The Indian Partnership Act, 1932
The Indian Partnership Act 1932 defines a partnership as a relation between two or more persons who agree to share the profits of a business run by them all or by one or more persons acting for them all.
As we go through the Act we will come across five essential elements that every partnership must contain. Let us have a look at Indian Partnership Act in detail.
Definition of Partnership The first part of section 4 of the Indian partnership act, 1932 defines partnership as follows:
"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.
Essential Elements of a Partnership
Essential Elements of a Partnership As we go through the Act we will come across five essential elements that every partnership must contain. Let us take a look at them.
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.
2. Association of Two or More Persons
A partnership is an association between two or more persons. And persons by law only include individuals, not other firms. The law also prohibits minors from being partners. But minors can be admitted to the benefits of a partnership.
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.
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.
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.
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Types of Partners
Here we will look at six types of partners we come across on a regular basis. This list is not exhaustive; the Partnership Act does not restrict any unique kind of partnership that the partners want to define for themselves. Let us take a look at some of the important types of partners.
1. Active Partner/Managing Partner
An active partner is also known as Ostensible Partner. As the name suggests he takes active participation in the firm and the running of the business. He carries on the daily business on behalf of all the partners. This means he acts as an agent of all the other partners on a day to day basis and with regards to all ordinary business of the firm.
2.Dormant/Sleeping Partner
This is a partner that does not participate in the daily functioning of the partnership firm, i.e. he does not take an active part in the daily activities of the firm. He is however bound by the action of all the other partners. He will continue to share the profits and losses of the firm and even bring in his share of capital like any other partner. If such a dormant partner retires he need not give a public notice of the same.
3. Nominal Partner
This is a partner that does not have any real or significant interest in the partnership. So, in essence, he is only lending his name to the partnership. He will not make any capital contributions to the firm, and so he will not have a share in the profits either. But the nominal partner will be liable to outsiders and third parties for acts done by any other partners.
4. Partner by Estoppel
If a person holds out to another that he is a partner of the firm, either by his words, actions or conduct then such a partner cannot deny that he is not a partner. This basically means that even though such a person is not a partner he has represented himself as such, and so he becomes partner by estoppel or partner by holding out.
5. Partner in Profits Only
This partner will only share the profits of the firm; he will not be liable for any liabilities. Even when dealing with third parties he will be liable for all acts of profit only, he will share none of the liabilities.
6. Minor Partner
A minor cannot be a partner of a firm according to the Contract Act. However, a partner can be admitted to the benefits of a partnership if all partner gives their consent for the same. He will share profits of the firm but his liability for the losses will be limited to his share in the firm.
Duties of Partners
All the duties of partners emerge from the second principle i.e. the relation of partners to one another is of utmost good faith.
Following are the duties of partners:
- Duty to act in good faith
- Duty not to compete
- Duty to be diligent
- Duty to indemnify for fraud
- Duty to render true accounts
- Duty to properly use the property of the firm
- Duty not to earn personal profits
Duty to act in good faith
Section 9 of the act provides that it is the duty of partners to act for the greatest common advantage of the firm. Therefore, the partner should work to secure maximum profits for the firm. A partner should not secure secret profits at the expense of the firm.
Section 9 of the act provides that it is the duty of partners to act for the greatest common advantage of the firm. Therefore, the partner should work to secure maximum profits for the firm. A partner should not secure secret profits at the expense of the firm.
Duty not to compete
Section 16(b) of the act provides that if the partner makes a profit by engaging in a business which is similar to or competing with the firm, then the partner should account for such profits.
Duty to be Diligent
Section 12(b) provides that a partner is bound to diligently attend his duties. states that a 13(f) because of his neglect Section should indemnify the firm for any loss caused to the firm wilful Duty to indemnify for fraud
Duty to indemnify for fraud
Section 10 of the Indian Partnership Act, 1932, provides that if a loss is caused to the business of the firm because of the act of the partners for such loss.
Duty to render true accounts
Section 9 e partner Act, provides that the partners are bound to disclose and provide full information about the things that affect the firm to any partner or his legal representatives. This means that a partner should not conceal things from other co partners in relation to the business of the firm.
Duty to account for personal profits
Section 16 of the Partnership Act, provides that:
If a partner makes the use of the property of the firm and earns profit out of it, then he should account for the property. This duty arises because of the fiduciary relationship between the partners.
Rights of Partners Mutual Rights of the partners generally depend upon the provisions of the agreement. But subject to their agreement, the law confers following rights on partners:
- Right to take part in the conduct of the business
- Right to be consulted
- Right to access and inspect books
- Right to indemnity
- Right to share profits
- Right to Interest
- Right to remuneration Right to take part in the conduct of the business
1. Section 12(a) of the act, provides that every partner has a right to take part in the conduct to the business of the firm.
This right can be curtailed by the provisions of the agreement. Thus, allowing only a few partners to actively participate in the functioning of the business.
2. Right to be consulted
Section 12(c) provides for resolving disputes relating to the ordinary course of business between the partners by the majority. It states that every partner shall have the right to express an opinion before the matter is decided.
If for example, there is a difference in opinion among the partners for introducing the son of one of the partners for the purpose of learning business then the majority decision will prevail. Right to access, inspect and copy books
3. Section 12(d) of the act, provides the right to partners to access inspect and copy account books.
A partner can exercise this right by himself or by his agent but none of them is authorised to use the gained information against the interest of the firm. Right to be indemnified
4. Section 13(e) provides the right to be indemnified to the partners. This section provides the right to indemnity under two circumstances:
5. A partner is entitled to recover for any expenses incurred by him in the ordinary and proper conduct of the business. Right to share profits
Section 13(b) of the Indian Partnership Act, provides that the partners are entitled to share the profits and losses equally. Right to share profits is not affected by the fact that the partners have contributed unequally in the firm, possess different skills, have laboured unequally in the firm.
6. Right to Interest
Interest on Capital: Section 13(c) provides that a partner is generally not entitled to claim on the capital. But if there is an express agreement between partners that allows interest on capital then, such an interest will be paid only out of the profits of the firm.
Interest is not provided to the partner on capital except when there is an express agreement or a usage to the effect, because a partner is deemed to be an adventurer rather than the creditor.
Right to remuneration
7. Section 13(a) provides that no partner in a firm is entitled to claim remuneration for taking part in the conduct of business. However, the remuneration can be provided to certain partners along with the share in profits if they have entered into an agreement to that effect or when such remuneration is payable under the continued usage of the firm.
Registration of Firm:
Under the Indian Partnership Act, 1932, the registration of the firm is compulsory. Because an unregistered firm suffers from certain limitations, hence the registration of the firm is desirable. Registration can be done at any time. The registration of partnership firm involves the following procedure:
The firm will have to apply to the Registrar of Firms of the respective State Government in a prescribed application form.
The form should be duly signed by all the partners. The application form should contain the following information:
- The firm-name.
- The name of business place.
- Names of other places, if any, where the firm is carrying on its business.
Date of commencement of business.
- Date when each partner joined the firm.
- Full names and permanent addresses of all the partners.
- The duration of the firm, if any.
When the Registrar of Firms is satisfied that all formalities relating to registration have been fully complied with, he makes an entry in the Register of Firms.
Thus, the firm is considered to be registered. The Registrar issues a certificate called ‘Registration Certificate’ to the firm. The Register of Firm remains open for inspection on payment of prescribed fee for the purpose.
Dissolution of Firm:
There is a difference between the dissolution of partnership and dissolution of firm. Dissolution of partnership occurs when a partner ceases to be associated with the business, whereas dissolution of firm is the winding up the business.
In other words, in case of dissolution of partnership, the business of the firm does not come to an end but there is a new agreement between the remaining partners. But in case of dissolution of firm, the business of the firm is closed up.
In brief, dissolution of partnership does not imply the dissolution of firm. But, dissolution of firm implies dissolution of partnership also. Following are the various ways in which a firm may be dissolved:
1. Dissolution by Agreement: The partnership firm may be dissolved in accordance with a contract already made between the partners.
2. Compulsory Dissolution: A firm stands compulsorily dissolved under the following circumstances:
(1) By the adjudication of all the partners or of all the partners but one as insolvent, or
(2) By the happening, of any such event that makes the business unlawful.
3. Dissolution due to Contingencies:
A firm stands dissolved on the happening of the any of the following contingencies:
(1) On expiry of partnership period, if constituted for a fixed period.
(2) On completion of the firm’s venture for which the firm was formed.
(3) On the death of a partner.
(4) On the adjudication of a partner as an insolvent.
4. Dissolution by Court:
Under any of the following cases, a court may order the dissolution of a firm:
(1) Any partner has become of unsound mind.
(2) Any partner has become permanently incapable of performing his duties as a partner.
(3) A partner’s misconduct is likely to affect prejudicial the business of the firm.
(4) A partner wilfully commits breach of the partnership agreement.
(5) A partner transfers his interest in the firm, but unauthorised, to a third party.
(6) The business of the firm can be carried on at loss only.
FAQ,s
When limited liability partnership act 2008 came into force ?
enacted 12 dec 2008, Commenced 31 march 2009
when partnership Act came into existence ?
the indian partnership act is in force since 1932.
What is partnership Partnerships Act 1932?