When two or more people come together as partners, they can form a partnership firm. This partnership firm is governed by the rules and regulations of the Indian Partnership Act, 1932. The partnership is also governed by the Indian Contract Act in areas where the Partnership Act, 1932 is silent. Let us have an overview of this act by understanding its meaning, scope, and different kinds of partnerships.
Section 4 of the Indian Partnership Act defines a partnership as “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”.
In a partnership firm, two or more people come together to carry out a business for the purpose of earning profits and sharing those profits. The partners combine their capital resources and work jointly to carry on the business. According to Section 12 of the Indian Partnership Act, a partnership must be formed for the purpose of carrying a business that is legal in nature. Co-ownership of a property is not considered as a partnership.
• There must be an agreement between the partners to carry on the business of the partnership firm.
• The aim of the formation of the partnership should be to earn profits and share them among partners. The sharing of profit and losses can either be according to the ratio of the capital contributed by each partner or be equally among all the partners unless otherwise specified.
• The partnership agreement must state that the business will be jointly carried on by all of them or some of them acting on the behalf of all. According to Section 13 of the Partnership Act, 1932, the mutual agency exists between the partners. Every partner in a partnership acts as a principal as well as an agent for other partners. The actions of a partner are binding on the actions of all the other partners.
• Unlimited Liability- The partners can be held liable jointly for any debts of the firm. They have an unlimited liability that extends to their private assets for the disposal of the firm’s debts.
According to the Indian Partnership Act, there is no limit on the maximum number of partners that can be there in partnership but there must be a minimum of two partners. However, according to Companies Act 2013, the maximum number of partners must not exceed 100 in case of a partnership. If the number of members in a partnership exceeds 100 then it is termed as an illegal association as per Section 464 of the Companies Act, 2013. As per Section 11 of the Companies Act, the maximum number of partners for banking purposes is 10 and for other purposes is 10.
The partnership agreement forms the basis of a partnership. It is the foundation that creates a legal relationship between the partners to carry out the business of the partnership firm. A partnership agreement can either be written or oral but in the written format it is known as the partnership deed. Some of the details mentioned in a partnership deed are as follows.
• Name and address of the partnership firm as well as that of the business
• Name and address of all the partners
• Rights, duties, and obligation of partners
• Profit and loss sharing ratio
• Capital contribution by each partner
• Rate of interest on capital, loan, drawings
• Settlement of accounts in the event of the dissolution of the firm
• Mode of settlement in the event of disputes among partners
• Salaries and commission payable to partners
• Rules to be followed in the event of the admission of a new partner, retirement and death of an existing partner
• Any other provisions affecting the rights of the partners
There are two kinds of partnerships on the basis of partnership terms and extent of the business.
Partnership on the Basis of Duration
• Partnership at Will- No fixed period is specified for the expiration of a partnership by will.
• Partnership for a Fixed Time- The partners fix the duration of the partnership, after the expiration of which the partnership comes to an end.
Partnership on the Basis of the Extent of Business
• Particular Partnership- When a partnership is formed for the completion of a particular project and it expires after the project is completed.
• General Partnership- When the partnership is formed for the general business of the firm and not for a specific project.
There are primarily six different kinds of partners in a partnership firm.
• Active/Managing Partner- Plays an active role in the day to day business operations of the firm.
• Sleeping/Dormant Partner- Does not participate in the operations of the business but is bound by the conduct of the other partners.
• Nominal Partner- Does not have any significant interest in the firm and is a partner in name only.
• Partner in profit only- Shares only the profits of the firm but does not share the losses. Such a partner is not liable for any third-party liabilities.
• Minor Partner- A minor cannot be a partner in a partnership firm as per the Indian Contract Act, but he can be entitled to the benefits of the firm with the consent of the other partners. The minor partner shares the profits of the firm equally but has limited liability for any losses of the firm.
• Partner by Estoppel- A person who is not a partner of the firm but represents himself to be one through his words or conduct, to another person is a partner by estoppel. Such a person cannot deny being a partner afterward even though he is not a partner.