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MODULE IX -INDIAN PARTNERSHIP ACT-1932

Topics Covered:
1) Definition and Characteristics of Partnership
2) Persons who are not a partner (partnership)
3) Difference between Partnership and Company
4) Types of Partners
5) Incoming and Outgoing Partner
6) Rights and Duties of a Partner
7) Dissolution of Partnership
8) Registration of a Partnership Firm
9) Effect of Non Registration of a Partnership Firm
10)
Position of a Minor in a Partnership
11)
Difference between Partnership and LLP
I)

Definition and Characteristics of Partnership

Section 4 of the Partnership Act defines a partnership as


follows: Partnership is the relation between persons who have
agreed to share the profits of a business carried by all or any of
them acting for all. A partnership, as defined in the Act, must
have three essential elements:
1. There must be an agreement entered into by two or more
persons.
2. The agreement must be to share the profits of a business.
3. The business must be carried on by all or any of them
acting for all.
The above points may be analysed as follows:
1) Agreement entered into by two or more
persons.
A partnership can only arise as a result of an agreement,
express or implied, between two or more persons. Where there
is no agreement there is no partnership. But a partnership
cannot be formed with more than ten persons in banking and
twenty persons in other types of business. A partnership with

persons exceeding the above limits must be registered under a


Companies Act.
2) Sharing of Profits (and losses) of a Business
The second element lays down that the existence of a business
is essential to a partnership. Business includes any trade,
occupation or profession. If two or more persons join together
to form a music club it is not a partnership because there is not
business in this case. But if two or more persons join together
to give musical performances to the public with a view to
earning profit, there is a business and a partnership is formed.
3. Mutual Agency
The third element states that persons carrying on business in
partnership are agents as well as principals. The business of a
firm is carried on by all or by any one or more of them on behalf
of all. Every partner has the authority to act on behalf of all and
can, by his actions, bind all the partner of the firm, each
partner is the agent of the others in all matters connected with
the business of the partnership. The law of partnership has
therefore been called a branch of the law of agency.
II) Persons who are not a partnership
(i)
the receipt by a person of a debt or other liquidated
amount by installments or otherwise out of the accruing profits
of a business does not of itself make him or her a partner in the
business or liable as a partner,
(ii) a contract for the remuneration of an employee or agent of
a person engaged in a business by a share of the profits of the
business does not of itself make the employee or agent a
partner in the business or liable as a partner
(iii) the spouse or child of a deceased partner who receives by
way of annuity a portion of the profits made in the business in
which the deceased person was a partner is not a partner.

(iv) the advance of money by way of loan to a person engaged


or about to engage in a business, on a contract between that
person and the lender under which the lender is to receive a
rate of interest varying with the profits or is to receive a share
of the profits arising from carrying on the business, does not of
itself make the lender a partner with the person carrying on the
business.
(v) a person receiving by way of annuity or otherwise a portion
of the profits of a business in consideration of the sale by him
or her of the goodwill of the business is not, merely because of
the receipt, a partner in the business or liable as a partner.
III) Difference between Partnership and a Company
1. Regulating Act:
A company is regulated by Companies Act, 1956, while a
partnership firm is governed by the Indian Partnership Act,
1932.
2. Registration:
A company needs to be registered, whereas registration is not
compulsory for a partnership firm except in the state of
Maharashtra.
3. Number:
The minimum number in a public company is seven and in case
of a private companies two. In case of partnership the minimum
number of partners is two and maximum is 20 in case of nonbanking and 10 in case of banking business.
4. Liability:

In case of company, the liability of shareholders is limited to the


extent of unpaid value of shares held by them. In case of
partnership the liability of partners is unlimited.
5. Management: The affairs of a company are managed by its
directors. On the other hand every partner of a firm has a right
to participate in the management of the business unless the
partnership deed provides otherwise.
6. Capital:
The share capital of a company can be increased or decreased
only in accordance with the provisions of the Companies Act,
whereas partners can alter the amount of their capital by
mutual agreement.
7. Legal Status:
A company has a separate legal status distinct from its
shareholders, while a partnership firm has no legal existence
distinct from its partners.
8. Transfer of Interest:
Shares in a public company are freely transferable . A partner
cannot transfer his interest to others without the consent of
other partners.
9. Insolvency/Death:
Insolvency or death of a shareholder does not affect the
existence of a company. On the other hand a partnership

ceases to exist if any partner retires, dies or is declared


insolvent.
10. Audit:
Audit of accounts of a company is compulsory whereas it is
discretionary in case of a firm.
11. Authority of Members:
A shareholder is not an agent of a company and has no power
to bind the company by his acts. A partner is an agent of a firm
and can enter into contracts with outsiders and incur liabilities
in the ordinary course of firms business.
12. Commencement of Business:
A company has to comply with various legal formalities and has
to file various documents with the Registrar of Companies
before the commencement of business while a firm is not
required to fulfill legal formalities.

IV) Types of Partners


The different kinds of Partners that are found in Partnership
Firms are as follows:1. Active Partner:
A person who takes active interest in the conduct and
management of the business of the firm is known as active
partner. He carries on business on behalf of the other partners.

If he wants to retire, he has to give a public notice of his


retirement; otherwise he will continue to be liable for the acts
of the firm.
2. Sleeping or dormant partner:
A sleeping partner is one who does not take active part in the
management of the business. Such a partner only contributes
to the share capital of the firm, is bound by the activities of
other partners, and shares the profits and losses of the
business. A sleeping partner, unlike an active partner, is not
required to give a public notice of his retirement.
4. Nominal Partner:
A nominal partner is one who does not have any real interest in
the business but lends his name to the firm, without any capital
contributions, and doesnt share the profits of the business. He
also does not usually have a voice in the management of the
business of the firm, but he is liable to outsiders as an actual
partner.
5. Partner by estoppel or holding out:
If a person, by his words or conduct, holds out to another that
he is a partner, he will be stopped from denying that he is not a
partner. The person who thus becomes liable to third parties to
pay the debts of the firm is known as a holding out partner.
There are two essential conditions for the principle of holding
out : (a) the person to be held out must have made the
representation, by words written or spoken or by conduct, that

he was a partner ; and (6) the other party must prove that he
had knowledge of the representation and acted on it, for
instance, gave the credit.
6. Partner in profits only:
When a partner agrees with the others that he would only share
the profits of the firm and would not be liable for its losses, he
is in own as partner in profits only.
V) Incoming and Outgoing Partners
Incoming Partner:
A new partner who will be joining the partnership firm. Partners
to a firm are free to develop any procedure or understanding
for inducting a new partner into their firm.
Such a method
can be included in the partnership agreement. The following
rules will apply in the absence of any agreement
1) New partner to be introduced into an existing
partnership firm with the consent of all the partners.
2) If there are senior partners (i.e. who have contributed
the bulk of the capital in the firm or who founded of
the business) they can induce new partners.
3) Incoming partner is only liable for the transactions
which were made after he has joined the firm.
Retirement of a Partner (Outgoing Partner):
1) A partner can be retired with the consent of all the
partners.
2) If there is any express agreement among the partners as
to how an outgoing partner will leave the firm then, that
agreement should be followed.

3) An outgoing partner can leave the firm by giving a notice


to all the other partners of his intention to retire. (
Partnership at will)
Expulsion of a Partner:
The power of expulsion to be exercised in good faith if these are
given in the deed of partnership.
1) To be exercised by the majority of the partners
2) The partner who is been expelled must be given the
opportunity to explain his conduct
3) The expelled partner is on the same footing as an outgoing
partner with regard to existing liabilities.
4) The expelled partner is entitled to the entire amount of
capital contributed by him & share of all the profit up to the
date of his expulsion.
VI) Rights and duties of partners
The mutual rights and duties of the partners of a firm may be
determined by a contract between the partners.
Rights of a Partner
1) Right to take part in the conduct of the business:Every partner has a right to take active part in the
management and administration of the firm.
2) Right to have access to books of accounts
Every partner has a right to have access to and to inspect
and copy any books of the firm.
3) Right to be Consulted
Every partner has a right to express his opinion before any
decision is taken by the other partners.

4) Right to Remuneration
Generally partners are not entitled to remuneration for
taking part in the business of the firm. However the
partnership deed may expressly provide for payment of
remuneration to some partners.
5) Right to share profits
Every partner has a right to share equally in the profits
earned by the firm.
6) Right to interest on capital and advances
Generally partners are not entitled to interest on capital
advances made by them. However the partnership deed may
expressly provide for payment of interest on capital
advances to partners.
7) Right to be indemnified
Every partner has a right to be indemnified by the firm for
any payment made or liabilities incurred by him on behalf of
the frim.
8) Right to be consulted at the time of admission of a new
partner
It is the right of every partner to be consulted at the time of
admitting of a new a new partner in the firm.
9) Right to retire from the firm
Every partner has a right to retire from the firm if he finds
difficult to adjust with the other partners.
10) Right not to be expelled
Every partner has a right to continue in the firm and cannot be
expelled by other partners.
Duties of a Partner
1) Duty of Good faith

Every partner should act in good faith and he should be just


and faithful to the other partners.
2) Duty
to carry on business to the greatest common
advantage
Every partner is bound to carry on the business of the firm to
the greatest common advantage.
3) Duty to render true accounts
Every partner is bound to keep and render proper books of
accounts.
4) Duty to give full information
It is the duty of every partner that he should give full
information of all things affecting the firm to the other
partners. He should not conceal any information from the
other partners.
5) Duty to indemnify loss caused by fraud
Every partner is bound to indemnify the firm for any loss
caused by his fraud in the conduct of business of the firm.
6) Duty to act diligently
Every partner is bound to attend diligently to his duties in the
conduct of business.
7) Duty to share losses
Every partner shall contribute equally to the losses sustained
by the firm.
8) Duty to account for personal profits
If a partner makes any personal profit for himself in any of
the following ways, he must account for those profits and
pay back the same to the firm:
a) Personal profit from any transaction of the firm.
b) Personal profit from the use of the firm property.

c) Personal profit from the business connections of the firm


d) Personal profit by using the firms name
9) Duty to act within authority
It is the duty of every partner to act within the scope of the
actual or implied authority.
10) Duty to use the property exclusively for then firm
The property of the firm shall be used by the partners
exclusively for the purposes of the business of the firm.
11) Duty to account for profits of competing business
If a partner carries on any business of the same nature as
and competing with that of the firm, he shall account for and
pay to the firm all profits made by him in that business.
VII) Dissolution of Partnership
The Act also provides that a partnership firm may be dissolved
under the following circumstances namely,
1) as a result of any agreement between all the partner.
2) by adjudication of all the partners or all partners but one as
insolvent, or
3) by the happening of an event which makes it unlawful for the
business of the firm to be carried on in partnership or
4) subject to agreement between the parties, on the happening
of any of the following events such as a) Efflux of time
b) Completion of the adventure
c) Death of a partner, and

d) Insolvency of a partner.
In these last four cases the partnership agreement may provide
whether the firm will be dissolved or not on the happening of
any of the four events. In the absence of a term in the deed of
partnership to that effect, it cannot be that, the partnership
shall continue, and notwithstanding the death of a partner it
will operate to extinguish his proprietary rights in the assets of
the Firm.
A partnership can also be dissolved by the Court under the
circumstances mentioned in section 44 of the Act.
Where the partnership is 'at will' the partnership can be
dissolved by any partner or partners giving notice of his/their
intention to dissolve the firm.
VIII) Registration of a Partnership Firm
A partnership firm is required to be registered under
sections 58 and 59 of the Partnership Act, though it is not
compulsory except in the state of Maharashtra
Registration means the act of getting the partnership firm
registered with the Registrar of Firms of the area in which the
place of business is situated or proposed to be situated.
Every change in the constitution of a partnership is also
required to be registered. But if it is not registered, then there
are certain handicaps stated in S.69 of the Act.
The main handicap being that a partnership firm or its partner
cannot file a suit against a third party. In Maharashtra, the
Section is made more stringent making registration almost
compulsory.

VIII) Effect of No- Registration of a Partnership Firm

1) No suit by a partner against the firm or the other partners


No suit to enforce a right arising from a contract or
conferred by this Act shall be instituted in any court by or
on behalf of any person suing as a partner in a firm
against the firm or any person alleged to be or to have
been a partner in the firm unless the firm is registered and
the person suing is or has been shown in the Register of
Firms as a partner in the firm.
2) No suit by firm against third party
No suit to enforce a right arising from a contract shall be
instituted in any Court by or on behalf of a firm against
any third party unless the firm is registered and the
persons suing are or have been shown in the Register of
Firms as partners in the firm.
3) No right to claim set-off
An unregistered firm or any of its partners cannot claim a
set off ( i.e. adjustment of debts by one party due to him
from the other party who files the suit against him) in
proceeding instituted against the firm by a third party to
enforce any right arising from a contract.
Hence it is advisable for every firm to be registered.
However non registration of a firm shall not affect:1) The right of a third party to file a suit against the firm or
its partners.
2) Right of a partner to sue :
a) For dissolution of the firm
b) For accounts of the dissolved firm
c) For claiming share of the assets of the dissolved
firm.
3) The right of the official assignee or receiver to bring an
action for realisation of the property of the insolvent
partner.

X) Position of a Minor in Partnership


A minor is not a partner but he may be admitted to the benefits
of partnership with the consent of all the partners.
1) Such minor has a right to such share of the property and of
the profits of the firm as may be agreed upon, and he may
have access to and inspect and copy any of the accounts of
the firm.
2) Such minors share is liable for the acts of the firm, but the
minor is not personally liable for any such act.
3) At any time within six months of his attaining majority, or of
his obtaining knowledge that he had been admitted to the
benefits of partnership, whichever date is later, such person
may give public notice that he has elected to become or that
he has elected not to become a partner in the firm, and such
notice shall determine his position as regards the firm:
Provided that, if he fails to give such notice, he shall become
a partner in the firm on the expiry of the said six months.
4) Where such person becomes a partner,
a)his rights and liabilities as a minor continue up to the date on
which he becomes a partner, but he also becomes personally
liable to third parties for all acts of the firm done since he was
admitted to the benefits of partnership, and
b) his share in the property and profits of the firm shall be the
share to which he was entitled as a minor.
5) Where such person elects not to become a partner,
a) his rights and liabilities shall continue to be those of a minor
under this section up to the date on which he gives public
notice,

b)his share shall not be liable for any acts of the firm done after
the date of the notice, and
c) he shall be entitled to sue the partners for his share of the
property and profits in accordance with sub-section (4).
XI) Difference between LLP and Partnership

S.No
.
1.

2.
3.
4.
5.

6.

7.

PARTICULARS

A LLP is a body corporate


formed and incorporated
under this act and which
has legal entity separate
from that of its partners,
having perpetual succession
and liability of its partner
shall be limited.
The
Limited
Liability
Governing Law
Partnership Act, 2008
Registration
Compulsory
Creation
Created by law
It is separate legal entity,
Separate
Legal separate from its partners.
Entity
It has perpetual succession.
Perpetual
succession
LLP can also purchase
Purchase
of movable
/
immovable
Property
property in its name
Nature

8.
Common Seal

9.
Formalities
Incorporation

10.

LIMITED LIABILITY
PARTNERSHIP

PARTNERSHIP FIRM
Partnership is a relation
between persons who
have agreed to share the
profits of business carried
on by all or any of them
acting
for
all
with
unlimited liability.
The Indian Partnership
Act, 1932
Optional
Created by contract
It is not separate legal
entity from partners.
It does not have perpetual
succession.

Partnership
firm
can
purchase
movable
/
immoveable property only
in the name of its
partners.
LLP has its own common Not required
seal.
It denotes the signature of
the LLP.
Various
documents
/ Partnership deed along
of declarations executed in with
form/
affidavit
prescribed formats pre-filled required to be filed with
in designated e-forms are Registrar of firms along
required to be filed with with requisite filing fees.
ROC along with filing fee.
LLP can also sue and be Only
registered

Legal Proceeding
11.
Name
12.
Liability

sued
Suffix LLP or
Limited
Liability Partnership has to
be added to the name.
Liability
of
partners
is
limited up to their capital
contribution. However in
case a partners acts with an
intention to conduct fraud,
they are personally liable.
/ A partner can enter into
contract with the LLP
by

partnership can sue.


No such requirement.

Liability of
unlimited

partners

is

13.

Contracts
Business
transaction
Members

14.

Continuance of LLP is not Partnership contract can


Dissolution
affected by the acts of its be put to an end by
Partners.
anyone of the members
on the happening of
event
specified
in
partnership act, 1932
Transferability
of Rights/ interest of partners Transferability of Interest
interest
are transferable as per the subject to the mutual
provisions
of
LLP consent
of
all
the
agreement.
members.
Jurisdiction
of CLB has jurisdiction over the CLB has no jurisdiction
Company
Law affairs of the LLP
Board (CLB)
Books of accounts must be
Books of Accounts prepared as specified in the Not applicable
LLP Act.
Statement of accounts and
Filing of Annual solvency are required to be Not applicable
Accounts
filed with ROC annually in
the prescribed format.
Annual Return is required to Not applicable
Annual Return
be filed with the ROC
annually in the prescribed
format
At least one designated
Digital Signature
partner of the LLP should Not
Applicable.
have their Digital signature. Documents
are
filed
Digital signature is a pre- manually.
requisite for e-filing
Maximum 10 for banking
Maximum number No cap of maximum number business and 20 for other
of Members
of its partners
business.
Remuneration
will
be A partner is not entitled to

15.

16.

17.

18.

19.

20.

21.

A partner cannot enter


into contract with the firm

22.

23.

Remuneration
Salary

/ provided
only if provided in the LLP
agreement.
LLP Agreement is a charter
Charter Agreement of the LLP which denotes its
scope of operation.

24.

Meetings

25.

Voting Rights

receive any remuneration


for taking part in the
conduct of business
Partnership Deed is a
charter of the firm which
denotes its scope of
operation.
Meeting of the Designated No such requirement
Partners have to be held at
specific time period as per
the Provisions of LLP Act.
Each partner has only one Not applicable.
vote.