PARTNERSHIP BUSINESS is a business where two or more persons agree to carry on commercial activity to earn profits. From legal point of view, partnership firm is not a separate legal entity. In other words, it has no existence separate from its partners. It means that in case of bankruptcy of partnership firm, private estates of partners would be liable to meet the firm’s debts.
The partners act both as an agent or principal of the firm. The persons who entered into a partnership with one another is collectively known as Partnership or individually known as Partners. The name of the partnership business is known as Firm Name. The partnership business is governed under Indian Partnership Act, 1932.
ACCORDING TO SECTION 4 OF INDIAN PARTNERSHIP ACT, 1932
“Partnership is the relation between persons who have agreed to share the profits of the business carried on by all or any one of them acting for all”.
ACCORDING TO ERIC L KOHLER
“A contractual relationship, based upon a written, oral or implied agreement between two or more persons who combine their resources and activities in a joint enterprise and share in varying degrees and by specific agreement in the management and in the profits or losses.”
ACCORDING TO PROF. L.H. HANEY
“Partnership is the relation existing between persons, competent to make contracts who have agreed to carry on a lawful business in common with a view to private gain.”
ACCORDING TO JOHN A SHUBIN
“Two or more individuals may form a partnership by making a written or oral agreement that they will jointly assume full responsibility for the conduct of the business.”
ACCORDING TO WILLIAM R SPRIEGEL
“Partnership has two or more members, each of whom is responsible for the obligation of the partnership. Each of the partners may bind others and the assets of the partners may be taken for the debts of partnership.”
To conclude, partnership is a business carried on with a view to earn and distribute profits between the partners in the agreed ratio or equal otherwise.
FEATURES OF PARTNERSHIP BUSINESS
The features of partnership are as follows:
1. ASSOCIATION OF TWO OR MORE PERSONS
In the partnership, there must be plurality of persons i.e. two or more persons should enter into an agreement to commence a partnership firm. A single person cannot be called as a firm. Partnership Act also states the minimum number of members must be two but does not specify maximum number of partners. However Section 464 of Indian Companies Act (Amendment), 2013 restricts the maximum number of partners to 50.
Partnership must be an outcome of the agreement, not an outcome of operation of law. Such an agreement can be either in oral or in writing. The agreement forms the basis of mutual rights and duties of the partners.
3. EXISTENCE OF BUSINESS AND PROFIT MOTIVE
Partnership can be formed for the purpose of carrying on some business with the intention of earning profits and such business must be legal. A joint ownership of some property by itself cannot be called a partnership.
4. SHARING OF PROFITS
The agreement between the partners must be aimed at sharing the profits of the business. If some persons join hands to run some charitable activity, it will not be called partnership. Further, if a partner is deprived of his rights to share the profits of the business, he cannot be called a partner. But it is not necessary that all partners should share the losses also. It may be agreed between the partners that one or more of them shall not be liable for losses.
5. RELATIONSHIP OF PRINCIPAL AND AN AGENT
Each partner is an agent as well as a partner of the firm. An agent, because he bind the other partners by his conduct or acts. He acts as principal because he himself can be bound by the acts or conduct of other partners.
6. BUSINESS BE CARRIED ON BY ALL OR ANY ONE OF THEM ACTING FOR ALL
It means that each partner can participate in the conduct of the business and each partner is bound by the acts of other partners in respect to the business of the firm.
7. UNLIMITED LIABILITY
The liability of the partners in the partnership firm is unlimited. Each partner is liable jointly or severally for all the debts of the firm. This means that the personal property of the partners is liable in case the capital of the firm falls insufficient to meet the liabilities of the firm.
8. RESTRICTION ON TRANSFER OF INTEREST
Partnership is born out of an agreement. If a partner wants to transfer his interest to an outsider, he can do so only with the consent of the all other partners.
9. COLLECTIVE MANAGEMENT
In case of partnership firms, the ownership and is not separate from the management. Each partner is an owner and also a part of management. Each one is entitled to take part in the management of day-to-day business of the firm. However, partners may give the right of management to any one partner. In this case, the partner will act as an agent to the firm on behalf of all the other partners.
10. GOVERNING ACT
The partnership business is governed under Indian Partnership Act, 1932. The section 4 of this act states:
“Partnership is the relation between persons who have agreed to share the profits of the business carried on by all or any one of them acting for all”.
Registration of partnership firm is not compulsory. However partners if so decide they may get it registered with the ‘Registrar’ of the Firms. The registration of the partnership business gives the firm and partners a right to sue others.
12. UTMOST GOOD FAITH
Every partner has a duty to act honestly and render proper accounts to other partners. Mutual trust and faith is essential for the success of partnership.
13. CAPITAL CONTRIBUTION
The partners contribute to the capital of the firm. It is not necessary to have capital in profit sharing ratio. A partner can be admitted t the firm even without contribution of the capital. It is not essential that all partners must contribute to the firm’s capital.
RIGHTS OF THE PARTNERS
1. RIGHT TO TAKE PART IN THE CONDUCT OF THE BUSINESS
Section 12(a) of Indian Contract Act, 1932 stipulates that each partner in a business partnership have the right to take part in the business proceeding. But this right is subject to a contract to the contrary. However, this right may be waived by a partner himself.
2. RIGHT TO BE CONSULTED
In case of matters affecting the business, each partner can has the right to be consulted. Further, every partner has the right to express his views in front of other partners also. Sometimes, difference of opinion arises among the partners. If it is over an ordinary matter, the same may be settled by a majority of the partners, whereas if it is over a fundamental matter, it can be settled only with the consent of all the partners.
3. RIGHT TO HAVE ACCESS TO BOOKS
Every partner in a business partnership can access and inspect any of the books of the firm as per law. It can be exercised either by the partner himself or by his authorized agent. The partners cannot object to inspection of books by the agent of a partner, unless they have a reasonable ground for believing that the trade secrets might be leaked out.
4. RIGHT TO SHARE PROFITS
Every partner is entitled to have equal share in the profits of the firm. At the same time, the partners are equally liable to all the losses sustained by the firm unless otherwise agreed upon as per the partnership agreement.
5. RIGHT TO INTEREST ON CAPITAL
Ordinarily, no interest is payable to the partners. However, if it is allowed by an express or implied agreement or by the custom of trade, a partner can charge interest on capital. In such a case also, interest shall be paid only out of profits.
6. RIGHT TO INTEREST ON ADVANCE
A partner who contributes additional advance to the firm apart from the amount of his capital for the purpose of business is entitled to get there on an interest at the rate of 6% per annum. It is payable out of the property of the firm as if it were an expense. Thus it is payable even if there are no profits.
7. RIGHT OT BE INDEMNIFIED
The partner of a firm is entitled be indemnified by the firm in the following circumstances:
- Expenses incurred in the ordinary course of business, and
- Expenses incurred in an emergency.
8. RIGHT TO THE USE OF THE PARTNERSHIP PROPERTY
In the absence of any contract to the contrary, each partner is presumed to have an equal share in the property of the partnership and is entitled to have them held and used only for the purpose of the business. Partners should not use it as their own property.When at any point of time, a partner uses the property of the business firm to his own benefit either directly or indirectly, the profits thus earned are accountable to the firm.
9. POWER IN AN EMERGENCY
As per the Indian Partnership Act, a partner is vested with the powers to initiate action to safeguard the firm from loss.
10. NO NEW PARTNER TO BE INTRODUCED
New partners may not be introduced in a partnership without the consent of every individual partners. They have the right to object such admission unless there is an express contract allowing such introduction.
11. NO LIABILITY BEFORE JOINING THE FIRM
Unless there is a contract to the contrary, new partner will not have any liability for any act of the firm done before he become a partner.
12. RIGHT TO RETIRE
Retirement from a partnership is a partner’s right. Partner can retire from partnership in any of the following modes.
- With the consent of all the partners, or
- As per the agreement between the partners, or
- In case of partnership- at-will, by giving prior notice to the other partners regarding the intention of his retirement.
13. RIGHT NOT TO BE EXPELLED
Every partner has a right not to be expelled from the firm unless there is a clause in the partnership agreement that give power to the majority of the partners to expel him in good faith.
14. RIGHT TO CARRY ON COMPETING BUSINESS
Outgoing partners cannot be restricted as they are not bound by the partnership agreement. They have the right to carry on a business competing with that of the firm. But he should not use the name of the firm or solicit the firm’s customers who were dealing with the firm. However, he may agree with the partners that he will not carry on any competing business.
15. RIGHT TO SHARE SUBSEQUENT PROFITS AFTER RETIREMENT
Where a partner has died or ceased to be a partner, the surviving or continuing partners may carry on the regular business with the firm’s property without any final settlement of accounts between them. In such cases, the outgoing partner or his estate then in the absence of a contract to the contrary is entitled to
- such share of the profits as is proportionate to his share in the property of the firm, or
- interest at the rate of 6% per annum on the amount of his share in the property of the firm.
DUTIES OF PARTNERS IN PARTNERSHIP BUSINESS
1. LOYALTY AND GOOD FAITH
Each partner must act in good faith towards the other partners and must not take any advantage over the other partners by misrepresentation or concealment. Each partner owes a duty of loyalty to the partnership, and this duty bars the making of any secret profit at the expense of the firm and bars the use of the firm’s property for personal benefit. A partner cannot promote a competing business, and if he does so, he can be liable for any damages sustained by the partnership.
Partners must observe any limitations adopted by a majority of the partners with regard to the ordinary details of the partnership business. For example, if a majority of the partners operate a retail store and decide that no sales can be made on credit, a partner placed in charge of the store must obey this limitation. If a third person does not know of the limitation, the managing partner will have the power to make a binding sale on credit to such a person, but if the third person does not pay his bill, the partner who violated the limitation is liable for any loss caused by his disobedience to the limitation.
3. REASONABLE CARE
A partner must use reasonable care in transacting the partnership’s business and is liable for any loss resulting from a failure to act with reasonable care.
A partner has the duty to inform the partnership of all matters relevant to the partnership. For example, if one partner is going to buy out the interest of another partner, this must be revealed to the partnership.
Each partner has the right to take an equal part in transacting the business of the partnership. It is irrelevant that one partner contributed more than another financially or that one contributed only services when the partnership was formed.
6. INSPECTION OF BOOKS
All partners are equally entitled to inspect the books of the partnership.
7. SHARE OF PROFITS
Each partner is entitled to a share of the profits. The partners may provide that profits shall be shared in unequal proportions. However, in the absence of such an agreement, each partner is entitled to an equal share of the profits without regard to the amount of capital or services contributed to the partnership by each partner.
In the absence of an agreement to the contrary, a partner is not entitled to compensation for services performed for the partnership. Partners may agree that one of the partners shall devote full time as manager of the business and may agree that a salary shall be paid to the partner in addition to the managing partner’s share of the profits. This sometimes occurs in legal partnerships or accounting partnerships when one of the partners is appointed managing partner. In most cases, the managing partner practices his profession, but also handles the business affairs of the partnership and is paid or compensated in some way for this extra duty.
9. REPAYMENT OF LOANS
A partner is entitled to reimbursement of money advanced to the partnership, such as travel expenses incurred on partnership business.
10. CONTRIBUTION AND INDEMNITY
If a partner pays more than his proportionate share of the debts of the partnership, he has a right to reimbursement from the other partners. If an employee of a partnership negligently injures a third person while acting within the scope of employment, and if the injured party collects damages from one partner, this partner is entitled to reimbursement from the other partners in order to divide the loss equally.
11. DISTRIBUTION OF CAPITAL
If a partnership is dissolved, every partner is entitled to receive a share of the partnership property after due payment of all creditors and the repayment of loans made to the partnership by the partners. Unless otherwise stated in the partnership agreement, all partners are entitled to the return of their capital contributions to the partnership.
12. NATURE AND EXTENT OF PARTNER’S LIABILITY
Partners are jointly and severally liable for all torts committed by one of the partners in the scope of the partnership business. When partners are held to be liable for an injury caused to a third person, the third person may sue all or any of the members of the partnership. Partners are also jointly and severally liable on all partnership contracts.
Each member of a partnership has individual and unlimited liability for the debts of the partnership regardless of the member’s investment or interest in the partnership. Even if a partner only owns 5% interest in the partnership, a judgment against the partnership in the amount of $100,000.00 can be collected from the 5% owner’s personal assets, particularly if the partnership or the other partners did not have the money to pay this debt.
13. LIABILITY FOR BREACH OF DUTY
If a partner breaches a duty to the partnership, an injured partner may recover damages from the partner who breached the duty.
14. LIABILITY OF NEW PARTNERS
A person admitted as a partner into an existing partnership has limited liability for all obligations of the partnership which arose before he was admitted as a partner. This type of claim could only be satisfied out of partnership property and would not extend to the individual property of a newly-admitted partner.
15. EFFECT OF DISSOLUTION ON PARTNER’S LIABILITY
A partner will remain liable after dissolution of the partnership unless all claims against the partnership have been paid or the creditors of the partnership have released their claims. The dissolution of the partnership does not in and of itself discharge the existing liability of any partner.