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Law Of Partnership: Nature And Definition

Partnership is a form of business organization in which two or more persons come together to carry out business. A partnership can be thought of as the development of a sole proprietorship in which a single individual carries on his business with his personal resources, skills and efforts.

The major disadvantage of being a sole proprietor is that since just one person is involved within the business, it's difficult for him to rearrange huge resources and investments in the business. On the other hand, in a partnership, several individuals are involved and they can pool their resources together to build and manage a larger business. Further, if there is a loss in business, it can be divided among the partners of the partnership firm.

When two or more people agrees to share losses and profits in Partnership firm is Partnership .In partnership, all the partners not have equal in profits and losses. There are different types of partnership according to the extent of their liability and their participation in the firm.

The Indian Partnership Act, 1932

Once upon a time the level of trade and commerce in the society was different, the needs of man were different. Only one person wont to produce something and also sell it. Trade commerce was not so developed. With the passage of time, the development of trade commerce went on, the needs of man kept on increasing, the nature of business also changed. First of all, sole trade has been the prevalent business in the forms of business, but sometimes partnership business also started coming into existence. Considering the responsibilities of business according to the needs of the society, partnership business started developing.

When the practice of partnership business started increasing in the society, there was also a need for related laws and regulations because it is the duty of a state to control any business. The State of India also compiled legislation related to partnership and the Indian Partnership Act 1932 was enacted.

The Indian Partnership Act 1932 enacts all the provisions concerning partnership. This act is useful act to control partnership business. Even today, India's economy is being run by partnership industries because it is not so easy to operate a company. In the Indian economy, either solo business is being done or partnership business is being done. Most of the industries are operating on a single or partnership basis. In order to operate such industries, the major responsibility for conducting these trades also falls on the state. On this basis the Indian Partnership Act 1932 becomes important which enacts the conduct of business and the agreements between the partners to settle disputes between them.

The Act compiles the laws relating to partnership and provides certainty to the trade and commerce of the partnership. Any business which is being carried on by more than 1 person under a particular contract, this type of business is called partnership business.

After studying the Indian Partnership Act 1932, some special things related to partnership come out and which can also be called essential elements of partnership. These elements are being mentioned in this assignment:

A Settlement

Partnership is born only after agreement. Under the Indian Contract Act, there is an agreement first. Agreement related articles can be read under Contract Law Series to know what is an agreement.

For partnership there should be an agreement of partnership between two or more persons but it is not necessary that the agreement is written or expressed, it can be created by conduct. The participation should be an agreement of a voluntary nature. If the agreement is not made voluntarily, it cannot take the form of partnership. Just as there are requirements under the contract law for having an agreement, the same requirement is valid for partnership agreement under the Partnership Act.

Only after an agreement is a partnership born. The Indian Partnership Act stresses the need for an agreement for any partnership. Such an agreement could also be oral or could also be by conduct. There is no need to have any written agreement for such an agreement.

Business

Any agreement under the Partnership Act is made for the purpose of carrying on any business. The aim of any business is to form profit. If any work is being done with the aim of earning profit then it is business. If such business is being carried on under this partnership then it will be considered as partnership business.

The definition of business has been given under section 2 (b) of the Indian Partnership Act 1932, according to which every business is a profession. The meaning of business is not clear from this definition, rather it is clearing the quantitative nature of business. Actually defining business is a question of one element, yet in working together, time, money, hard work, done and done with the aim of getting profit, will be called business.

In the case of Vishwanath Namak Chand AIR 1955, Judge Venkataraman in his judgment held that partnership can exist where there is a business to be carried on where there is no business to be done, the question of partnership does not arise.

It has been held in Vicky Chandra Vs Harishchandra AIR 1940 Nagpur 211 that two persons together buy hundred bales of cotton and jointly enter into an agreement to sell. This agreement is business and both are partners in the business, so here it is partnership. Partnership requires business, partners establish a partnership relationship to get a share of the profits of the business.

It can be said simply that where more than one person is doing a business or commerce profession with the aim of making profit together, this type of business is called partnership business.

Just as two owners can jointly own their property and form a partnership, similarly two doctors or two lawyers can form a partnership to treat patients or to litigate their clients. What is turnover is only a question of the element which will be answered with reference to the specific elements of a case. Merely a program or an act of lending money alone cannot be a business and does not come under the business referred to in section 4 of the Partnership Act.

Get Profit

The purpose of any business is to get profit, all business activities are being conducted with the aim of earning dividend. Any business, industry, commerce, profession is conducted almost with the aim of making profit. It is the most essential element of partnership that the share of profits should be received by the partnership. Whatever profit is being received from trade commerce, there should be some share of the partners in that profit. When the partners receive a share in the profit received by the business, it is called a combination of profits. The profit is called sharing among themselves.

Under the Partnership Act, it has not been mentioned that how much profit will be taken, what will be the ratio of profit taking, but it has definitely been mentioned that dividend will be received. Partners can receive the same in any proportion and at any time. In the earlier times, this essential element was given so much importance that in relation to running a business, if the share of profits between two or more persons was divided among themselves, partnership was considered as decisive, but today there has been a change. And it is said that mere right to participate in or receive profits does not entitle a person to be a participant.

Mutual agent
Under the Partnership Act, one of the most important properties or elements under any partnership is that the partners are agents among themselves. For partnership to exist, it is necessary for the partners to be agents among themselves. In partnership, all the partners are agents for each other.

For the general purpose of business, each partner is an agent of the other partners. If two or more persons agree that they shall carry on business and receive profit, each is an owner; Which gives full benefit to its owner.

In the case Pratibha Rani Vs Suraj Kumar AIR 1985 AC 628, it has been said that the partnership in the relation between the wife and the husband cannot be contemplated for the appointment of wealth. Unless the wife has made a clear legal act compulsorily indicating that the stridhan entrusted to the wife is to be used for any participatory business.

It is an essential element of conducting any business, commerce, profession under partnership. When these elements are found in any trade, commerce or business, then partnership becomes trade, commerce, business and such business is governed by the provisions given under the Indian Partnership Act 1932.

Definition Of Partners

As per Section 4 of the Indian Partnership Act, 1932, a partnership is defined as a relation between two persons who mutually comply with share profits and losses in business. Therefore, individuals who have entered into an agreement with each other are individually referred to as partners.

Furthermore, according to the Black Law Dictionary, a partner could also be a member of a firm or co-partnership; One who has united with others to form a partnership in business.

Common Types Of Companions

The following list covers the kinds of partners we encounter on a daily basis. The following list of partners isn't exhaustive in nature, because the Partnership Act, 1932 doesn't prohibit any sort of partnership that the partners might need to define for themselves.

Active / Managing Partner

An active partner primarily participates in the day to day trading and also has an active participation in the operation and management of the business firm. He performs the day-to-day business activities on behalf of the other partners. He may act in various capacities such as manager, advisor, organizer and controller of the affairs of the firm. To be precise, he acts because the agent of all the opposite partners to hold out the core functions associated with the business. Further, subject to the clause in the partnership deed, the active partner can withdraw the remuneration from the firm.

With regard to their role in the partnership, their role is of utmost importance. Therefore, if he wishes to retire from the partnership company, he must give public notice of his decision. He gives a public notice to absolve himself of the liability and of the acts done by the other partner. If he does not issue a public notice declaring his retirement, he will be held liable for the acts done by other partners after retirement.

Passive Partner

The sleeping partner is also known as the passive partner. This partner does not participate in the day to day working of the partnership firm. A person who has sufficient funds or interest within the firm, but cannot devote his time to the business, may act as a silent partner within the firm. However, he's bound by all the acts of the opposite partners.

A silent partner like all other partner brings share capital to the firm. If a dormant partner decides to retire from the partnership firm, it is not mandatory for him to give public notice to him. Since a passive partner is not participating in the day-to-day affairs of the business, he is not allowed to withdraw the remuneration from the firm. If all the partnership deed is providing remuneration to inactive partners, then it is not deductible under Income Tax Act, 1961.

Nominal Share

The nominal partner has no real or material interest in the partnership firm. In simple words, he is only lending his name to the firm and does not have a voice in the management of the firm. By virtue of its name, the firm can promote its sales in the market or obtain more credit from the market.

For example: A partnership between a partner and a celebrity or a business tycoon is executed for the added value of the firm and also to promote the branding by using the fame and goodwill of the individual.

This partner does not share any profit and loss in the firm as he does not contribute any capital in the firm. However, it's pertinent to notice that a minor partner is susceptible to outsiders and for acts committed by other partners of third parties.

Essay By Partner (Estopel)

A partner by estoppel is a partner who by his words, actions or conduct demonstrates that he is a partner of the firm. In simple words, even though he is not a partner in the firm, he has presented himself in such a way as to show that he has become a partner by estoppel or partner. It is pertinent to note that, though he contributes to the capital or management of the firm, he is liable for the credits and loans received by the firm by virtue of his representation in the firm.

There are two prerequisites for setting up a 'holding out':
  1. First, the person who is excluded must have represented by words, actions or conduct that he is a partner in the firm.
  2. Secondly, the other party must prove that it had knowledge of such representation and acted upon it

Partner In Profit Only

This partner of the firm will share only the profits of the firm and will not be liable for any loss of the firm. Further, if a partner who is partner only in profits deals with any third party or outsider, he shall be liable only for acts of profit and not for any liability. He is not allowed to participate in the management of the firm. Such partners are related to the firm for his or her goodwill and money.

Minor Partner

A minor may be a one that is yet to achieve the age of majority within the law of the land. According to Section 3 of the Indian Adulthood Act, a person is deemed to have attained the age of majority in 1875 on attaining the age of 1875. However, a minor also can be appointed to say the advantages of the partnership.

It is pertinent to note that, Section 11 of the Indian Contract Act, 1872 prohibits a minor from entering into an agreement, as the agreement entered into by a minor is voidable. However, the Partnership Act, 1932 allows a minor to enjoy the advantages of partnership when a group of rules and procedures are complied with as per law. A minor will share the profits of the firm, however, his liability for the losses is limited to his share of the firm only.

A minor after attaining the age of majority (i.e. 18 years of age) has to decide within 6 months whether he is willing to become a partner for the firm. If all the minor partners decide to continue as a partner or wish to retire, in both cases they are required to make such declaration by public notice.

Secret Partner

In a partnership, the position of the secret partner is located between the active and the sleeping partner. The membership of a secret partner's firm is kept secret from outsiders and third parties. His liability is unlimited as he shares the profits and shares the liabilities for the losses in the business. He may also participate in working for the business.

Outgoing Partner

An outgoing partner is a partner who voluntarily retires without dissolution of the firm. He leaves the existing firm, so he is called an outgoing or retiring partner. Such partner is liable for all his debts and obligations incurred before his retirement. However, he may be held liable for his future obligations, if he fails to give public notice about his retirement from the partnership firm.

Limited Partner

A limited partner is a partner whose liability is only to the extent of his contribution to the capital of the partnership firm.

Sub-Partner

A sub-partner is a partner who adds someone else to his share of the firm. He gives a part of his share to the person. It is pertinent to note that, the relationship is not between the sub-partner and the partnership firm, but between him and the partner. Therefore, a sub-partner is a non-entity of the firm and does not bear any liability to the firm.

A sub-partner usually agrees to share profits that are received from third parties. Such partner cannot represent himself as a partner in the parent firm. Further, he does not hold any right in the parent firm nor is he liable for the actions done by the partners of the firm. He can claim his agreed share on profits only from the partner who has contracted him to be a sub-partner.

Types Of Partners In The Partnership Act

The types of partners under the Partnership Act, 1932 can be studied under the following heads:
  1. According to objectives
  2. According to tenure
  3. According to nature
  4. Legally
  5. On the basis of registration

According To Purpose

Willing Participation
When a partnership is formed, it is at the discretion of the partners that the partnership exists for as long as they wish. Therefore, whenever a partnership is formed without stipulation of any specific time limit, it is known as partnership at will.

Such partnership is based on the will of the partners and can be brought so long as any of the partners gives notice indicating the intention for the same. This partnership is formed to conduct a lawful business for an indefinite period.

Further, the dissolution of partnership is not predetermined and is taken into account when required. This is for deciding the expected time period of the partnership between the partners.

Special Participation
The main objective behind forming a special partnership is to undertake a specific undertaking. Such partnership is formed between partners for a temporary contract-based work or only for the project of a specific business, it is known as an exclusive partnership. In special partnerships, once the purpose of the business partnership is achieved, the partnership is dissolved. In simple words, this partnership is formed for the particular undertaking and it automatically terminates after the completion of the functions involved in the enterprise.
 Nevertheless, the partners have the option of continuing the partnership by coming to an agreement.

For example: partnership for the production of a film or for the construction of a building.

According To Tenure

Partnership For A Fixed Period
In this type of partnership, the partnership is for a fixed period of 5 years, 2 years or for a specified period. After the expiry of the said period, the partnership automatically terminates.

Flexible Partnership
Partnerships which are neither for a fixed period nor for a particular undertaking, are called flexible partnerships.

According To Nature

General Partnership
In a general partnership, each partner has the right to take decisions regarding the working and management of the firm. It is pertinent to note that, in this type of partnership the liability of the partner is unlimited. This means that if there is any financial error or loss by one of the partners, the assets of all the other partners will be taken into account to pay the liabilities due in the form of debt.

If no agreement is reached, the provisions of the Indian Partnership Act, 1932 apply for general partnerships, in which the liability of each partner is unlimited.

Limited Liability Partnership (LLP)
Unlike a general partnership, a limited liability partnership is a corporate form of business organization. In this type of partnership, the liabilities for each partner are limited according to the contribution made by them to the business. Further, the personal property or assets of the partner cannot be attached to pay the liability of the firm. It is pertinent to note that this organization is not governed under the Partnership Act, 1932 but is governed under the Limited Liability Partnership Act, 2008.

In a limited liability partnership, some or all except one partner have limited liability as per the limit of the capital contributed by them. It is pertinent to note that, in a partnership, not all partners may have limited liability.

According To Validity

Legal Partnership
When a partnership is formed in accordance with the provisions of the Indian Contract Act, 1872 and the Indian Partnership Act, 1932, it shall be called a valid partnership.

Illegal Partnership
A partnership may be invalid when it violates the provisions of any law of the land or when the required number of partners is reduced beyond the time limit or less than the time limit.

On The Basis Of Registration

Registration of a firm is not mandatory under the Partnership Act, 1932. Both a registered firm and an unregistered firm are valid in the eyes of law.

Unregistered Partnership Firm
An unregistered firm is established when the agreement between the partners is executed. The partnership firm, which is unregistered, allows the partners to carry out the business activities provided for in the agreement.

Registered Partnership Firm
To register a partnership firm, it must be registered with the Register of Firms (ROF) where the firm is carrying out its business activities. Application for registration involves payment of registration fee to the ROF, which varies from state to state as per state laws. In a partnership, registration of a firm is preferred as it offers benefits such as filing a lawsuit in court.

Conclusion
The Indian Partnership Act, 1932 talks about the general form of partnership, however, the general form of partnership has lost its charm due to its inherent disadvantage somewhere. One of the major disadvantages is the unlimited liability of all the partners in the partnership in terms of legal consequences and debts in the firm, irrespective of their respective holdings. In addition, general partners are held jointly and severally liable for acts committed by other partners.

Therefore, we will see that there's a shift towards indebtedness Partnership, which provides more flexibility to the partners. Even the Government of India has recognized the disadvantages of General Partnership and said that there is a need to start LLP in India. The government also appointed a committee under the chairmanship of Mr. Naresh Chandra to come up with a proper framework for LLP in India.

References: Written By: Abhijeet Ujjwal

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