The law relating to partnership firm in India is prescribed in the Indian Partnership Act of 1932.
Persons who have entered into partnership with one another to carry on a business are individually called “Partners “; collectively called as a “Partnership Firm”; and the name under which their business is carried on is called the “Firm Name”
What is Partnership
A partnership is a relationship between individuals who have agreed to share the profits of a business carried on by all or any one of them acting for all as stated in Section 4 of the Indian Partnership Act. Therefore, a partnership consists of following three important conditions.
- A partnership must be a result of an agreement between two or more individuals.
- The agreement must be built to share the profits obtained from the business.
- The business must be run by all or any of them representing the rest.
All these conditions must coexist before a partnership can come into existence.
Five Essential Elements of a Partnership Firm
Some key elements are required for the formation of a Partnership. They are listed below with a brief explanation.
- Contract for Partnership
A partnership is the result of a contract between two or more persons. It should be noted that this sort of a deal can arises only from a contract and not from status.
This is why a partnership is distinguishable from a Hindu Undivided Family carrying on family business. The reason is that this kind of an alliance is a creation only out of a mutual agreement. Thus, the nature of a partnership is voluntary and contractual.
An agreement from which a partnership relationship arise may be express. It may also be implied from the Partnership Act done by the partners and from a consistent course of conduct being followed, showing a mutual understanding between them. This agreement may be in oral or in writing.
2. Sharing Profits
This essential element provides that the agreement to carry on business must be with the object of sharing profits amongst all the partners.
Secondly, there must be an agreement concerning the sharing of profits. For example, A and B buy certain bales of cotton which they agree to sell on their joint account and to share the benefits equally. In such a situation, A and B are partners in respect to the business they have planned out. However, an agreement to share the losses is not an essential element that is considered. However, in the event of damages, unless agreed otherwise, these must be borne in a profit-sharing ratio.
3. Carrying on of Business in a Partnership
The third requirement for a partnership is that the business must be carried on by all the partners or by one or more of the partners acting for all. This is the crucial principle of the partnership law. An act of one partner in the course of the business of the firm is, in fact, an act of all partners. A partner carrying on a business is the principal as well as the agent for all the other partners. Therefore, it should be noted that the real test of a partnership is a mutual agency rather than sharing of profits. If the element of interactive agency is absent, then there will be no partnership. Sharing of benefits is the only Prima Facie evidence which can be rebutted by stronger evidence. This, this prima facie evidence can be countered by proving that there is no mutual agency.
4. Maximum No. of Partners in a Partnership is twenty
Since partnership is the result of a contract, at least two people are necessary to constitute a partnership. The Indian partnership Act, 1932 does not mention anything about the maximum no. of partners in a partnership firm but as per the Companies Act, a partnership consisting of more than 10 persons for a banking business and more than 20 persons for any other business would be considered as illegal. Hence, these should be regarded as the maximum limits to the number of partners in a partnership firm.
5. Mutual Agency in a Partnership
The fifth element in the definition of partnership provides that the business must be carried on by all the partners or any (one or more) of them acting for them all, i.e. there must be a mutual agency.
Thus, every partner, is both an agent and principal for himself and other partners, i.e. he can bind by his acts the other persons and can be bound by the acts of other partners. The importance of the element of mutual agency lies in the fact that it enables every partner to carry on the business on behalf of others.
Types of Partnership
There are two types of partnership which are as follows.
A. Partnership at will
A partnership by will is a partnership where there is no provision made by contract between the partners for the duration of their partnership, or the determination of their partnership.
B. Particular Partnership
A particular partnership is when a person becomes a partner with another individual in a particular business enterprise or for a particular business venture or undertaking, such as the construction of a road, laying a railway line, etc. This sort of a partnership shall come to an end on the completion of the task for which it was initially formed.
Types of Partners
The different classes of partners can be derived based on the extent of liability in a partnership firm.
- Active/ Actual/ Ostensible Partner
When a partner of a partnership firm,
- has become a partner by an agreement;
- actively participates in the conduct of the partnership.
The partner of the firm acts as a representative of other partners for all the acts carried out in the usual business lifecycle of the business. In the event of a retirement of a partner, the person must give a public notice to absolve himself of their liabilities for acts carried out by the other partners after his retirement.
2. Sleeping or Dormant Partner
A Sleeping or a Dormant Partner is a partner,
- who is a partner by agreement;
- who does not actively take part in the conduct of the business.
These partners share their profits and losses and are liable to third parties for the business carried out by the partnership firm. However, they are not required to give public notice of their retirement from the partnership firm.
3. Nominal Partner
A nominal partner is an individual who lends his name to the partnership form. When this is done without having any real interest in the business, the person is a nominal partner. This kind of a partner is not entitled to share the profits of the firm. This partner has neither invested in the firm nor takes part in how the business is run at the firm. Although, such a partner is liable to third parties for all the actions taken by the firm.
4. Partner in Profits only
This is a partner who is entitled to have a share of the profits without being liable to the losses. This kind of a partner is liable to third parties only for acts of the gain.
5. Sub-Partner
A Sub-partner is a partner in a partnership firm who agrees to share his profits in a partnership firm with an outsider to the firm. A sub-partner does not hold any right against the firm nor is liable to any debts caused by the firm.
6. Incoming partners
This is a partner who is admitted as a partner into an already existing firm with the consent from all the other existing partners. Such a partner is not liable for any acts of the form taken before his entry as a partner to the firm.
7. Outgoing Partner
An outgoing partner is a partner who leaves the firm in which the rest of the partners continue to carry on the business. Such a partner remains liable to third parties for all the actions taken by the firm until a public notice concerning his retirement is given.
8. Partner by holding out (Section 28)
Partnership by holding out is also called as a partnership by estoppel. This is when an individual holds himself out as a partner or allows others to do so, the person is then stopped from denying the character he has assumed and upon the faith of which creditors may be presumed to have acted. When an individual represents himself or knowingly permits himself, to be represented as a partner in a partnership firm (when in fact he is not) he is liable, like a partner in the firm to anyone who on the faith of such representation, had given credit to the firm.
An individual may themselves, by their words or conduct has induced other to believe that they are a partner or they may have allowed others to represent them a partner. The result in both the situations is identical.
9. Minor as a Partner
A minor is a person who has not yet attained the age of majority, which is 18 years. A ‘Minor’ does not enjoy the capacity to enter into contracts in his own. Since Partnership is a contractual relationship, a minor cannot become a partner.
As per the Indian Contract Act, a minor cannot enter into a contract and if any such contracts have been entered into, then such contracts are void. However, he can be admitted into the benefits of Partnership, with the consent of all partners of the firm.
The following are the rights and liabilities of a minor, who is a partner:
(a) A minor has a right to the share of the profits and property of the partnership, as per the agreement between the partners.
(b) He can inspect the books of accounts of the firm.
(c) The liability of a minor is limited to his share of capital in the firm. He is personally not liable for any wrong doings by the firm and his personal property will not be attached while paying the liabilities of the firm.
(d) A minor cannot sue the other partners for payment of his dues in respect of his share in the profits of the firm. However, if he decides to leave the partnership, then he can sue the other partners for payment and final settlement of his dues relating to his partnership share.
(e) A minor, within six months of attaining majority, shall decide whether he wants to continue as a partner in the business or leave the partnership. He shall do this by giving a public notice regarding his decision. However, if he fails to give a public notice regarding his decision or if he fails to decide within six months of attaining majority, then he shall become a partner.
(f) If a minor decides to become a partner then he shall be liable for all acts, debts and obligations of the firm, since the date of his admission into benefits of partnership of the firm. His personal assets shall be used to repay the liabilities of the firm, if required. (g) If he decides not to become a partner, he shall not be liable for any acts of the firm after the date of issue of notice.