Partnership firms

Section 4 of the Indian Partnership Act, 1932, provides that "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. Persons who have entered into partnership with one another are called individually “partners" and collectively “a firm”, and the name under which their business is carried on is called the “firm name"

The essentials of a partnership are that there should be an agreement between individuals to carry on a business and share profits arising from it. The business might be carried on by all or any of them acting for all. According to Section 2, business means and includes every trade, occupation and profession. There should be some activity with an intention of making profit. Any association not having a profit motive like a charitable or religious society is not a partnership. An agreement to carry on business in future is not a partnership at present.

Mutual agency means ‘one for all, all for one’. Partnership is based on mutual agency. In a partnership, all or any of the partners can act for all of them and carry on the business of the firm.

A partnership is different from a company as it is not a legal person but an aggregate of partners. Further, the liability of partners is unlimited and any partner cannot sell its share without the consent of other partners.

Creation of a firm

A firm is created by an agreement between individuals desiring to carry on a business with an aim to earn profits and share the same. A person may become a partner with another for a single adventure or undertaking (section 8). If the duration of a partnership is not fixed at the time of creation, it becomes partnership at will and its duration depends upon the willingness of the partners (section 7).

Registration of a partnership firm

Registration of a firm is not compulsory. Section 58(1) lays down the procedure of registration. It provides that: The registration of a firm may be effected at any time by sending by post or delivering to the registrar of the area in which any place of business of the firm is situated or proposed to be situated, a statement in the prescribed form and accompanied by the prescribed fee stating -

a) The firm name,

b) The place or principal place of business of the firm.

c) The names of any other places where the firm carries on business

d) The date when each partner joined the firm

e) The names in full and permanent addresses of the partners and

f) The duration of the firm

The statement shall be signed by all the partners, or by their agents specially authorised in his behalf.

Section 59 further lays down that when the Registrar is satisfied that the provision of section 58 have been duly complied with he shall record an entry of the statement in a register called the Register of firms, and shall file the statement.

Rights and duties of partner

The partners of a firm share mutual rights and liabilities. They also have certain liabilities towards third parties as well.

(a)    Rights of partners

(1)    Right to take part in business (section 12(a)) – every partner has a right to take part in the business of the firm.

(2)    Majority rights (section 13(c)) – differences arising in the ordinary matters connected by the business are to be decided by majority of the partners, however, the nature of the business cannot be changed without the consent of all the partners. All the partners have got a right to express their opinions.

(3)    Access to books (section 12(d)) – every partner has got a right to access and inspect any book of the firm.

(4)    Right to indemnify (section 13(e)) – the firm shall indemnify any partner all payments and liabilities in respect of anything done by him in the ordinary and proper course of business.

(5)    Right to profits (section 13(b)) – the partners have a right to share the profits equally.

(6)    Right to interest on capital (section 13(c) & (d)) – a partner making any payment or advance beyond the amount of capital subscribed by him is entitled to interest thereon at the rate of six percent per annum.

(7)    Right to remuneration (section 13(a)) – a partnership agreement may provide for remuneration of the partners. However, in case there is no agreement, the partners are not entitled to receive remuneration for taking part in the business of the firm.

(b)   Liabilities of partners to each other

(1)    Duty of absolute good faith (section 9) – all the endeavors of the partners should be for securing maximum profit for the firm and not for individual profit.

(2)    Duty not to compete (section 16(b)) – a partner is not permitted to carry on any business of the same nature as the firm so as to compete with it.

(3)    Duty of due diligence (sections 12(b) & 13(f)) – a partner shall indemnify for any loss to the firm caused by his negligence.

(4)    Duty to indemnify for fraud (section 10) – a partner has to indemnify the firm for any loss caused by his fraud.

(5)    Duty to render true accounts (section 9) – partners are bound to render true accounts and full information to other partners and their legal representatives.

(6)    Proper use of property (sections 15 & 16(a)) – the property of a firm is held by the partners and is to be used exclusively for the business of the firm.

(7)    Duty to account for personal profits (section 16) – if a partner gets personal profit from any transaction of the firm or from any competing business, he is liable to account for it and pay it to the firm.

(c)    Liabilities of partners to third parties

(1)    Liability for tort

Section 26 of the act provides that: Where by the wrongful act or omission of a partner acting in the ordinary course of the business of a firm, or with the authority, of his partners, loss or injury is caused to any third party, or any penalty is incurred, the firm is liable therefor to the same extent as the partner.

(2)    Liability for misappropriation

Section 27 provides that:  Where -

a) a partner acting within his apparent authority receives money or property from a third party and misapplies it or,

b) a firm in the course of its business receives money or property from a thirty party, and the money or property is misapplied by any of the partners while it is in the custody of the firm.

The firm is liable to make good the loss.

(3)    Liability for holding out

Section 28 provides that: (1) Any one who by words spoken or written or by conduct represents himself, or knowingly permits himself to be represented, to be a partner in a firm, is liable as a partner in the firm to any one who has on the faith of any such representation given credit to the firm, whether the person representing himself or represented to be a partner does or does not know that the representation has reached the person so giving credit.

(2) Where after a partner's death the business continued in the old firm name, the continued use of that name or of the deceased partner's name as a part thereof shall not of itself make his legal representative or his estate liable for any act of the firm done after his death.