INDIAN PARTNERSHIP ACT, 1932

A partnership is the relationship between persons who have agreed to share the profits of a
business carried on by all or any of them acting or all. In India it is governed by the Indian
Partnership Act, 1932, which extends to the whole of India except the State of Jammu and
Kashmir. It came into force on 1st October 1932.

According to Section 4 of the 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 one of them acting for all”.

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.

ESSENTIAL ELEMENTS OF PARTNERSHIP

There are five essential elements that every partnership must contain:

1. Contract for Partnership

A partnership is contractual in nature. As the definition states a partnership is an association of

two or more persons. So a partnership results from a contract or an agreement between two or
more persons. A partnership does not arise from the operation of law. Neither can it be inherited.
It has to be a voluntary agreement between partners. A partnership agreement can be written or
oral. Sometimes such an agreement is even implied by the continued actions and mutual
understanding of the partners.

2. Association of two or more persons

A partnership is an association between two or more persons. And persons by law only includes
individuals, not other firms. The law also prohibits minors from being partners. But minors can
be admitted to the benefits of a partnership. The Act is actually silent on the maximum number
of partners. But this has been covered under the Companies Act 2013. So a partnership can only
have a maximum of 10 partners in a banking firm and 20 partners in all other kinds of firms.
 3. Carrying on of Business

There are two aspects of this element. Firstly the firm must be carrying on some business. Here
the business will include any trade, profession or occupation. Only that some business must exist
and the partners must participate in the running of such business. Also, the business must be run
on a profit motive. The ultimate aim of the business should be to make gains, which are then
distributed among the partners. So a firm carrying on charitable work will not be a partnership. If
there is no intention to earn profits, there is no partnership.

4. Profit Sharing

The sharing of profits is one of the essential elements of a partnership. The profit sharing ratio or
the manner of sharing profits is not important. But one partner cannot be entitled to the entire
profits of the firm. However, the sharing of losses is not of any essence. It is up to the partners
whether the losses will be shared by all the partners. If nothing is said then the losses are also
split in the profit sharing ratio. Say for example two individuals are operating out of the same
warehouse. So they agree to divide the rent amongst themselves. This is not a partnership since
there is no profit sharing between the two.

5. Mutual Agency

The definition states that the business must be carried out by the partners, or any partner/s acting
for all of them. This is a contract of mutual agency another one of the five elements of a
partnership. This means that every partner is both a principle as well as an agent for all the other
partners of the firm. An act done by any of the partners is binding on all the other partners and
the firm as well. And so every partner is bound by the acts of all the other partners. This is one of
the most important aspects of a partnership. It is, in fact, the truest test of a partnership.
TYPES OF PARTNERSHIPS

There are 4 general types of partnership arrangements:

1. General Partnerships assume that profits, liability, and management duties are

divided equally among partners. If you opt for an unequal distribution, the
percentages assigned to each partner must be documented in the partnership
agreement.
2. Limited Partnerships (also known as a partnership with limited liability) are
more complex than general partnerships. Limited partnerships allow partners to have
limited liability as well as limited input with management decisions. These limits
depend on the extent of each partner’s investment percentage. Limited partnerships
are seen as attractive to investors of short-term projects.
3. Joint Ventures act as general partnership, but for only a limited period of time or for
a single project. Partners in a joint venture can be recognized as an ongoing
partnership if they continue the venture, but they must file as such.
4. Silent partner is one who still shares in the profits and losses of the business, but
who is uninvolved in its management, and/or whose association with the business is
not publicly known; these partners usually provide capital.

INDIA INTRODUCES NEW LIMITED LIABILITY PARTNERSHIP LAW

 
The Indian Parliament has passed the Limited Liability Partnership (LLP) Bill, 2008.  LLP, as
a corporate entity is similar in concept to the Limited Liability Company (LLC), available in the
United States.  The LLP format provides the benefits of limited liability of a corporation but
allows its members the flexibility of organizing their internal management on the basis of a
mutually arrived agreement, as in a partnership firm.

PROS OF A PARTNERSHIP

● The workload can be shared between partners

● Each partner may specialize in their own area of the business
● More finance can be raised then, say sole-traders, due to more owners investing in the
business
● Due to the business being generally larger than a sole-trader, it has a better chance at
generating other sources of finance e.g. bank loans, etc
● There are no legal formalities to complete prior to starting the business
● Partners can cover each other during times of absence, e.g. holidays or illnes

CONS OF A PARTNERSHIP

● Profits are shared between partners

● Decisions may take time to reach due to other partners disagreeing
● Partners are equally responsible for liability
● Any actions and decisions based on the business are legally binding to ALL partners
● A partnership is terminated when a partner dies and therefore the process of forming a new
partnership has to be taken

RIGHTS OF THE PARTNERS

1. Right to participate in the conduct of business (Section 12(a)): each partner has a

right to participate in the conduct of the business.  A partner right to participate in
business is curtailed in a case where some of them only participate in the business
affairs of the firm. this right can be curtailed only when the partnership deed states so.
2. Rights to access and inspect books and accounts (Section 12(d)): This right is also
given to the active and dormant partner. Each partner has a right to access and inspect
the book of account of the firm. In case of death of a partner, his legal heir can inspect
the copies of accounts.
3. Right to be indemnified: The partners have a right to be indemnified for the decision
taken in the course of the business. But such a decision is to be taken in the case of
urgency and should be of such nature that the ordinarily prudent person would take.
4. Rights to express his opinion (Section 12(c)): Each partner has a right to express his
opinion with regard to business affairs. They also have the right to participate in the
decision-making process.
 5. Rights to get interested in capital or advances: Generally, partners are not entitled
to get any interest on the capital that they invest .But when they agree to give interest,
then such interest would be paid from the capital. They are also entitled to 6%interest
on the advances made towards the business of the firm.
6. Right to share profit and loss: The partners share the profit and losses equally in the
absence of any deed. But when there is a partnership deed prescribing the ratio of
profit and losses it will be shared in accordance with the partnership deed.

DUTIES OF PARTNERS

The rights and duties are correlated with each other. When the rights are given to the partners
then there must be some which the partners should perform..the various duties of partners are as
follows:

1. Duty to act diligently (Section 12(b)): It is the duty of the partners to act with due
care and diligence because his actions will affect all other partners. If his wilful act
causes a loss or injury to other partners he is entitled to pay compensation to the
affected partners.
2. Duty to indemnify fraud (Section 10): whenever any fraud is committed by partners
then every partner is liable to indemnify the firm for losses because the firm is liable
for the wrongful acts of the partners. If the fraud causes the losses to other partners he
is entitled to indemnify for the loss caused.
3. Duty to use the firm property exclusively for the purpose of business (Section
15): The partners can use the firm property for the purpose of the business but not for
its personal purpose. The partner must use the property in a lawful manner. they must
not earn a person gains from such property.
4. Duty to hand over personal gains (Section 16): All the partners should act towards
achieving the common goal. They must not engage in other professions or engage in
any competitive business venture. If they earn any personal gains from the conduct of
business then they should hand over to all the partners.
 5. General duties (Section 9): It is the duty of all partners to make all the efforts to
achieve a common goal, to render a true account and provides all the information
affecting a firm to partners, or his representative

REGISTRATION OF PARTNERSHIP FIRM

The registration of Partnership in India is not compulsory under Indian Partnership Act 1932.
Yet, the unregistered partnership firms lack certain advantages in its future business course. For
example, in the unregistered firm the expenses viz., payment of salary, commission, interest on
borrowings or drawings are not considered as allowable expenses for determination of total
income for payment of tax. There are more which are detailed below.

1. Procedure of Registration

Entrepreneurs desirous of setting a partnership firm should apply in the prescribed form (Form
No. 1) to be submitted to the Registrar of Firms on their jurisdiction with prescribed fee. The
application must be signed by all the partners or their authorized agents.

The application contains the following details:

● Name of the firm

● Place of Business.
● Name and Address details of a Partner
● Date of formation of business
● Date of Joining the Firm.
● Duration of the firm.

The duly filled Form 1 shall be submitted along with the required proof before the Registrar of
Firms. The details will be verified and then the register will issue the certificate of registration.

Effects of Non-Registration:

● An unregistered firm cannot file a suit against a third party to enforce a right
arising from a contract. (For example, for the recovery of the price of goods
supplied)
● The unregistered partnership cannot file suit in the firm name
● The partner cannot claim his rights from the fellow partners arising out of the
partnership deed.
 ● Bank Current Account, Pan Card, TAN. VAT license cannot be availed in the
firm's name.

So, needless to add the registered partnership firms avail vice versa of above limitations. It is
further advisable to consult a competent lawyer to proceed with the registration of your firm.

DIFFERENCE BETWEEN PARTNERSHIP AND CO-OWNERSHIP

Partnership and co-ownership are two different things. The ownership of a property by more than
one person is called co-ownership. If two brothers purchase a property collectively, it will be a
case of co-ownership. The property will be disposed of with the consent of all the co-owners.
Any income arising out of co-ownership is shared by all the co-owners.
The property is not purchased with the object of earning profits. If a building is purchased to let
it for rent, then it will be a case of partnership and not of co-ownership. In co-ownership, there is
only joint ownership without any business motive. In partnership joint ownership and business
are combined. It is elaborated below:

1. Contract:
Partnership is based on contractual relationships among partners. Co-ownership may be by the
operation of law. On the death of father, sons become co-owners of his property. On the other
hand, partnership is the outcome of an agreement.
2. Object:
The object of partnership is to enter into some business and earn profits. Co-ownership is not
meant for business purposes.
3. Transfer of Income:
No partner can transfer his interest (share) without the consent of all other partners. A co-owner
can transfer his interest at any time and without asking from other co-owners.
4. Agency Relationship:
Partners can act as agents of the business. They have implied authority to bind the firm by their
acts. No agency relationship exists in co-ownership. Every co-owner is responsible for his own
deeds only.
5. Division of Joint Property:
A co-owner can demand the division of property. Two co-owners may divide a plot of land by
erecting a wall on the land. In partnership the division of property cannot be demanded. A
partner can demand the payment of his share in business by way of cash.

6. Right of Investment:
If a partner spends some money for the business he can demand its reimbursement. On the other
hand, if a co-owner spends money for the improvement of property he cannot claim it as a lien
on property.
7. Act:
Partnership is formed under Partnership Act, 1932 but there is no such act governing co-owners.

DIFFERENCE BETWEEN PARTNERSHIP AND CLUB

The difference is elaborated below:

1. Definition:

A club is in association of persons formed with the object not of earning profit, but of
promoting some beneficial purposes such as improvement of health. On the other hand
partnership is an association of persons formed for earning profits from a business.

2. Relationship:

The persons forming a partnership are called partners and a partner is an agent for other
partners. Whereas the persons forming a club are called members and the member of club
is not an agent for other members.

3. Interest in the property:

Partner has interest in property of the firm whereas member has no interest in the
property of the club.
4. Dissolution:

A change in the partners of the firm affects its existence whereas a change in the
members of a club doesn’t affects its existence.