INDIAN PARTNERSHIP ACT, 1932
The law of partnership is one of the specific
contracts contained in the Indian partnership act
which was come into existence on 1st Oct, 1932.
According to sec (4) of Indian partnership act,
“partnership is the relation between the
persons who have agreed to share the profits
of the business carried on by all or any of
them acting for all”.
The person who has entered into the partnership
agreement with one another is individually called
partners and collectivity of a firm.
ESSENTIAL ELEMENTS OF PARTNERSHIP
Association of two or more persons: There
should be at least two competent parties to form
a partnership. Hence any person who is not a
minor, of sound mind and is not disqualified by law
can be a partner.
Partnership act does not say
anything about the maximum no of partners but
sec11 of the companies act fixes the maximum no.
at 10 or according on banking business and 20 for
carrying on any other business. If the no. of
partners exceeds this limit the partnership becomes
an illegal association.
Agreement: There must be an agreement to form a
partnership. This agreement may be express or
implied. Partnership is created by contract and not
arises by operation of law. If one of the partners is
expired, his son or daughter will not
automatically become partners unless there is an
agreement between them to carry on the business
as a partner.
Business: A partnership can be formed only for
the purpose of carrying on some business. Where
there is no business to be done there can be no
question of partnership. The business to be carried
on by the firm must be legal.
Sharing of profits: The sharing of profits is an
essential feature of partnership. Profits must be
distributed among the partners in an agreed ratio.
The partners may agree to share profits in any
manner they like. They may share it equally or in
any other proportion.
Mutual agency: The business of partnership may
be carried on by all the partners or any of them
acting for all. In a firm each partner is a
representative of the other partners. Each of the
partners is an agent as he can bind the other
partners by his act and he is a principal in the
sense that he is bound by the act of the other
Restriction on the transfer of shares: No
partners can sell or transfer his share to the third
party without the consent of all the partners.
Extent of liability: Liability of each partner for the
firm is unlimited. The creditors have the right to
recover the firm debt from the private property
of any or all the partners.
No separate entity: Partnership is an association
of person who are individually called as partners
and collectively called firm. Legally a partnership
firm is not a separate entity from the partners.
DURATION OF PARTNERSHIP
At the time of partnership agreement partners may fix
the duration of the partnership or may not. The duration
may be decided as:
Partnership for a fixed term: It is a partnership
created for a fixed period of time. When the fixed period
is over, partnership comes to an end.
Partnership at will: According to sec 7 of the act
where no provision has been agreed for the duration of
the partnership, it is called partnership at will. A
partnership at will may be dissolved by any partner
by giving notice in writing to all the partners of his
intention to dissolve the firm.
Particular partnership: When a partnership is formed
for a specific venture, the partnership is called particular
partnership. It comes to an end on the completion of the
TYPES OF PARTNERS
Active partner: A partner who is actively engaged
in the conduct of business is known as an active
partner. He is also called a working partner and his
liabilities are unlimited.
Sleeping partner: Sleeping partner is one who
contributes share, profits and losses of the firm but
does not participate in the working of the business.
He is also liable for the liabilities of the firm.
Nominal partner: A nominal partner is one who
does not contribute any capital or share in profit but
lends his name to the business is called nominal
partner. He is also liable to the third parties.
Partner in profit only: A partner sharing a profit of
business without bearing the losses is called partners in
profits only. He contributes capital and is also liable
to the third party but is not allowed to take part in
the management of the firm.
Minor as a partner: A minor cannot become the partner
in the partnership firm because he cannot enter into the
contract but he may be admitted to the benefits of
partnership as per the consent of all the partners.
Incoming partner: A person who is admitted as a
partner in an existing partnership is called as incoming
partner. He is not liable to the creditors for anything that
has happened before he joined the business.
Outgoing partner: Partner leaving the existing firm
is called an outgoing partner or retiring partner. An
outgoing partner is liable for the debts incurred
Partner by estoppel or holding out: When a
person is not a partner but he pretend to be partner
by words spoken or written or by his conduct is
called partner by estoppel or holding out.
He shall be liable for the third party who deals with
the firm on the supposition that he is a partner even
though he is not a partner.
MINOR AS A PARTNER
A minor cannot become a partner in the partnership
because according to Indian contract act he is
incapable of entering into the contract of
partnership but he may be admitted to the benefits
of partnership with the consent of all the partners.
The position of minor partner is studied under two
Position before majority:
a) Every minor has a right of share in the profits and
property of the business as agreed by the
b) He has the right to inspect the books of accounts.
c) If he is not given his due share, he has the right to
file a suit against the firm.
Position after majority:
On attaining majority the minor has to declare within six
months whether he shall continue in the firm or leave it.
If he fails to declare, he becomes partner in the firm at
the end of six months.
1) When he elects to be a partner:
He becomes personally liable to all the third parties for
all the act of the firm since he has admitted to the
benefits of partnership.
His share in the profits of the firm is the share to which
he has entitled as a minor.
2) When he elects not to become a partner:
His right and duties continue to be as a minor up to the
date of notice.
He is not liable for any act of the firm done after the date
of public notice.
He has a right to sue the partners if his share of profits
ADVANTAGES OF PARTNERSHIP
Easy formation: Like sole proprietorship
partnership form of organization can be formed
without legal formalities because registration is not
compulsory and the agreement may be written or
Sharing of risk: In partnership the losses are
shared by all the partners, whereas in case of sole
traders, he bears it alone.
Large resources: Partnership firm enjoys large
resources as compared to sole proprietorship.
Flexibility: The partnership business is considered
flexible because it is free from legal formalities and
the partners can introduce any change whenever
Maintenance of secrecy: The partnership
business is less secretive but it doesn’t have to get
it accounts audited and published as is necessary
for joint stock companies.
Direct relationship between reward and work: In
partnership there is direct relation between reward
and work and this enables the partners to put more
labor and earn more profit.
Easy dissolution: The partnership business can
be easily dissolved on the death, insolvency of
partners. There are no legal formalities involved in
DISADVANTAGE OF PARTNERSHIP
Lack of harmony: In partnership firm there is
mostly disharmony among partners which results in
lack of management.
Limited resources: Maximum no of partners is 20
in a partnership firm so it limits the amounts of
Instability: One major disadvantage is that the firm
can come to abrupt and on death, lunacy and
insolvency of partners. It can also be closed by the
order of law or if a partner expresses his desire to
dissolve the partnership.
Lack of public faith: There is lack of public faith in
this form of organization as it has no legal
formalities and people do not get exact position of
business because accounts in this form of
organization is not published.
Restriction of transfer of interest: In partnership,
if a partner wants to transfer his interest to the third
party, he will have to seek the consent of all the
Liability after retirement: A partner is liable after
his retirement also. He is liable to all the acts done
by him when he was a partner.
Partnership is the result of an agreement which
may be in writing or formed verbally. But it is
desirable to have the partnership agreement in
writing to avoid future disputes.
The deed is required to be duly stamped as per
the Indian Stamp Act, 1889 and duly signed by
all the partners.
The agreement between the partners is written in a
partnership deed. The agreement should be signed
by all the partners. Partnership deed is not a
public document like M.O.A (Memorandum of
CONTENTS OF PARTNERSHIP DEED
Name of the firm.
Name and addresses of all the partners.
Nature and place of the business.
Term or duration of partnership.
Amount of capital to be contributed by each partner.
The drawings that can be made by each partner.
The interest to be allowed on capital, and charges on
Rights of partners.
Duties of partners.
Remuneration of partners.
Ratio in which the profits and losses are to be shared.
The procedure of admission and retirement of a partner.
Settlement of amount in case of retirement, death of partners
or dissolution of the firm.
The procedure to be adapted in case of disputes.
RULES TO BE FOLLOWED IN ABSENCE OF
The partners will share the profits and losses
They will not get any interest on capital.
No interest will be charged on personal drawings.
No salary for the partners.
REGISTRATION OF PARTNERSHIP
Sec 57 deals with appointment of registrar of firms.
The state govt. is empowered to appoint
registrar of firms for carrying out the purposes of
act and lays down the areas within which they
shall exercise their powers and perform their
PROCEDURE FOR REGISTRATION
Sec 58&59 deal with the procedure for the registration of
the firm. An application in the prescribed fees is to be
filled with the registrar of the area in which any where
place of the business of the firm is situated or proposed
to be situated. The application shall state the following:
The name of the firm.
The place of the business of the firm.
The name of any other place where the firm carries on
The date when each partner join the firm.
The name in full and the permanent addresses of all the
The duration of the firm.
The application shall be signed and
verified by each partner or his agent
specifically authorized for this purpose in
the manner prescribed by law.
When the registrar is satisfied that the
provision of sec58 have been compiled with,
he shall make an entry of the application
in the register of firms and shall file the
RIGHTS OF PARTNERS
The rights of all the partners are as follows:
Right to take part in the business.
Right to be consulted.
Right to access of account.
Right to share in profit.
Right to interest on capital.
Right to the use of partnership property.
Right to retire.
Right to remuneration.
DUTIES OF PARTNERS
To indemnify for loss caused by fraud.
To work without remuneration.
To share losses.
To hold and use property of the firm.
To act within authority.
To account for profits of completing business.
RELATION OF PARTNER WITH THIRD PARTIES
Subject to the provision of the partnership act, 1932
every partner is the agent of the firm for the
purpose of the business of the firm (sec18).
One of the essential of the partnership is that
the business must be carried on by all or any
one of them acting for all. Accordingly partners
are agent and principal both. In carrying of the
business of the firm partners act as agent as well
IMPLIED AUTHORITY OF A PARTNER
Sec19 provides that the act of the partner which is done
to carry on the business of the firm, binds the firm. Thus
the authority of the partner to bind the firm by his
act is called the implied authority of the partner.
Acts within implied authority:
Purchasing goods on behalf of the firm in which they
Selling the goods of the firm.
Receiving payments of the debts and giving receipts for
Settling accounts with the person dealing with firm.
Engaging servants for the partnership business.
Borrowing money on the credit of the firm.
Limitations of implied authority:
Cannot open a bank account on behalf of the firm in
his own name.
Cannot withdraw a suit for proceedings file on
behalf of the firm.
Cannot acquire immovable property on behalf of
Cannot transfer immovable property belonging to
Cannot enter into partnership on behalf of the firm.
IMPLIED AUTHORITY WITH THIRD PARTY
The relation of partners with the third parties arises
out of the authority of partners as an agent of the
firm. Any third party while dealing with an agent
believes that he is dealing with the firm.
The act makes some special provisions with regard
to the relation of partner with third parties. They are
Admission or representation by a partner (sec
23): It is obvious that if a partner acts beyond his
authority then the firm shall not be bound by it but
the third party acting in good faith can bind the firm
and in that case the partner concern shall indemnify
Notice to acting partner (sec 24): Notice to a
partner who habitually acts in the business of the
firm of any matter relating to the affairs of the firm
operates as notice to the firm except in the case of
fraud on the firm committed.
Liability of a partner (sec 25): According to sec 25
the liability of the partner is joint and several
even though the act of the firm may have been
done by only one of them. Thus a third party if he
so likes can bring an action against anyone of
them or against all of them jointly.
Liability of the firm (sec 26&27): Since a partner
represents as an agent of the firm with the third
parties and hence the firm becomes liable to
third parties for binding the firm.
DISSOLUTION OF PARTNERSHIP FIRM
Dissolution of the firm means dissolution of
partnership between all the partners of the firm. It
means the business of the firm is discontinued.
Dissolution of partnership involves only change in
the relation of the partners. The firm still
continues even after the dissolution of
partnership because this may happen on
admission, retirement or death of the partner.
MODES OF DISSOLUTION OF FIRM
1) Dissolution without the order of the court (sec 43):
Dissolution of the firm without the order of court may
take place in the following ways:
a) Dissolution by agreement (sec40): A firm may be
dissolved with the consent of all the partners with the
contract between the partners. The contract for the
dissolution of firm may be express or implied.
b) Compulsory dissolution (sec 41): A firm is
compulsory dissolved in the following circumstances:
If all the partners or one partner of the firm are declared
If some events takes place which makes it unlawful for
the business of the firm to be carried on.
c) Dissolution on the happening of certain
contingencies (sec 42): A firm is dissolved on the
following four contingencies:
On the expiry of the fixed term.
On completion of the venture or undertaking.
On the death of a partner.
On the insolvency of the partner.
d) Dissolution by notice (sec 43): Where the
partnership is at will, the firm may be dissolved by
any partner giving notice in writing to all the other
partners of his intention to dissolve the firm.
2) Dissolution by court (sec. 44): According to sec
44 of the Indian partnership act, dissolution by court
may take place on the following grounds:
a) Insanity: The court may dissolve the firm where a
partner has become of unsound mind. The firm may
dissolve on the petition of any of the partner or by
the next friend of insane partner.
b) Permanent incapacity: When a partner has
become permanently incapable of performing
duties, any other partner may apply for dissolution
in the court. The incapacity must be of a permanent
nature such as physical disablement, illness etc.
c) Misconduct: The court may order the dissolution
of firm on account of misconduct of any partner
other than the one filling a suit for dissolution.
d) Persistent breach of agreement: When a partner
willfully or persistently commits breach of the
partnership agreement relating to the affairs of the
firm or conduct of the business, the court may at
instance of any of the other partner dissolve the
e) Business working at loss: Where the business of
the firm cannot be carried on except at a loss, the
court may order dissolution of the firm.
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