The term partnership is derived from the word ― “to part”, which means ― “to divide”. A partnership is a relationship where two or more persons, having compatible goals, form an agreement to share the work, risk and results or proceeds. Persons who have entered into partnership with one another are identified as partners.
The laws relating to partnership in India, before 1932 were contained in Chapter XI of the Indian Contract Act, 1872. On various occasions, it was held that Chapter XI of the Indian Contract Act, 1872 was not exhaustive and on certain points it was not clear and definite. Thus, certain amendments were desired and certain points, relating to partnership needed proper clarification. Accordingly, Chapter XI of the Indian Contract Act was repealed and new and comprehensive legislation in the shape of the Indian Partnership Act, 1932 was passed.[1]
Table of Contents
DEFINITION OF PARTNERSHIP
Section 4 of the Indian Partnership Act, 1932 defines “partnership”, “partner”, “firm” and “firm name”. Partnership refers to 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 individually called “partners” and collectively known as a “firm”, and the name under which their business is carried on is called the “firm name”.[2]
Section 239 of the repealed chapter XI of the Indian Contract Act, 1872 defined partnership as “the relation which subsists between persons who have agreed to combine their property, labour or skill in some business and to share the profits thereof between them”.
Partnership has not been found easy to define. Eminent Jurists and authors have defined the term in various ways. According to Kent, “partnership is a contract of two or more competent persons to place their money, effects, labor, and skill, or some or all of them, in lawful commerce or business, and to share the profit and bear the loss in certain proportions.”
Further, Pollock defined partnership as “the relation which subsists between a person who has agreed to share the profits of a business carried on by all or any of them on behalf of all of them”.[3]
The definition of partnership adopted in section 4 of the Act is the same as suggested by Pollock with a small variation. It underlines the fundamental principle of mutual agency e.g. the partners when carrying on the business of the firm are both the agent as well principals.
NATURE OF PARTNERSHIP
Partnership is a form of business organization where two or more persons come together for jointly carrying on some business. It is an improvement over the “Sole-trade business‟, where one single individual, with his resources, skill, and effort, carries on his own business. Due to the limitations of the resources of a single person being involved in the sole-trade business, a larger business requiring more investment and resources available to a sole-trader, cannot be thought of in such a form of business organization. In a Partnership, on the other hand, several persons could pool their resources and efforts and could start a much larger business than could be afforded by any of these partners individually. In case of loss also the burden gets divided amongst various partners in a partnership.
The new Companies Act has prescribed the maximum number of members in the case of a partnership firm not to be more than 100.[4] As per the previous Companies Act, 1956,[5] the maximum limit in the case of partnerships was 10 and 20 for banking business and other businesses respectively. The minimum number of partners is 2. In the case of private companies, the maximum limit has been increased by the new Companies Act, 2013 from 50 to 200. There is however no maximum limit on the number of members in a public company and, therefore, any number of persons can hold shares in a public company. The minimum number of members in the case of a public company is seven and in the case of a private company are two. In the case the parties intend to opt for a much larger business, they can go for the company type of business organization. Imagine, there is one public company having 1,00,000 members and each member has contributed Rs.10 for the business. This can be helpful and a better option from varied angles for running a business. It also possesses the longevity of the organization and its people.
However, in companies, the liability of members (shareholders) is limited whereas the partnership provides unlimited liability to every partner. In certain respects, a partnership is a more suitable form of business organization than a Company. For the creation of partnership, all we require is just an agreement between parties whereas, in the case of a company, one faces a lot of procedural formalities which are time-consuming too. Even at the time of the dissolution of the business, partnership requires a mere agreement but a company follows a set of regulations that are somewhere hard to adhere to for every individual. Because of these distinct advantages of a partnership over a sole-trade business and certain advantages even over a company, it is a very popular form of business organization.
GENERAL TYPES OF PARTNER
Here is the list of partners that we come across frequently in the field of business. The Partnership Act, 1932 allows all types of partnership that an individual wants to establish.
ACTIVE OR MANAGING PARTNER
An active partner is the one who takes part in managing regular stuffs of the business such as advising, organizing or controlling the affairs etc. He can also withdraw remuneration according to the partnership deed. If an active partner decides to take retirement from the partnership, he must give a public notice.
SLEEPING PARTNER
A sleeping partner is the one who cannot devote his time to the business but has sufficient money and interest in the business. He takes the benefits and losses of the firm and is restricted by the acts of the other parties. If he decides to take retirement from his job, then he does not need to present a public notice.
NOMINAL PARTNER
A nominal partner does not contribute capital to the firm, he only allows his name to be presented for the functioning of the business and has no say in the decision making. Based on his name, the firm takes advantage of promoting its sales and getting more credits from the market.
PARTNER BY ESTOPPEL
A partner by estoppel is not the partner in the firm but he has represented himself by his words, actions, or conduct which depicts that he has become a partner by estoppel. Afterward, he is responsible for all the credits and loans he has taken in the name of the firm.
PARTNERS IN PROFITS ONLY
Such type of partners are only liable for the profits and won’t attain any losses and are not allowed to take part in the coordination of the firm.
MINOR PARTNER
A minor is allowed to enjoy the benefits of partnership. although his liability for losses will be limited only to his shares. After he reaches the age of majority, he needs to decide within a period of 6 months if he wishes to continue as a partner of the firm or not. In both situations, he has to declare the same by the mode of public notice.
SECRET PARTNER
Secret partner position always lies between the active and sleeping partner. He practices unlimited liability and he is kept secret from the outside world and the third party.
OUTGOING PARTNER
An outgoing or retiring partner is a partner who retires on his will before dissolving the firm but he is liable from the eye of law for all his debts before retirement.
LIMITED PARTNER
A limited partner is a partner in a company whose liability is limited to the extent of investment done by him during partnership.
SUB-PARTNER
A sub-partner is a non-entity of the firm because he associates someone else in his share. The relationship does not exist between the sub-partner and the partnership firm but it resides between the third party and the partner.
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TYPES OF PARTNER UNDER INDIAN PARTNERSHIP ACT 1932
ACCORDING TO OBJECTIVES
PARTNERSHIP AT WILL
Under Section 7 of the Partnership Act, when partners haven’t made any provision in the contract for the duration of their partnership and it can end when one of the parties gives the notice for its dissolution, it is termed as Partnership at will.[6]
PARTICULAR PARTNERSHIP
Under Section 8 of the Partnership Act, when partners decide the duration of their partnership in their contract and the same comes to an end when the specific task gets over. Example: Partnership made for construction of a building.[7]
ACCORDING TO TENURE
PARTNERSHIP FOR A FIXED TERM
Under such types of partnerships, the time duration is fixed prior to completing any specific task. It can be for 2 years, 10 years and when the said duration comes to an end, the partnership dissolved.
FLEXIBLE PARTNERSHIP
It is a partnership where no fixed duration or specific task is mentioned.[8]
ACCORDING TO NATURE
GENERAL PARTNERSHIP
Under a general partnership, the liabilities of partners are unlimited and every partner has equal right to make decisions regarding the functioning of the firm.
LIMITED LIABILITY PARTNERSHIP
Under a Limited liability partnership, every partner has a limited liability and is responsible for his conduct. This partnership is addressed under the Limited Liability Partnership Act, 2008.[9]
ACCORDING TO LEGALITY
LEGAL PARTNERSHIP
Any partnership formed under the provisions of the Indian Contract Act, 1872 and Indian Partnership Act, 1932, is called a legal Partnership.
ILLEGAL PARTNERSHIP
When any partner violates any law of the country, it becomes an illegal partnership.
ON THE BASIS OF REGISTRATION
The Partnership Act provides for both, registered firms and unregistered firms.
REGISTERED FIRMS
The firms which are registered with the Register of Firm (RoF) [10] are termed as registered firms. The registration fee of RoF varies from state to state.
UNREGISTERED FIRMS
When the two parties set an agreement between them and run their business according to it, it is termed as an unregistered firm.
CONCLUSION
Partnership is one of the oldest forms of business relationships and it is also a special kind of contract, which is created out of an agreement. The joint efforts of all the partners result in the successful accomplishment of tasks and can be easily afforded too.
For the past decades, partnership business has had rapid growth and it’s considered as legal business and nowadays partnerships are still preferred by professional, small trading and business enterprises.
REFERENCES
[1] Formation of Partnership by Rajat Sharma, Lawordo, available at: https://www.lawordo.com/formation-of-partnership-indian-partnership-act-1932/ (last visited September 13, 2020).
[2] The Indian Partnership Act, 1932.
[3] Dr. Ashok K. Jain, Contract II (Ascent Publications, 8th edn., 2019).
[4] The Companies Act, 2013, ss. 241, 188.
[5] The Companies Act 1956, s.11.
[6] The Indian Partnership Act,1932, s.7.
[7] The Indian Partnership Act,1932, s.8.
[8] Dr. R.K. Bangia, Indian Partnership Act and Sale of Goods Act (Allahabad Law Agency, 2nd edn., 2003).
[9] The Limited Liability Partnership Act, 2008, s.26.
[10] Government of Rajasthan Industries Portal, available at: http://industries.rajasthan.gov.in/content/industries.html# (last visited September 14, 2020).
BY KHUSHI PALIWAL | UNIVERSITY COLLEGE OF LAW, MLSU