“LAW OF PARTNERSHIP”

Submitted to:
Miss Anum Shaikh

Group “D”
S.# Name Roll#` Presentation Topic
1 Fida Hussain Mangi 131 Registration of Firms,
Advantages of Registration,
Effects of Non-Registration
2 Ghulam Abbas 132 Formation of Partnership,
Partnership Deed, Types of
Partnership
3 Hafeezullah 134 Law of Partnership, Test of
Partnership, Ideal Partnership
4 Ibrar Ahmed Qazi (Leader) 136 Reconstitution of Firm,
Dissolution of Firm, Grounds
of Dissolution
5 Iftikhar Ahmed 137 Rights of Partners, Duties of
Partners
6 Javed Iqbal Rajput 140 Kinds of Partners, Difference
Between Partnership and Co-
Ownership

Table of Contents
 Law of Partnership...........................................................................................1
1. Characteristics of Partnership..........................................................................1
2. Advantages and Disadvantages of Partnership................................................1
3. Formation of Partnership.................................................................................1
3.1 Partnership deed...............................................................................................2
3.2 Rules in the absence of written agreement......................................................2
3.3 Firm’s name.....................................................................................................3
4. Registration of Partnership..............................................................................3
4.1 Preparation/submission of application.............................................................4
4.2 Certification.....................................................................................................4
4.3 Registration of change.....................................................................................4
4.4 Advantages of registration...............................................................................4
4.4.1 Advantages to firm……………………………………………………….......4
4.4.2 Advantages to partners……………………………………………………….4
4.4.3 Advantages to creditors……………………………………………………....5
5. Types of Partnership........................................................................................5
5.1 Partnership at will............................................................................................5
5.2 Particular partnership.......................................................................................5
5.3 Limited partnership..........................................................................................5
6. Kinds of Partners..............................................................................................6
6.1 Active partner...................................................................................................6
6.2 Sleeping partner...............................................................................................6
6.3 Nominal partner...............................................................................................6
6.4 Senior partner...................................................................................................6
6.5 Junior partner...................................................................................................6
6.6 Partner in profits only......................................................................................7
6.7 Secret partner...................................................................................................7
6.8 Minor partner...................................................................................................7
6.9 Incoming partner..............................................................................................7
6.10 Outgoing partner..............................................................................................7
7. Rights and Duties of Partners..........................................................................7
8. Reconstitution of Firm.....................................................................................8
8.1 Admission of new partner................................................................................8
8.2 Retirement of partner.......................................................................................8
8.3 Death of partner...............................................................................................9
8.4 Insolvency of partner.......................................................................................9
9. Dissolution of Firm..........................................................................................9
9.1 Dissolution Conditions.....................................................................................9
9.1.1 Dissolution without intervention of court........................................................9
9.1.2 Dissolution by court.........................................................................................10
References........................................................................................................11
LAW OF PARTNERSHIP
A partnership exists whenever two or more persons associate to conduct a non-corporate
business. Partnerships may operate under different degrees of formality, ranging from
informal, oral understandings to formal agreements filed with the secretary of the state in
which the partnership was formed.
According to Sec. (4) of Partnership Act-1932; “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 called individually
“partners” and collectively “a firm” and the name under which their business is carried on is
called the “firm name”.

1. CHARACTERISTICS OF PARTNERSHIP

Following are the significant features/characteristics of the partnership:

1. Ease of formation
2. Combined judgment and managerial skill
3. Large capital
4. Youngsters can enter in business
5. Mutual agency
6. Unlimited liability
7. Limited life

2. ADVANTAGES AND DISADVANTAGES OF PARTNERSHIP

The major advantage of a partnership is its low cost and ease of formation. The
disadvantages are similar to those associated with proprietorships: (1) unlimited liability,
(2) limited life of the organization, (3) difficulty transferring ownership, and (4) difficulty
raising large amounts of capital. The tax treatment of a partnership is similar to that for
proprietorships, but this is often an advantage

3. FORMATION OF PARTNERSHIP

Partnership business comes into existence by an agreement in writing or oral. However, in

order to avoid the future dispute and to run the business smoothly by quick decision it is
highly desirable to have a written agreement among partners.
The following points must be considered before entering into an agreement of
partnership:

1. The partners of a firm should be selected with care

2. The object of the firm should be lawful
3. The rights and duties of partners must be discussed in detail and in writing
4. The partnership should be registered. If it is unregistered, it will create problems
3.1 Partnership Deed/Agreement/Contract
This written agreement known as “Partnership Agreement”, “Partnership Deed” or
“Article of Association”. It is drafted by Commercial Lawyer, Income Tax Advisor, Tax
Advisor, and also by some other lawyers so that stamps can be used according to Stamp
Act as amended on date. An article of partnership will generally cover the following
points:

1. The name of the firm

2. The nature of business that is to be carried out by the firm
3. The address at which the firm intends to conduct its business
4. The amount of capital that each partner contributes. The form of capital whether it
will be cash or property needs to be documented. If the capital is property, a full
description of the property and the valued amount should be given also.
5. The names and addresses of each partner should be given
6. The duration of the partnership if any
7. The ratio of sharing profits and losses
8. The amount or percentage of interest, if any, which is to be allowed on capital
9. The amount of salary each partner is to receive
10. The manner in which a partnership is to be dissolved and the subsequent
distribution of property among the partners.
11. In the case of insolvency the valuation and treatment of goodwill
12. Provisions regarding the accounting system and the fiscal year to be used
13. Rules to be followed in the case of retirement, death and admission of a partner
14. The method of settling disputes if any among partners. I.e. whether or not an
arbitrator is to be appointed
15. Method of calculating amount issued to a deceased partner, and whether this is to
be paid in full or in installments to his legal representative.
16. In the case of breach of duty by one partner, powers of other partners to expel him
from the firm
17. The keeping of proper books of accounts and periodical preparation of accounts.
18. Any provisions to prevent any future misunderstanding and ill will.

Notes: A Partnership deed can be obtained in the form of Judicial papers that cover all the
points mentioned above. This in turn can be signed and submitted to the registrar as
mentioned.

3.2 Rules in the absence of written agreement:

The following rules will apply in the absence of a written agreement among the partners:

1. Each partner is entitled to share the income or losses equally; no consideration of

capital
2. Partner shall not be allowed any salary; no consideration of services
3. Mark-up on capital or drawing shall not be allowed
4. New partner can not be admitted without the consent of all the partners
5. Each partner shall have equal right in the business activities
6. The firm shall be liable for any liability incurred by any partner
7. 6% per annum mark-up is allowed on the amount of loan provided by any partner
 8. books of accounts and documents must be kept at the principal place of the
business with an access to all the partners

3.3 Firm’s Name:

The partners can choose any name for the firm according to the following rules:

1. The name must not be identical or similar to the name of an existing firm
2. A firm name shall not contain any of the following words, namely:
“Crown”, “Emperor”, “Empress”, “Empire”, “Imperial”, “King”, “Queen”,
“Royal”, “Jinnah”, “Quaid-e-Azam”, “Dominion”, or words expressing or
implying the sanction, approval or patronage of the Crown or of the Quaid-e-
Azam or the “Federal” Government or any Provincial Government, except when
the Provincial Government signifies its consent to the use of such words as part of
the firm name by order in writing.
3. It must not contain the name of “United Nations” or abbreviations of its subsidiary
body without the sanction of the Secretary General of UNO
4. It must not contain the name of “World Health Organization” or its abbreviations
without the sanction of the Director General of WHO
5. It must contain any word, which may be declared by the Provincial Government,
as undesirable

4. REGISTRATION OF PARTNERSHIP

The registration of partnerships is not compulsory by law. It is optional and there is no

penalty for non-registration. However there are disadvantages for not registering. If any
dispute arises among the partners or ex-partners they may not resolve the issue through
the civil courts. An unregistered firm cannot institute a suit to settle these disagreements.
Neither can an unregistered firm sue a third party for the enforcement of any rights arising
from a contract, e.g. the recovery of the price of goods supplied. It must be noted
however, that a third party may file suit against the partnership. Even in this case, the
partnership can not mention any monies that may be outstanding to them in court. There
is no protection to the partners’ liability either. As there is no formal documentation stated
that they are in partnership, if one decides to deny the existence of the partnership, there is
not much that can be done about it legally. Registering during any suit can not
subsequently cure this effect. Prior registration is necessary.

4.1 Preparation of Application/Submission of Application:

The procedure of registration is comparatively simple. An application in the prescribed

form with the prescribed fee is submitted to the Registrar of Firms. The application must
be signed by all the partners. The application must contain the following particulars:
 1. The name of the firm
2. The place or principal place of business of the firm
3. The names and addresses of other places where the firm may conduct business
4. The partner’s date of joining the firm
5. The duration of the firm
6. The name and address of the partners

4.2 Certification:

Once the registrar is satisfied with the application, he registers the firm and enters its
name in the Register of Firms. He then issues a certificate of registration is issued to the
partners. This completes the procedure of registration.

4.3 Registration of Change:

Where any change in the constitution of the firm occurs, during the continuance of
partnership, such change shall also be registered with the register of firms. Such change
may be; any change among the partners due to admission, retirement, death, insolvency,
expulsion minor or dissolution.

4.4 Advantages of Registration:

The following are the advantages of a registered firm:

4.4.1 Advantages to firm:

1. Registered firm can bring a suit against third party for enforcement of rights
arising from a contract
2. Registered firm can claim set-off or adjustment of amount receivable or payable
from third party
3. Registration enhances the goodwill of the firm
4. Registered firm contracts large capital resources

4.4.2 Advantages to partners:

1. Dispute among parties can be settled through court

2. An incoming partner has more confidence at the time of admission in a registered
firm
3. An outgoing partner has a legal evidence of his ceasing as a partner in the records
of registered and can escape liability

4.4.3 Advantages to creditors:

1. Creditors can definitely know from the records of registrar the persons who are
partners
 2. Creditors can claim their due from all the partners

5. TYPES OF PARTNERSHIP

The following are three types of partnership:

5.1 Partnership at will:

The essence of a “partnership at-will” is that the partners do not limit the duration of their
partnership, and are free to break their relationship at any time they see fit. It is a
partnership for indefinite period. The partnership may be dissolved at any point as long as
the partner gives notice to all the other partners. An ordinary partnership becomes a
partnership at-will under the following circumstances:

1. If the partnership is of a indefinite period

2. If a partnership is formed for a limited period of time and the firm continues to
function after the expiry of this period.
3. If a partnership is formed to conduct a particular venture, and then continues to
function after the venture is complete.

5.2 Particular Partnership:

When a partnership is formed to do a business for a particular period, it is called a

particular partnership. Such a partnership is dissolved immediately on the completion of
the particular business.

5.3 Limited Partnership:

In this kind of partnership one or more partners have limited liability and at least on of the
partners has unlimited liability. The liability of the limited partner is limited to the extent
of his investment in the business.

1. It is formed under Limited Partnership Act 1907 (of England)

2. One or more partners have limited liability
3. There is at least one partner with unlimited liability
4. The firm must be registered. Once this is done the rights and duties of the partners
are also recognized.
5. A limited partner has no right to take an active role in the management of the
partnership.
6. The capital invested by the limited partner will not be returned to him as long as
he remains a limited partner on the firm.
7. The limited partner can inspect the accounts of the firm at any time.
8. A new partner can be introduced into the firm at any time without the consent of
the limited partners.
9. The partnership should not consist of more than 20 partners (whether limited or
not) except in the case of banking where they should not exceed 10.
 10. The registrar of Joint Stock Companies shall be the registrar of Limited
Partnerships.

6. KINDS OF PARTNERS

Following are the kinds of partners, according to liability, participation in management

etc.

6.1 Active Partner:

A partner who takes an active part in the management of firm is called active partner. He
takes much interest in the affairs of firm. Such a partner must give public notice of his
retirement from the firm in order to free himself from liability. He is also called working
partner.

6.2 Sleeping Partner:

One who does not take an active part in the management of the firm is called sleeping or
dormant partner. He is also liable to the creditors of the firm like other partners. He is not
required to give notice to general public about his retirement from the firm because he is
not known to the general public.

6.3 Nominal Partner

One who leads his name and reputation to firm is called nominal partner. He does not
invest in business. He does not take part in the management like other partners. He does
not get share in profits. But he is regarded as partner in the eye of law. He is liable to
outsiders for the debts of the firm.

6.4 Senior Partner:

A partner who has a more investment in the firm and receives more profit is called senior
partner. He plays a major role in the management of the business due to experience, age,
capability and other skills.

6.5 Junior Partner:

A junior partner is opposite of a senior partner. Usually, he is a young man who has
recently become a partner of the firm. He has a small investment in the business. Due to
small investment and less experience, he receives a nominal share in profits. He has no
major role in decision making.

6.6 Partner in Profits Only:

He is a partner who shares the profits of a firm but is not liable for the losses. A sleeping
partner may be a partner in profits only. He is equally liable to the outsiders like other
partners.

6.7 Secret Partner:

He is a partner whose membership is kept secret from outsiders. He takes an active part in
management of the firm. He is liable for debts of the firm like other partners.

6.8 Minor Partner:

A minor partner is a person who is under 18 years of age. The person who wants to enter
into partnership must be competent to contract. As a minor is not competent to contract,
so he cannot become a partner. But with the consent of all the partners he may be
admitted to the benefits of partnership by an agreement with his guardian.

6.9 Incoming Partner:

A partner who joins a running business as a new comer. This partner, in fact, pays the
premium of the goodwill of the firm which has been established by other partners. The
incoming partner, after his joining, assumes all the liabilities of the firm.

6.10 Outgoing Partner:

According to partnership deed, a partner can leave the partnership and after him,
remaining partners could keep the business continue. Such partner would assume the
responsibility of all the loans which were acquired before his quitting from the business.
It is therefore, necessary that such partner should inform the concerned people about his
leaving the firm.

7. RIGHTS AND DUTIES OF PARTNERS

Rights of Partner(s):

1. To take active part in business management

2. To be consulted or express his view before other partners
3. To inspect and access any of business book
4. To use business property for business use only
5. To share profit or losses as per written agreement
6. To claim profit on his investment (if agreed by all)
7. To accept or not accept the new partner
8. To retire
9. To challenge the expel motion if made
 10. To be demnified by the firm in respect of payments made or liability incurred by
him, during the ordinary and proper conduct or in an emergency, for the purpose
of protecting the firm from loss and damage

Duties of Partner(s):

1. To observe good faith in all respect

2. To perform his duties diligently without personal interest
3. To indemnify for willful neglect
4. To indemnify for fraud
5. To share losses
6. To account for private profits obtain by him
7. To act within authority assigned to him
8. To hold and use property of the firm exclusively for the business purpose
9. To be liable for the business debts jointly and serially
10. Not to assign his rights to an outsider

8. RECONSTITUTION OF FIRM

A partnership is reconstituted on following changes:

8.1 Admission of New Partner:

A new partner can be admitted into partnership with:

a. the consent of old partners
b. in accordance with the previous contract between the parties
The new partner can invest an amount for a portion of business interest or he can purchase
some portion of any one or more partners’ interest of the business.

8.2 Retirement of Partner:

A partner of a firm can retire due to following reasons:

1. He may require capital for some other purpose
2. He losses faith of the other partners
3. He will retire in accordance with an express agreement
4. He can retire with consent of all partners
5. Where the partnership is at will, by giving notice to retire, or any other reason
It means that there will be a change in the constitution or dissolution of the existing
partnership. At this stage, dissolution of partnership does not mean that business is
discontinued or liquidated; but after computing the balance towards the retiring partner,
the existing partners are allowed to continue their business after amending the necessary
clauses of the partnership
8.3 Death of Partner:

If a partner of a firm dies, his successors may or may not like to remain as partners of the
firm. If any one agrees to remain partner, at least a new name must be recorded in the
partnership. Therefore, dead partner’s account should be closed from the partnership
business. It means that there is change in membership or dissolution of the existing
membership. Again, dissolution of a partnership in these cases doesn’t mean that business
should be discontinued or liquidated, but after computing the payable amount (balance) of
dead partner and making payment in full or partial to the dead partner’s successors, the
existing partners with or without the entry of new partner are allowed to continue their
business after amending the necessary clauses of the partnership agreement.

8.4 Insolvency of Partner:

Where a partner in a firm is adjudicated as insolvent, he ceases to be a partner on the date

on which the order of adjudication is made. Where under a contract between the partners,
the firm is not dissolved by the adjudication of a partner; the insolvent partner is not liable
for any act of the firm and the firm is not liable for any act of the insolvent done after the
date on which the order of adjudication is made.

9. DISSOLUTION OF FIRM

The dissolution of a partnership between all the partners of a firm is called the dissolution
of the firm, in such case, the firm is closed down and its affairs are wound up. The assets
are realized and the liabilities are paid off.

9.1 Dissolution Conditions/Grounds of Dissolution:

A firm may be dissolved on any of the following grounds:

9.1.1 Dissolution without intervention of court:

1. Dissolution by mutual consent: If all the partners have agreed to dissolve the
business
2. Compulsory dissolution: If any one or all partners become insolvent or the firm
is becoming unlawful due to the happening of any such event
3. Dissolution on the happening of certain contingencies:
i) If partnership was formed to undertake a specific project and that project has
been completed
ii) If partnership was constituted for a specific period and that period has expired
iii) By the death of partner(s)
9.1.2 Dissolution by order of the court:
A partnership may also be dissolved by court on the filling of a suit by a partner on any of
the following grounds:

i) that a partner has become unsound mind

ii) a partner, other than the partner suing, has become in any way permanently
incapable of performing his duties
iii) a partner, willfully or persistently breaches the agreement
iv) a partner, without consent of other partners, transferred his whole interest in
business to the third party
v) continuous loss in business
vi) if any partner found in any misconduct or unlawful activity
vii) deadlock in the management dealing and taking stop among partners etc.

When the firm is dissolved; its assets are disposed off by selling or transferring to
partner(s) and the amount so realized is utilized in paying-off first the liabilities of the
firm; next to partners as refund of loan (if any), and lastly; payment of partners capital
along with profit or loss of the business in the same proportion in which they had been
sharing profit during the life of the firm.
 REFERENCES

• Intermediate Accounting, Part-II, by Prof. Dr. M.A Raoof Baig

• Fundamentals of Financial Management, 10th Edition, by Brigham & Houston

• Partnership Act, 1932

• Fundamentals of Corporate Finance, 3rd Edition, by Brealey, Myers & Marcus

• Business Law, by Khalid Mehmood Cheema

• “Registration Procedure for Partnership” a report by “Policy Planning & Strategy”

SMEDA, Government of Pakistan, June 1, 2008

• Principles of Commerce, by Prof. Saeed Ahmed Siddiqui