What is partnership?

The law of partnership is contained in the Indian Partnership Act, 1932, which came into force
on 1st October 1932, except section 69 (dealing with the effect on non-registration of firms),
which came into force on 1st October 1933.
Section 4 of the 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 one of them acting for all.” It therefore follows that a partnership consists
of three essential elements.
(i) It must be a result of an agreement between two or more persons.
(ii) The agreement must to be sharing the profits of the business.
(iii) The business must be carried on by all or any of them acting for all
Essential elements of partnership:
(1) contract
(2) association of two or more persons
(3) carrying on of business
(4) sharing of profits
(5) mutual agency

Partners, Firm and Firm name

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” (sec.4)

Partnership Co-ownership
Similarities
It is constituted by two or more persons. Co-ownership arises only when two or more
persons own a thing.
Differences
Formation – It is created by an agreement. It may be created by an agreement or by any
other way like inheritance.

Number of members - Maximum 10 in case of a There is no statutory limit on maximum number

banking firm, and 20 in case of a non-banking of co-owners.
firm.
Business – Carrying on of a business is It can exist with or without business.
necessary for existence of a partnership.

Agency relationship – Every partner is agent of Co-owners are not agents of each other.
the other partner as well as of the firm.
Profits sharing – Profit sharing is must.
Transfer of share – A partner cannot transfer
his share without consent of all the partners.
Partition of property – A partner cannot sue for
the partition of partnership property. However he
can sue for dissolution.
Right of lien – A partner has a right to retain the
partnership property for the expenses incurred by
him.
Differences
Partnership
Formation - It is formed by an agreement between
parties.
Separate entity -It has no separate legal entity
apart from its members. It is simply a collection of
members.
Number of members – Maximum number of
members allowed is 10 in a banking firm, and 20
in a non-banking firm.
Liability -The liability of partners is unlimited.
Agency relationship- Every partner is an agent of
the other partner as well as of the firm.
Right to manage -Every partner has a right to take
part in the management of he affairs of the firm.
Ownership of property -The partners are joint
owners of the property of the firm.
Transfer of share -A partner cannot transfer his
share in the firm without consent of all the
partners.
Dissolution -It is dissolved on the death or
insolvency of any of the partner.
Governing Act -It is governed by the Indian
Partnership Act, 1932.
It does not necessary involves sharing of profits
and losses.
A co-owner can transfer his share with out the
consent of other co-owners.
A co- owner can sue for the transfer of joint
property.
A co-owner has no such right to retain the
property.
Joint Stock Company
It is formed by getting it registered under the
Companies Act, 1956.
It has a legal entity of its own separate from its
members.
Maximum numbers of members in private
company are 50, and in a public company there
is no limit.
The liability of the members is limited to the
extent of the value of their shares.
A member is neither an agent of other members
nor of a company unless specifically appointed
so.
Its management is entrusted to elected members
of the company known as directors
The members of a company are not joint owners
of its property.
A member (i.e., shareholder) can transfer his
shares in the company at his own will without
taking consent from anybody.
A company has a perpetual succession, which is
not disturbed by the death or insolvency of any
number of members.
It is governed by the Companies Act, 1956.
 Partnership and Hindu Undivided Family (HUF)

Partnership Hindu Undivided Family

Position of females – Females can be full-fledged Membership is restricted to the male members
partners. only.

Agency relationship – Every partner is an agent There is no agency relationship.

of the other partner as well as of the firm.

Right to manage – Every partner has a right to It generally vests with Karta, the governing
take part in the management of the affairs of the member of the family.
firm.

Liability- All the partners are person ally liable Only Karta is personally liable for the debts of
for the debts of partnership. the HUF. Liability of all other members is
limited to their respective interest in the property
of the family.

Share in partnership – The share of each partner The share of each partner cannot be defined as
is defined by agreement. such. It keeps fluctuating with the births and
deaths of male members in the family.

Partition of property - A partner cannot sue for A coparcener can demand partition of HUF
the partition of partnership property. However, he property.
can sue for dissolution.

Right to see accounts – A partner has a right to A member has no right to ask for any accounts
demand, inspect, and copy the accounts of the of the past dealings of the family.
firm.

Registration – The partnership may be registered There is no concept of registration of a HUF.

or unregistered, and if it is unregistered, it suffers
from certain disabilities.

Dissolution – It is dissolved on the death or It is not dissolved on the death or insolvency of a

insolvency of a partner. member.

Governing law – It is governed by the Indian It is governed by the Hindu Law.

Partnership Act, 1932.

Mode of creation- A partnership arises out of a It arises by the operation of law and not the
contract. result of a contract
 Types of partners
(1) Active partner or actual partners means a person - who actively participates in the
conduct of the partnership.
(2) Sleeping partner or dormant partner: who does not take an active part on the conduct of
the business of the firm is called a sleeping partner. His position is similar to that of an
undisclosed principal.
(3) Partner by holding out (section 28): When a person
 Represents himself, or
 Knowingly permits himself, to be represented as a partner in a firm then he is liable, like
a partner in the firm to anyone who on the faith of such representation has given credit to
the firm. The representation referred to above may be express or implied.
The rule enunciated in Section 28 is also applicable to a former partner who has retired
from the firm without giving proper public notice of his retirement.
(4) Sub-partners
A person is a sub partner when he has some interest in the firm due to interest of some other
partner in the firm. It happens when a stranger makes an agreement with the partner and. He
does not have any right against firm but only against partner with whom he has agreed.
(5) Nominal partner:
Who gives only his name to a firm.He is not entitled to profit but liable to third party.
(6) Minor Partner (See Below)
Minor's position in partnership:
Though a minor cannot be a partner in a firm, he can nonetheless be admitted to the
benefits of partnership under Sec.30. It can be done with the consent of all the
partners. Rights and liabilities of such a partner will be governed by section 30 as
follows.
(I) Rights:
● Of sharing profits
 Sue to the partners for his share if separating from the firm.
 Access to, inspect and copy the account of the firm.
 On attaining majority he may within 6 months elect to become a partner or not to
become a partner.
(II) Liabilities:
 Upto the extent of his share but not personally liable.
 Within 6 months of his attaining majority or on his obtaining knowledge that he had been
admitted to the benefits of partnership, whichever date is later, he may give public notice
that he has elected to become a partner or not to become a partner. If the minor becomes a
partner of his own willingness or by his failure to give the public notice within specified
time, the position will be as follows.
He becomes personally liable to third parties for all acts of the firm done since he
was admitted to the benefits of partnership.
(7) Silent partner; those who by the agreement with other partners have no voice in the
management of the partnership business are called “silent partners”. They share profit and losses,
are fully liable for the debts of the firm and may take active part in the conduct of the business
Rights:

 Right to take part in the conduct of the business

 Right to be consulted
 Right of access to books
 Right to remuneration
 Right to share profits
 Interest on capital
 Interest on advances
 Right to be indemnified
 Right to stop admission of a new partner
 Right to retire
 Right not to be expelled
 Right of outgoing partner to carry on competing business
 Right of outgoing partners to share subsequent profits:
 Right to dissolve the firm

Duties:
 Bound to carry on the business
1. To the greatest common advantage,
2. To be just and faithful to each other and
3. To render to any partner or his legal representative a true account and full
information of all things affecting the firm

 Liable to indemnify the firm for any damage caused to it by reason of his fraud or willful
negligence in the conduct of the business of the firm.
 To attend diligently to his duties relating to the conduct of the firm's business.
 To let his partners have the advantage of his knowledge and skill. To disclose and
account for the benefit if derived any transaction related to firm.
 If a partner carry on business competing with the main business then all profits to be
surrendered to the firm but firm is not liable to any loss. When firm is reconstituted then
all the rights and duties of partners remain same as they were in the old firm.

Implied authority of a partner of the firm: (Sec. 19 and 22)

The act of a partner binds the firm, provided that the act is done in the firm name, or any
manner expressing or implying an intention to bind the firm. This authority is the implied
authority.
If the act is“outside the usual course of the business of the firm" it will not bind the firm
even if it is prudent or has benefited the firm unless it is ratified and approved by all the partners.
The usual powers differ from business to business.
 Acts beyond implied authority (Section 19)
If there is no custom usage or trade then a partner does not have the implied authority to
a) Submit a dispute relating to the business of the firm to arbitration as it is not the ordinary
business of partnership firm to enter into a submission for arbitration;
b) Open a bank account on behalf of the firm in his own name;
c) Compromise or relinquish any claim or portion of a claim by the firm against a third party
d) Withdraw a suit or proceedings filed on behalf of the firm;
e) Admit any liability in a suit or proceedings against the firm;
f) Acquire immovable property on behalf of the firm;
g) Transfer immovable property belonging to the firm; and
h) Enter into partnership on behalf of the firm.

Mode of effecting registration

The registration of a firm may be affected at any time by sending by post or delivering to the
registrar, of the area in which any place of business of the firm is situated or proposed to be
situated, a statement in the prescribed form. It is not essential that the firm should be registered
from the very beginning when the partners decide to get the firm registered. As per the
provisions of section 58 of the partnership Act, they have to file the statement in the prescribed
form.
The statement must be accompanied by the prescribed fee stating
(i) The firm's name
(ii) The principal place of business
(iii) The names of its other places of business
(iv) The date of joining of each partner
(v) The names in full and the permanent addresses of the partners and
(vi) The duration of the firm.

The aforesaid statement is to be signed by all the partners or by their agents specially
authorized in this behalf. Each partner so signing it shall also verify it in the manner prescribed.

When the registration is complete

When the registrar is satisfied that the provision of section 58 have been duly complied
with, he shall record an entry of the statement in a register called the register of firms and shall
file the statement. Then he shall issue a certificate of registration. Registration is deemed to be
complete as soon as an application the prescribed form with the prescribed fee and necessary
details concerning the particular of the partnership is delivered to the Registrar. The recording of
an entry in the register of firms is a routine duty of registrar.
 Consequences of non-registration
(i) The firm or any other person on its behalf cannot bring an action against the third party of
breach of contract entered into by the firm
(ii) If an action is brought against the firm by a third party then neither the firm nor the
partner can claim any set off, if the suit be valued for more then Rs. 100 or other
proceedings to enforce the rights arising from any contract.
(iii) A partner is precluded from bringing legal action against the firm or any person deemed
to be or to have been a partner in the firm. But such a person may sue of dissolution of
the firm or for accounts and realization of his share in the firm's property where the firm
is dissolved.

Where e new partner is introduced the fact is to be notified under section 63 (1) of the
Act to registrar who shall make a record of the notice in the entry relating to the firm in
the register of firms.
Dissolution on firm (Section43-47)

It means the discontinuation of the judicial relation existing between all the partners of
the firm. But on certain events like retirement, death, insolvency then partnership between much
a partner and other is dissolved but otters may agree to continue the business.
Dissolution of a firm may take place, (Sec. 39-44)
1) Dissolution by agreement
2) Compulsory dissolution
(i) By the adjudication of all the partners or of all the partners but one as insolvent
(ii) By the business of the firm becoming unlawful
3) Subject to agreement between the parties, on the happening of certain contingencies
such as;
(i) Efflux of time
(ii) Completion of the venture for which it was entered into
(iii)Death of a partner
(iv) Insolvency of a partner.
4) Partnership at will By a partner giving notice of his intention to dissolve the firm and the firm
being dissolved as from the date mentioned in the notice or if no date is mentioned, as from
the date of communication of the notice and
5) By intervention of court in case of [sec. 44]
 A partner becoming of unsound mind
 Permanent incapacity of a partner to perform his duties.
 Misconduct of a partner affecting the business;
 Willful persistent breaches of agreement by a partner?
 Transfer or sale of the whole interest of a partner;
 Impossibility of the business being carried on save at a loss;
 The court being satisfied on other equitable grounds that the firm should be dissolved.