
provided.

One final change deserves mention. Partnership law no longer governs limited partnerships
pursuant to the provisions of RUPA itself. First, limited partnerships are not "partnerships"
within the RUPA definition. Second, UPA Section 6(2), which provides that the UPA
governs, limited partnerships in cases not provided for in the Uniform Limited Partnership
Act (1976) (1985) ("RULPA") has been deleted. No substantive change in result is intended,

[89]
however. Section 1105 of RULPA already provides that the UPA governs in any case not
provided for in RULPA, and thus the express linkage in RUPA is unnecessary. Structurally, it
is more appropriately left to RULPA to determine the applicability of RUPA to limited
partnerships.52

4.3 Similarities and Differences between India and USA Partnership Law

A) Concept paper on Limited Liability Partnership:

a) India

Based on the recommendations of the NC Gupta Committee, and the Irani committee, the
Govt. had come out with a concept paper and a draft of the LLP bill in late 2005.
LLP bill has been placed before:

Lok Sabha on 7th Dec. 2006


Rajya Sabha on 15th Dec. 2006.

The constitution (entry 44, list 1 of seventh schedule) has put Corporation Law in the
Union list:

As LLPs are to be given an incorporated status, they will fall under this list.

b) In Canada (Ontario) introduced limited liability Partnership Law in 1998.

B) Partnership Taxation:

a) US The entity does not pay taxes on its income. Instead, the owners of the entity pay tax
or their distributive share of the entitys taxation income.
b) India For taxation purposes a partnership is considered as a separate legal entity. Hence
the entity pays the taxes.53

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[90]
C) India-USA Treaty:

Under Article 4 of that India-USA Treaty, it is provided that in reference of partnerships,


the term resident of a contracting State applies only to the extent that the income
derived by such partnership is subject to tax in that State as the income of a resident,
either in its hands or in the hands of its partners. In this regard, the technical explanation
of the India-US Treaty on Article 4 provides that under U.S. Law, a partnership is not
taxed as such. Under the Treaty income received by a partnership will be treated as
received by US resident only to the extent such income is subject to tax in the United
States as the income of a U.S. resident. Thus, for U.S. tax purposes, the question of
whether income received by a partnership is received by a resident will be determined
by the residence of its partners rather than by the residence of the partnership itself.
To the extent the partners (looking through any partnerships which are themselves
partners) are subject to U.S. tax as residents of the United States, the income received by the
partnership will be treated as income received by a U.S. resident. Hence, the India-US
Treaty is a good example of how contracting States may provide for specific remedy,
for issues of taxation of tax transparent partnerships, without overtly agreeing with the
OECD approach in this regard.54

D) Indias Strategic Partners: A Comparative Assessment

The 21st century has witnessed a new pattern of international relationships in which
nations enter into freewheeling partnerships with other nations based on complementarily of
interests in specific but vital areas. These partnerships, unlike the Cold War type of alliances,
do not bind nations to support each other on all strategic issues in all situations.

The partnerships are entered into in those areas of common interest where mutual help and
collaboration can be of long-term benefit to both. Being bilateral in nature, they do not have
the stigma of a multilateral alliance, which may be presumed to be a power bloc meant to
countervail some big power or another power bloc. These partnerships are considered
strategic in nature because of the importance of the issues involved and the long-term nature
of cooperation that is visualised.

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[91]
India has entered into strategic partnerships with more than a dozen countries in the last 10
years. They pertain to core areas of national interest like supply of defence equipment and
technology, military exercises, cooperation in the field of nuclear energy, trade and
investments, diplomatic support on critical issues, cooperation in science and technology,
education, agriculture, information and communication technology, banking, insurance, and
various other sectors.

Each partnership has a specific character focusing on certain issues. It is in the nature of
things that some partnerships are more comprehensive than others, depending on the
number of areas in which the two sides can fruitfully and actively engage to mutual benefit
and the scope and depth of their relations.

In view of the large number of these partnerships and the importance of issues
involved, we thought it necessary to undertake an assessment of how well these
partnerships are working and what kind of potential they have in future.

Thus, strategic partnerships with all these countries would be evaluated on the basis of
three variables, namely, defence cooperation, economic cooperation and political
cooperation.

Each variable would be subjected to three parameters, i.e. one, how substantial the
cooperation has been in the last 10 years; two, how sustained the cooperation has been;
and three, how much potential it has for future.

Political and Diplomatic Cooperation

The extent of support provided by a foreign country to India on issues that are critical to its
national security is a measure of how useful a partner that country is. In this context, we
identified three major issues on which India expected diplomatic support from its
strategic partners in the last 10 years.

These issues are:

(i) Indias policy with regard to Pakistan/Afghanistan/Kashmir and Terrorism; (ii) Indias
Nuclear Policy; and (iii) Indias bid for a permanent seat in the UN Security Council.
The country-wise analysis given below examines the extent of support received by
India on each issue on the basis of three parameters: (a) how substantial the support was;
(b) how sustained it was; and (c) how potentially important it is.

[92]
United States

India and the US entered into a Strategic Partnership in 2004, although the thaw in an
otherwise estranged relationship had begun during President Clintons visit to India in
2000. The Next Steps in Strategic Partnership, initiated in January 2004, became the
building block of a deeper bilateral relationship that now included civil nuclear activities,
civil space programmes, high technology trade and missile defence. Post-defence and
civil nuclear agreements in 2005, IndiaUS ties have seen a qualitative transformation, and
the successive US administrations have repeatedly claimed that they would help India
emerge as a major world power in the 21st century.

The underlying motives of the US engagement with India are varied. Convergence of geo-
political interests vis--vis Chinas rise, the dynamics of the new great game being played in
Af-Pak, Indias rising economic prowess, and Americas search for new allies,
especially after the relative decline of its old European allies are the main drivers of
this new partnership. An important contributor to IndiaUS ties in the past decade has been
the Indian diaspora in the US. The Indian community in the US has grown to2.84 million,
which includes a large number of professionals, educationists, entrepreneurs, and politicians.
The Indian Caucus in the US has emerged as an important lobby, influencing policy
decisions.

On issues such as Pakistan, Afghanistan, terrorism and Kashmir, the US support to India has
been insubstantial and inconsistent. In the post-9/11 phase, US policy on Pakistan has been
ambivalent. It sees Pakistan as an ally in Af-Pak while recognising that it is also a source of
terror. So the US has consistently funded Pakistan in the name of the war on terror, without
doing much to ensure that these funds are not used to procure arms against India. The US has
intermittently issued strong statements against terror emanating from Pakistan, but has done
little to force the Pakistani government and the ISI to desist from supporting such acts. Of
late, frustrated with the inadequacy and insincerity of Pakistans anti-terror operations
in Af-Pak, the US has become more demanding of Pakistan in this respect, and this
may have a positive fallout for India. On Kashmir, despite Pakistans demand for the US
intervention, the US has been sensitive to Indias position that it was a bilateral issue.

On nuclear issues, the US position has undergone a most perceptive change only recently.
Traditionally, the US has insisted that India sign Non-Proliferation Treaty (NPT),
Comprehensive Test Ban Treaty (CTBT) and Fissile Material Cut-off Treaty (FMCT).

[93]
The US still continues to pressurise India to sign these, but it has been significantly
diluted with the de facto recognition of Indias entry into the nuclear club post the civilian
nuclear deal with India. During President Obamas visit to India in 2010, he announced US
support to Indias membership to global non-proliferation regimes like the Wassenaar
Arrangement, Australia Group, Missile Technology Control Regime and the Nuclear
Suppliers Group (NSG). However, the US attitude on restrictions imposed by the NSG in
June 2011 with regard to the export of enrichment and reprocessing (ENR) technologies was
far from satisfactory.

On Indias candidature for UNSC permanent membership, US support is weakest among the
other strategic partners. However, from the days when it refused to commit anything to
President Obamas state visit in November 2010, when it supported Indias candidature, the
change in position is significant. The support meanwhile came with a caveat that no
timeframe was specified.

In view of the deep interest taken by the US in developing a strong strategic


partnership with India in recent years, more so because it is driven by the shifting power
balance in the world, we think that there is considerable potential in the growth of this
partnership as far as political and diplomatic cooperation is concerned.

Based on the above analysis, we have graded the US support to India on 10-point scale at five
on how substantial it was, five on how sustained it was and eight on how much potential it
has.

Defence Cooperation

For an emerging power like India, self-reliance in defence is an important prerequisite to


strategic autonomy, which by itself is a basic attribute of sovereignty. While absolute
self-reliance is not an achievable goal, India has attempted to enhance its defence
capability under the rubric of modernisation by importing equipment from leading arms
manufacturers and establishing joint ventures with them in the hope of receiving the
latest technology. The level of satisfaction vis--vis each supplier country varies
according to the political imperatives of the country concerned, national regulatory laws of
each country, and the interests of the private sector wherever it is relevant on the
supplier side. While making an assessment of how well our strategic partners have
performed in the area of defence cooperation, we again shall take into account how

[94]
substantial their supplies have been in the last ten years, how sustained they were, and going
by past records, how much potential each country has for future cooperation.

Unites States

In the last decade, the US has already delivered 12AN/TPQ-37 (V)3 Firefinder Radar, INS
Jalashwa (formerly USS Trenton) along with six embarked UH-3H Sea King
helicopters, Five of six C-130J Super Hercules transport aircraft, 41 General Electric F-404-
GE-IN20 after burner engines for Tejas LCA, and3 Boeing 737 Business Jets for Indian Air
Forces (IAF) VVIP squadron. In all, since 2004, India has concluded military contracts
worth over $11 billion with the US. Impending transfers include 145 BAE Systems M777
155mm/39 caliber Howitzers and Laser Inertial Artillery Pointing Systems, 8 P-81 long
range maritime reconnaissance aircraft, and 10 C-17 Globemaster III Very Heavy Lift
Transport Aircraft. Moreover, India and US are negotiating for addon C-130Js and C-17s.

Although Lockheed Martin and Boeing were recently eliminated from the IAFs Medium
Multi-role Combat Aircraft (MMRCA) contract for fighters, the Pentagon has now offered
to sell the IAF the fifth generation, single-seat, single-engine, stealth-capable F-35 Lightening
II Joint Strike Fighter. This proposal stems not only from hard-headed financial motives
aimed at defraying the F 35s spiraling developmental costs but also from Washingtons
desire to embrace Delhi as a strategic ally and emerging continental power.

Alongside the F 35, the Pentagon has also offered the prospect of jointly developing a
range of military products and systems, an indicator of the massive potential India holds for
the US as it sets about modernising its services equipment profile. In the pipeline from the
US are onboard systems and components like EW systems, radar for aircraft, ships, tanks and
land vehicles from companies like Raytheon, Lockheed Martin, Honeywell, Northrop
Grumman, Boeing and United Technologies. These were offered to India on purely
commercial terms.

The US remains a favoured potential supplier for not only hardware but critical military
technologies, which India requires and in which it undeniably will remain the world
leader for decades. The little understood offset route in which the US is poised to become a
major player is one certain avenue for Indias military technological development,
which if exploited has immense symbiotic potential. This would, doubtless, be
sustained by a commonality of regional interests and backed by bilateral exercises,

[95]
particularly those involving the Indian Navy, which the United States Navy (USN) is
keen to see develop into a stabilising force in the Indian Ocean Region, in view of Chinas
emphasis on the enhancement of its naval power.

In short, the US presents an opportunity to provide India a quantum jump in both materiel
and technology, but this is unlikely to affect its commercial military ties with Moscow.

Taking into account these factors, we have rated the US at five and six points
respectively with regard to how substantial and how sustained its supplies were. But we
assess its potential for defence supplies to be seven.

Economic Cooperation

There has been a rapid increase in the global linkages of the Indian economy over the last two
decades. This is evident not only in the increase in Indias trade and investment flows but
also in the increasing number of foreign business delegations visiting India to explore
business opportunities. Indian entrepreneurs have also been actively developing their
markets abroad, often acquiring foreign companies in their quest for a global footprint. It is
worth exploring the strength of the economic partnerships that have developed with
different countries. In our examination of the strength of the economic relationship
between India and these six countries, we have ranked the relationships on three different
qualities whether the existing relationship is substantial, whether it has been a
sustained one or a sporadic one and our assessment of its potential in the future. We find a
wide variation in relationships ranging from those with a long history of trade and
commerce with India to those with a newly developed interest. Of course, such an
analysis is bound to be subjective when it comes to assessing the potential for
relationships. But it is based on the available data on trade and investment in the past.

United States

As per our analysis, the economic relationship with the USA ranks the highest, with not only
a strong existing relationship, but potential for it to move to a higher plane. Among the
countries considered, the US share of total trade and investment in India was by far the
highest, with the share in trade amounting to 7.3 per cent in 201011 and the share in total
Foreign Direct Investment (FDI) inflow amounting to 6.7 per cent during April 2000
August 2011. India also enjoys a trade surplus with the US, exporting goods worth $25

[96]
billion and imports amounting to $20 billion. These figures do not include trade in services,
where again India enjoys a significant share in the US market.

Our ranking of eight for potential economic cooperation is based on business


opportunities that exist in many areas, including critical ones, such as banking and
finance, infrastructure and electronics. In addition, the presence of a large Indian diaspora in
the US raises the potential for greater trade and investment flows. At the same time, it is felt
that the potential for further economic cooperation is limited by certain restrictions and
conditional ties imposed by the US pertaining to dual use and high technology trade.

Conclusion

The study brings us to the conclusion that the respectable nomenclature of a Strategic
Partner should be bestowed only on those countries with which there is a strong and
mutually beneficial relationship in all the three sectors of political-diplomatic, defence
and economic cooperation. Even if the relationship is weak in one of the three areas,
there should be hope that in the next five to 10 years, the deficiency in that sector will be
made up and a meaningful relationship built. For a country like India which has built its
reputation on value based and rule based foreign and security policies, and has exhibited its
economic potential by consistent growth in the last two decades, it is important to be exacting
and serious in building an architecture of its bilateral relationships.

It is obvious from this study that with all hitches and glitches, Russia emerges as the most
important strategic partner of India. It has given us strong political and diplomatic support
and helped us enormously in building our defence capability. But the economic content of the
partnership is extremely weak. Urgent and vigorous steps need to be taken to improve
economic relations if this partnership is to be sustained and made durable.

The United States is a strong competitor with Russia and is currently the second most
important partner. The strategic partnership with the US usually acquires a higher profile
because of its image as a global power. But the US has been very lackadaisical in providing
political and diplomatic support to India on vital issues. Even its defence cooperation with
India has been subjected to lots of ifs and buts driven by domestic political and economic
considerations. The United States needs to take India more seriously if this strategic
partnership is to be placed on a robust footing because it has tremendous potential for the
benefit of both countries.

[97]
France occupies the third position in terms of the importance of strategic partners. Its political
and diplomatic support to India has been valuable. There is greater potential for IndiaFrance
defence cooperation than has been exploited so far. But India and France need to pay
greater attention to strengthening their economic ties. France and India are both
independent-minded nations and have a certain similarity of world-views. No opportunity
should be missed to widen and deepen the strategic partnership with France.

It is unfortunate that the strategic partnership with the United Kingdom lies at a rather
moderate level of importance. Historical ties with the UK and the presence of a large Indian
diaspora tend to raise hopes of a strong partnership. If these hopes are to be turned into
reality, the UK needs to take a more independent view of issues of concern to India and
provide it stronger political and diplomatic support. India and the UK also need to do more to
improve their defence cooperation and economic relations.

Strategic partnerships with Germany and Japan seem to be taking off. The potential for
economic cooperation with both these countries is already visible. This potential needs
to be further exploited. Even if defence cooperation takes time to develop, efforts should be
made to seek the support of both these countries on political and diplomatic issues of
concern to India more strongly and consistently.

India has signed strategic partnership agreements with a host of other countries. We need to
consider whether a less serious but equally palatable nomenclature can be devised for
relationships that are not as comprehensive and far reaching as these.55

55
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[98]
CHAPTER 5

CONCLUSIONS AND
SUGGESTIONS

[99]
5.1 Conclusion

A partnership is an association of persons who have agreed to pursue a business objective for
their mutual benefit.

Accordingly, a partnership allows two or more people or entities to come together to operate
a business and share the profits, the responsibilities, and the risks of the business.

It is quite clear that both general partnership and limited liability partnership are the two
varieties of partnership.

Further, an LLP is different from a partnership, in the way that partners are joints or severally
liable for the acts of the partners and the firm, in a partnership. On the other hand, in the case
of limited liability partnership, the partners are not held responsible for the acts of other
partners.56

After globalization, Indian professionals are able to serve worldwide. They cannot serve
inform of company because of professional restrictions and moreover they hesitate to form
Partnerships due to number of reasons. In the wake of same, LLP would be a suitable vehicle
for partnership among professionals who are already regulated such as company secretaries,
chartered accountants, cost accountants, lawyers, architects, engineers, doctors. So, we can
say that LLP is a format that attempts to fill up the vacuum that existed between partnership
law and company law. It is a marriage of principles of company law and partnership law in
order to address the deficiencies in both the areas for small scale business and professional
firms.

LLP promises a rosy future in the future for the small scale industries and the professionals
alike. Moreover, the possible Business Structures can convert into reality if the concerns that
matters relating to the same are contained. LLPs can be seen as a corporate business vehicle
that enables professional expertise and entrepreneurial initiative to combine and operate in
flexible, innovative and efficient manner, providing benefits of limited liability while
allowing its members the flexibility for organizing their internal structure as a partnership.

56
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[100]
This set up is useful for small and medium enterprises in general and for the enterprises in
service sector. Hence, there is a large scope of LLPs in future given that the issues relating to
them are timely and properly addressed to ensure their working the best possible and efficient
manner. With its inherent flexible structure, it remains a viable form of business in the long
run.57

In my opinion Partnership is very important because in day to day activities we enter into
partnership agreements and by making partners big goals are achieved with the help of joint
and more number of people.

The joint efforts of all the member results in successful accomplishment of tasks and that task
or job can be easily afforded. Division of work leads to increase in efficiency at work among
different partners.

When some job is done by consent of all the members and if some profit is earned then it is
shared among the different partners. And similar is the case when some loss occurs then that
is also beard among all the members and its not that only one has to take responsibility or
give compensation.

So in my view Partnership is a good form of doing business than a company which is owned
by a single person.

Partnership is one of the oldest forms of business relationships. Though limited liability
companies have replaced partnership firms in complex businesses, partnerships are still
preferred by professionals and small trading and business enterprises in India and abroad.

The Indian partnership act of 1932 provides for a general form of partnership which is the
most prevalent form in India, but, over time the general form of partnership has lost its charm
because of the inherent disadvantages in it, the most important is the unlimited liability of all
partners for business debts and legal consequences, regardless of their holding, as the firm is
not a legal entity.

General partners are also jointly and severally liable for tortuous acts of co-partners. Each
partner has the exposure of their personal assets being appropriated and liquidated to meet
partnership dues.

57
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[101]
These are statutory position, which cannot be altered by contract inter-se, though at times
subterfuges are resorted to by unscrupulous partners to avoid personal liability.
General partnership holdings are not easy to transfer; typically all other partners have to
agree. Yet partnership is preferred in India, because of the ease of formation and lack of
compliances involved.58

Strategic Partner should be bestowed only on those countries with which there is a
strong and mutually beneficial relationship in all the three sectors of political-
diplomatic, defence and economic cooperation.

Even if the relationship is weak in one of the three areas, there should be hope that in
the next five to 10 years, the deficiency in that sector will be made up and a meaningful
relationship built.

For a country like India which has built its reputation on value based and rule based foreign
and security policies, and has exhibited its economic potential by consistent growth in the last
two decades, it is important to be exacting and serious in building an architecture of its
bilateral relationships.

It is obvious from this study that with all hitches and glitches, Russia emerges as the most
important strategic partner of India. It has given us strong political and diplomatic support
and helped us enormously in building our defence capability.

But the economic content of the partnership is extremely weak. Urgent and vigorous steps
need to be taken to improve economic relations if this partnership is to be sustained and made
durable.

The United States is a strong competitor with Russia and is currently the second most
important partner. The strategic partnership with the US usually acquires a higher profile
because of its image as a global power.

But the US has been very lackadaisical in providing political and diplomatic support to India
on vital issues. Even its defence cooperation with India has been subjected to lots of ifs and
buts driven by domestic political and economic considerations.

58
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[102]
The United States needs to take India more seriously if this strategic partnership is to be
placed on a robust footing because it has tremendous potential for the benefit of both
countries.

France occupies the third position in terms of the importance of strategic partners. Its political
and diplomatic support to India has been valuable. There is greater potential for IndiaFrance
defence cooperation than has been exploited so far.

But India and France need to pay greater attention to strengthening their economic
ties. France and India are both independent-minded nations and have a certain similarity of
world-views. No opportunity should be missed to widen and deepen the strategic
partnership with France.

It is unfortunate that the strategic partnership with the United Kingdom lies at a rather
moderate level of importance. Historical ties with the UK and the presence of a large Indian
diaspora tend to raise hopes of a strong partnership.

If these hopes are to be turned into reality, the UK needs to take a more independent view of
issues of concern to India and provide it stronger political and diplomatic support. India and
the UK also need to do more to improve their defence cooperation and economic relations.

Strategic partnerships with Germany and Japan seem to be taking off. The potential for
economic cooperation with both these countries is already visible.

This potential needs to be further exploited. Even if defence cooperation takes time to
develop, efforts should be made to seek the support of both these countries on
political and diplomatic issues of concern to India more strongly and consistently.

India has signed strategic partnership agreements with a host of other countries. We need to
consider whether a less serious but equally palatable nomenclature can be devised for
relationships that are not as comprehensive and far reaching as these.59

Partnerships are communities in their own right. The roles and functions of the parties
involved are important constituents of partnerships. Internal resources and relations should be
considered as key factors for success and for maximising the knowledge brought to bear by
the partnership.

59
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[103]
If clarity is achieved in relation to roles and responsibilities, the desired outcomes of the
partnerships are more likely to be achieved. Partnerships should thus put more effort into
achieving both an outward and an inward focus with the aim of developing further
alliances through a strong and robust partnership base.60

5.2 Suggestions

Development of trade and commerce around the world necessitated a separate and an
exhaustive law and to set out clearly the terms and conditions of any partnership firm.

A more exhaustive statute was required to help the members of the business community who
intended to form partnerships and also to set out the duties and liabilities of the partners.

Necessity to change in policy and to control the framework of partnership law for resolving
conflict between partners and also for smooth running of the partnership firm.

60
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[104]
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