A]    INTRODUCTION–

A partnership is an association between two or more persons who have come together to carry on some business activity. Mutual agency and to sharing profits of business so carried on are important characteristics of partnership. In other words, partnership is a business arrangement in which you can open up a new venture, with another person or persons (as prescribed by law) sharing profits and losses in fixed proportion.

Suppose a person wants to open a restaurant in his locality. He will need to gather together a lot of things. He may find that it is not possible to arrange the money required to start and run the business alone. He may then talk to his friends and all of them agree to run the restaurant by contributing a certain amount of money and the other things required. So all of them join hands together to become the owners and share the profits and losses. This form of business organization is called as partnership.

B] MEANING OF PARTNERSHIP–

Partnership is basically a relation between two or more persons who join hands to form a business organization with the objective of earning profit. The persons who join hands are individually known as ‘Partner’ and collectively a ‘Firm’. The name under which the business is carried on is called ‘firm name’. A partnership firm is governed by the provisions of the Indian Partnership Act, 1932. Section 4 of the Indian Partnership Act, 1932, defines partnership as “a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”. The partners provide the necessary capital, run the business jointly and share the responsibility.

Now the questions coming to our mind are “Do all the partners jointly manage the business or can any of them manage the business on behalf of others? Who will take the profits? If there is any loss then who will suffer the loss? Actually, when one invites his friends to start such a business, it should be the duty of all of them to decide (i) the amount of capital to be contributed by each one of them; (ii) who will manage; (iii) how will the profits and losses be shared. Thus, there must be some agreement between the partners before they actually start the business. This agreement is termed as ‘Partnership Deed’, which lays down certain terms and conditions for starting and running the partnership firm. This agreement may be oral or written. Actually, it is always better to insist on a written agreement among partners in order to avoid future controversies.

C] ESSENTIAL CONDITIONS FOR THE FORMATION OF A PARTNERSHIP-

  1. AGREEMENT- whenever a person thinks of joining hands with others to form a partnership firm there must be an agreement between them. The agreement contains:
  2. the amount of capital contributed by each partner;
  3. profit or loss sharing ratio;
  4. salary or commission payable to the partner, if any;
  5. duration of business, if any ;
  6. name and address of the partners and the firm;
  7. duties and powers of each partner;
  8. nature and place of business; and
  9. any other terms and conditions to run the business
  10. TWO OR MORE MEMBERS- The members of the partnership firm are called partners. At least two members are required to start a partnership business The partners must be competent to contract, must have attained the age of majority, sound mind and not disqualified from law.

But the number of members should not exceed 10 in case of banking business and 20 in case of other business. If the number of members exceeds this maximum limit then that business cannot be termed as partnership business. Partnership having members more than 20 is illegal.

THE FOLLOWING CAN ENTER INTO PARTNERSHIP-

  1. individual
  2. firm
  3. Hindu undivided family
  4. company
  5. trustees
  6. LAWFUL BUSINESS- The partners should always join hands to carry on any kind of lawful business. To indulge in smuggling, black marketing, etc., cannot be called partnership business in the eye of the law. Again, doing social or philanthropic work is not termed as partnership business.
  7. COMPETENCY OF PARTNERS- Since individuals join hands to become the partners, it is necessary that they must be competent to enter into a partnership contract. Thus, minors, lunatics and insolvent persons are not eligible to become the partners. However, a minor can be admitted to the benefits of partnership i.e., he can have a share in the profits only.
  8. SHARING OF PROFIT-The main objective of every partnership firm is sharing of profits of the business amongst the partners in the agreed proportion. In the absence of any agreement for the profit sharing, it should be shared equally among the partners. Suppose, there are two partners in the business, earning a profit of Rs.20, 000. They may share the profits equally i.e., Rs. 10,000 each or in any other agreed proportion, say one forth and three fourth i.e. Rs 5,000/- and Rs. 15000/-.
  9. UNLIMITED LIABILITY- Just like the sole proprietor the liability of partners is also unlimited. That means, if the assets of the firm are insufficient to meet the liabilities, the personal properties of the partners, if any, can also be utilized to meet the business liabilities. Suppose, the firm has to make payment of Rs.25,000/- to the suppliers of goods. The partners are able to arrange only Rs. 19,000/- from the business. The balance amount of Rs. 6,000/- will have to be arranged from the personal properties of the partners.
  10. VOLUNTARY REGISTRATION-It is not compulsory that you register your partnership firm. However, if you don’t get your firm registered, you will be deprived of certain benefits, therefore it is desirable. The effects of non-registration are: 1.Your firm cannot take any action in a court of law against any other parties for settlement of claims. 2. In case there is any dispute among partners, it is not possible to settle the disputes through a court of law. 3. Your firm cannot claim adjustments for amount payable to or receivable from any other parties.
  11. NO SEPARATE LEGAL EXISTENCE- It may be surprising but true that a partnership firm is not a legal entity. Just like sole proprietorship, partnership firm also has no separate legal existence from that of its owners. Partnership firm is just a name for the business as a whole. The firm means the partners and the partners collectively mean the firm.
  12. PRINCIPAL AGENT RELATIONSHIP-All the partners of the firm are the joint owners of the business. They all have an equal right to actively participate in its management. Every partner has a right to act on behalf of the firm. When a partner deals with other parties in business transactions, he/she acts as an agent of the others and at the sometime the others become the principal. So there always exists a principal agent relationship in every partnership firm. Mutual agency is the real test of partnership whether he can act on behalf of other partners or not.
  13. RESTRICTION ON TRANSFER OF INTEREST-No partner can sell or transfer his interest to any one without the consent of other partners. For example – A, B, and C are three partners. A wants to sell his share to D as his health does not permit him to work anymore. He cannot do so until B and C both agree.
  14. CONTINUITY OF BUSINESS-A partnership firm comes to an end in the event of death, lunacy or bankruptcy of any partner. Even otherwise, it can discontinue its business at the will of the partners. At any time, they may take a decision to end their relationship.

D] TYPES OF PARTNERS–

In a partnership firm one can find different types of partners. Some may actively participate in the business while others prefer not to keep themselves engaged actively in the business activities after contributing the required capital. Also there are certain kinds of partners who neither contribute capital nor actively participate in the day-to-day business operations. Let us learn more about them.

  1. a) Active partners – The partners who actively participate in the day-to-day operations of the business are known as active or working partners. They contribute capital and are also entitled to share the profits of the business. They are also liable for the debts of the firm.
  2. b) Dormant partners – Those partners who do not participate in the day-to-day activities of the partnership firm are known as dormant or sleeping partners. They only contribute capital and share the profits or bear the losses, if any.
  3. c) Nominal partners – These partners only allow the firm to use their name as a partner. They do not have any real interest in the business of the firm. They do not invest any capital, or share profits and also do not take part in the conduct of the business of the firm. However, they remain liable to third parties for the acts of the firm.
  4. d) Minor as a partner – a minor i.e., a person under 18 years of age is not eligible to become a partner. However in special cases a minor can be admitted as partner with certain conditions. A minor can only share the profit of the business. In case of loss his liability is limited to the extent of his capital contribution for the business.
  5. e) Partner by estoppel – when a person by his act or word shows or proves himself to be the partner of a particular firm or associates himself as the partner or acts in such capacity and believing the same if a party comes into any agreement with such person or with this impression transacts with that firm then that person is considered o be a partner of the firm by estopple. Example, assume in Krishna Hari & Co firm there are two partners. One is Krishna, Hari. If Sri, an outsider shows himself as a partner of Krishna Hari & Co and transacts with Madhu then Sri will be liable for any loss occurring to Madhu. Here Sri is partner by estoppel.
  6. f) Partner by holding out – In the above example, if either Krishna or Hari asserts that Gopal is a partner of their firm and knowing this assertion Gopal remains silent then Gopal will be responsible to parties who experienced losses by dealing with Krishna Hari & Co with the conviction that Gopal is a partner of the firm. Here Gopal is answerable and will be known as partner by holding out.
  7. g) Partnership at will – a partnership is believed to be partnership at will whilst no stipulation is prepared in the partnership agreement as to its period and determination.

FORMATION OF PARTNERSHIP-

  1. May be formed by oral or written agreement.
  2. All essentials of valid contract must be present.
  3. Mutual rights and obligations to be present in a partnership deed.
  4. The deed to be registered.

PARTNERSHIP DEED must contain the following:

  1. Name of the parties
  2. Nature of business
  3. Duration of partnership
  4. Name of the firm
  5. Capital
  6. Share of partners in profits and losses
  7. Banking, account firm
  8. Books of accounts
  9. Powers of partners
  10. Retirement and expulsion of partners
  11. Death of partners
  12. Dissolution of firm
  13. Settlement of disputes

E] CONCLUSION –

Thus a partnership can be formed by any individual with one or more persons, for the purpose of earning profit in a business organization. One may register the partnership deed or not, although the process is voluntary and no laws are violated by non-registration of the partnership firm and deed, but it is advised that it should be registered, to derive benefits from the Partnership Act and stay away from legal complications arising from non registration, because being on the side of a policy is always a smarter choice.

Specimen for the Partnership Deed[1]

 

(Rs. 200 stamp paper)

 

 

 

 

 

 

PARTNERSHIP DEED

 

THIS DEED OF PARTNERSHIP IS MADE on this 14th day of January, 2016 by and between

Mr. A S/o C R/o XYZ hereinafter referred to as Party of the FIRST PART (which expression shall deem and include his heirs, executors, administrators, representatives, assigns and agents), AND

Ms. B D/o D R/o XYZ, Party of the SECOND PART (which expression shall deem and include his heirs, executors, administrators, representatives, assigns), AND

 

WHEREAS the above named partners have decided to start the partnership business of Recruitment Services in the name and style of M/s XY with effect from …th day of January, 20.. on the terms and conditions hereinafter mentioned and have desired to reduce the terms and conditions into writing.

 

NOW THIS INDENTURE IS WITNESSETH AS FOLLOWS:

 

  1. THAT the PARTIES referred above shall carry on the business of Recruitment Services in the PARTNERSHIP FIRM under the name and style of M/s XY hereinafter referred to as the FIRM) XYZ, But by their mutual consent may start and carry on any other business or businesses under any other name or names at any other place or places.

 

  1. THAT the business of the PARTNERSHIP pursuant to this DEED of PARTNERSHIP shall be deemed to have commenced with effect from …th day of January, 20…

 

  1. That the capital required for the business of Partnership shall be contributed time to time by the PARTIES in such manner in all respect as may be agreed to between them and such capital may be paid interest as may be mutually agreed from time to time at the rate of rates not exceeding 12% (Twelve Percent) per annum.

 

  1. That all the PARTIES referred above shall be Working Partners and shall attend diligently to the business of the Partnership and carry on the same for the greatest advantage of the Firm.

 

  1. That all the WORKING PARTNERS may be paid Salary w.e.f. … day of Feb., 2008, for the work of the FIRM as may be agreed mutually from time to time between the PARTIES in accordance with the provisions of the Income Tax Laws as well as business necessities and other factors, subject however, that the monthly Salary to each such Partner shall not exceed as under:

 

NAME OF WORKING PARTNER MAXIMUM BASIC SALARY NOT TO EXCEED

  1. A Rs. 18,000/-  per month
  2. B Rs. 18,000/-  per month

 

 

  1. That all business expenses shall be borne by the FIRM.

 

  1. That the Profits or Losses, as the case may be, of the Partnership business shall be divided among the Partners as under :

 

NAME OF WORKING PARTNER       SHARE OF PROFIT         SHARE OF LOSS

  1. A 50%                                50%
  2. B 50%                                50%

 

  1. That the duration of the PARTNERSHIP shall be at WILL subject to Clause ‘9’.

 

  1. That any Partner may retire from Partnership after giving a notice to the other Partner (s) of not less than one month in writing and at the expiry of such notice period he shall be deemed to have retired.

 

  1. Upon mutual understanding, each Partner or his duly authorised agent shall have free access to the account books of the Partnership and shall be entitled to take copies or extracts from any or all such books and records of the Partnership Business.

 

  1. That no Partner shall have the right to sell, mortgage or transfer his share of interest in the FIRM to any one else except to his heir or heirs or any one of the existing Partners or to their heir (s). In the event of heir (s) selling his/her share to anyone else, the existing Partners shall have a right or pre-emotion in respect of such share (s) sold.

 

  1. That the Partners shall keep or cause to be kept the books of account of the FIRM at the principal places of its business and make all entries therein, and that all such books of account kept shall be closed on 31st March every year or in the case of any necessity on any other date as the Partners may mutually decide.

 

  1. That no Partner shall do any act or thing whereby FIRM or the FIRM property may be prejudicially effected.

 

  1. That the terms of the Partnership Deed may be altered, added to or cancelled by the written consent of the Parties to this DEED.

 

15   That the partners can open the bank account of the firm, in any bank and bank account shall be operated by the partners jointly or individually, as the case may be.

 

  1. That the partners shall not take any loan from any person/Financing Company, bank or any other Govt./Pvt. Department in any case, without the written consent of each other.

 

  1. That in the case of any dispute arising out of this DEED between the Parties of this DEED, it shall be decided by Arbitration as provided for under the Indian Arbitration Act.

 

IN WITNESS WHEREOF the Parties hereto have set and subscribed their respective hands to these presents the day, month and year first written above.

 

WITNESSES:

                                                                              

 

1.

      Mr. A   

                                                                                  (Party of the First Part )

 

 

 

 

  1. Ms. B

                                                                                 (Party of the Second Part )

 

 

[1] www.charteredclub.com/wp-content/uploads/2013/…/Sample–Partnership–Deed-4.doc