PARTNERSHIP FIRM

INTRODUCTION

In India, we have a definite law that covers all aspects and functioning of a
partnership, The Indian Partnership Act 1932. The act also defines a partnership as
“the relation between two or more persons who have agreed to share the profits
from a business carried on by either all of them or any of them on behalf of/acting
for all”
So in such a case two or more (maximum numbers will differ according to the
business being carried) persons come together as a unit to achieve some common
objective. And the profits earned in pursuit of this objective will be shared amongst
themselves.
The entity is collectively called a “Partnership Firm” and all the individual members
are the “Partners”. Features of a Partnership

1] Formation/Contract
A partnership firm is not a separate legal entity. But according to the act, a firm
must be formed via a legal agreement between all the partners. So a contract must
be entered into to form a partnership firm.
Its business activity must be lawful, and the motive should be one of profit. So two
people forming an alliance to carry out charity and/or social work will not
constitute a partnership. Similarly, a partnership contract to carry out illegal work,
such as smuggling, is void as well.
2] Unlimited Liability
In a unique feature, all partners have unlimited liability in the business. The
partners are all individually and jointly liable for the firm and the payment of all
debts. This means that even personal assets of a partner can be liquidated to meet
the debts of the firm.
If the money is recovered from a single partner, he can, in turn, sue the other
partners for their share of the debt as per the contract of the partnership.
3] Continuity
A partnership cannot carry out in perpetuity. The death or retirement or
bankruptcy or insolvency or insanity of a partner will dissolve the partnership. The
remaining partners may continue the partnership if they so choose, but a new
contract must be drawn up. Also, the partnership of a father cannot be inherited by
his son. If all the other partners agree, he can be added on as a new partner.
4] Number of Members
As we know that there should be a minimum of two members for a partnership.
However, the maximum number will vary according to a few conditions. The
Partnership Act itself is silent on this issue, but the Companies Act, 2013
provides clarity.
For a banking business, the number of partners must not exceed ten. For a business
of any other nature, the maximum number is twenty. If the number of partners
increases it will become an illegal entity or association.
5] Mutual Agency
In a partnership, the business must be carried out by all the partners together. Or
alternatively, it can be carried out by any of the partners (one or several) acting for
all of them or on behalf of all of them. So this means every partner is an agent as
well as the principal of the partnership.
He represents the other partners in some cases so he is their agent. But in other
circumstances, he is bound by the actions of any of the other partners aking him
the principal as well.

AIMS AND OBJECTIVES

The project aims to learn about the process of registering a partnership firm and
its benefits
Objectives of the study are
• To learn about what is a partnership firm
• To learn about the process of registering a partnership firm
• To learn about the different benefits of partnership firm
• To study how a partnership firm is different from a company
• To determine the pros and cons of partnership firm

NEED AND IMPORTANCE

The Indian Partnership Act, 1932 defines partnership as “the

relation between persons who have agreed to share the profit of
the business carried on by all or any one of them acting for all.”
The inherent disadvantage of the sole proprietorship in financing
and managing an expanding business paved the way for
partnership as a viable option. Partnership serves as an answer
to the needs of greater capital investment, varied skills and
sharing of risks. The persons who own the partnership business
are individually called ‘partners’ and collectively they are called as
‘firm’ or ‘partnership firm’. The name under which partnership
business is carried on is called ‘Firm Name’. In a way, the firm is
nothing but an abbreviation for partners.
The proprietorship form of ownership suffers from certain
limitations such as limited resources, limited skill and unlimited
liability. Expansion in business requires more capital and
managerial skills and also involves more risk. A proprietor finds
him unable to fulfill these requirements. This calls for more
persons to come together, with different edges and start a
business. For example, a person may lack managerial skills but
may have capital. Another person may be a good manager but
may not have capital. When these persons come together, pool
their capital and skills and organize a business, it is called
partnership. Partnership grows essentially because of the
limitations or disadvantages of proprietorship.
A business is a combination of a lot of functions like planning,
production, finance, marketing, HR etc. The success of a
business depends to a great deal on how efficiently these
functions are performed. It is very rare, almost impossible for a
single human being to manage and excel in all the functions at
the same time, which in turn, hampers the success as well as the
growth of a business. This is the primary reason why partnerships
are important.
One partner might see the opportunity to create a new product.
Another partner might know a better way to distribute it. A third
partner might provide the logistics expertise or industry
connections to get the business producing revenues in half the
time. Businesses started by teams tend to have more unique
product offerings and the ability to execute faster.
Many companies started by individuals plod along. They neither
grow as such, nor do they quite fail. However, partners will be less
likely to entertain business limbo. When more people come
together, they will be quicker to try to fix things and the
encouragement and resources needed to start something new or
expand the business further will be readily available.
Before any partners have invested significant time or money, it is
important to have a partnership agreement (partnership deed)
that sets out expectations and responsibilities. Each partner
should have independent legal advice before signing. Decide who
will do what, how these inputs will be measured, who has the right
to make what decisions, how profits and losses will be shared,
and what happens when partners disagree.
Also, it is optional for a partnership firm to get registered. In
case a firm gets registered, it has much benefit:
(a) A partner of a registered firm can file a suit against the firm or
other partners,
(b) The firm can file a suit against third parties, and
(c) The firm can file a case against the partners.
The following characteristics of a partnership form of business
establish the importance of partnerships and prove how it is
better than other forms of business:-
•
• Risk bearing: The partners bear the risks involved in
running a business as a team. The reward comes in the form
of profits which are shared by the partners in an agreed
ratio. However, they also share losses in the same ratio in
the event of the firm incurring losses.
• Decision making and control: The partners share amongst
themselves the responsibility of decision making and control
of day to day activities. Decisions are generally taken with
 mutual consent. Thus, the activities of a partnership firm are
managed through the joint efforts of all the partners.
• Continuity: Partnership is characterized by lack of continuity
of business since the death, retirement, insolvency or
insanity of any partner can bring an end to the business.
However, the remaining partners may if they so desire
continue the business on the basis of a new agreement.
• Mutual agency: The business is carried on by all the
partners or any (one or more) of them acting on behalf of the
others. Thus, every partner is both an agent as well as a
principal for himself and the other partners, i.e. he can bind
by his acts the other persons and can be bound by the acts
of the other partners. The importance of this element of
mutual agency lies in the fact that it enables every partner to
carry on the business on behalf of others.

Advantages of a partnership firm

• Availability of large resources
• Better decisions
• Flexibility in operations
• Sharing risks
• Protection of interest of each partner
• Benefits of specialization

Disadvantages of a partnership firm

• Instability
• Unlimited Liability
• Lack of Harmony
• Limited Capital
• No legal status
• Not easy to transfer ownership
 PRESENTATION OF DATA AND INFORMATION

A partnership firm can be registered, whether at the time of its formation or even
subsequently. You need to apply with the Registrar of Firms in the area in which
your business is located.
• Application for partnership registration should include the following
information: – Name of your firm – Name of the place where the business
is carried on – Names of any other site where the company is given on –
Date of partners joining the firm – Full name and permanent address of
partners. – Duration of the firm
• Every partner needs to verify and sign the application
• Ensure that the following documents and prescribed fees are enclosed
with the registration application:
• Application for Registration in the prescribed Form
• Duly filled Specimen of Affidavit – Certified copy of the Partnership deed
• Proof of ownership of the place of business or the rental/lease agreement
thereof It may be noted here that the name of your partnership firm should
not “contain any words which may express or imply the approval or
patronage of the government except where the government has given its
written consent for the use of such words as part of the firm’s name”. Once
the Registrar of Firms is satisfied that the application procedure has been
duly complied with, he shall record an entry of the statement in the
Register of Firms and issue a Certificate of Registration.

Essential Elements of a Partnership Firm

• Contract for Partnership

The partnership is the result of a deal. It does not arise from status, the operation
of law or inheritance. Thus, at the time of the death of the father, who was a
partner in the partnership firm, the son can claim a share in the partnership
property but cannot become a partner unless he enters into a contract for the
same with other persons concerned. Similarly, the members of a HUF carrying on
a family business cannot be called partners for their relation arises not from any
contract but status. Thus, a “contract” is the very foundation of partnership.
• Maximum No. of Partners in a Partnership is 20
Since the partnership is the result of a contract, at least two people are
necessary to constitute a partnership. The Indian Partnership Act, 1932 does not
mention anything about the maximum no. of partners in a partnership firm, but as
per the Companies Act, a partnership consisting of more than ten persons for
banking business and more than 20 persons for any other company would be
considered as illegal. Hence, these should be regarded as the maximum limits to
the number of partners in a partnership firm. Only, the persons competent to
contract can enter into a contract of partnership. Persons may be natural or
artificial. A Company may be a fake legal person, enter into a settlement of the
business if authorized by its Memorandum of Association to do so.
• Carrying on of Business in a Partnership
The third essential element of a partnership is that the parties must have agreed
to carry on a business.  The term “business” is used in its broadest sense and
includes every trade, occupation, or profession. Therefore, if the purpose of us to
carry on some charitable work, it will not be a partnership. Similarly, if several
persons agree to share the income of a particular property or to divide the goods
purchased in bulk amongst them, there is no partnership and such persons
cannot be called partners because in neither case they are carrying on a
business.
Thus, where A and B jointly purchased a tea shop and incurred additional
expenses for buying pottery and utensils for the job, contributing the money in
equal proportions and then leased out the shop on rent which was shared equally
by them , it was held that they are only co-owners and not partners as they never
carried on any business

• Sharing of Profits
This essential element provides that the agreement to carry on business must be
the object of sharing profits amongst all the partners. Thus, there would be no
partnership where the company is carried on with an altruistic motive and not for
making a profit or where only one of the persons is entitled to the whole of the
advantages of the business. The partners may, however, agree to share the
benefits in any ratio they like. Sharing of losses not necessary
To constitute a partnership, it is not essential that the partners should agree to
share the failures (Raghunandan vs. Harmasjee). It is open to one or more
partners to agree to bear all the shortcomings of the business.
Moreover, how the profits/losses are to be shared should be expressly stated in
the partnership deed. In the absence of this being mentioned in the partnership
deed, the provisions of the Partnership Act, 1932 would apply which state that
the profits/losses should be distributed equally among all partners.
• Mutual Agency in a Partnership
The fifth element in the definition of partnership provides that the business must
be carried on by all the partners or any (one or more) of them acting for them all,
i.e., there must be an interactive agency. Thus, every partner is both an agent
and principal for himself and other partners, i.e., he can bind by his acts the other
persons and can be bound by the laws of other partners. The importance of the
element of mutual agency lies in the fact that it enables every partner to carry on
the business on behalf of others.

Types of Partnerships
• General Partnership
In a traditional partnership model, all the partners share in the profits and risks of
the business. Each partner has unlimited liability for the debts of the company –
your assets can be seized if your business owes money. If your partners do
anything wrong with the business, you are also held responsible.
• Limited Partnership
Limited partnerships have two different types of partners: general partners
and limited partners.
General partners are responsible for managing the business. They have
unlimited liability (the same as a general partnership).
Limited partners are only liable for what they’ve contributed to the business –
they can only lose the money they’ve invested. Limited partners do not manage
the business.
• Limited Liability Partnership
A limited liability partnership protects the partners from the debts of the business
or the actions of other partners.
Limited liability partnerships are only available to some professions:
• Chartered Accountants
• Certified management accountants
• Certified general accountants
• Medical doctors
• Chiropractors
• Dentists
• Optometrists
• Lawyers
 ANALYSIS OF DATA

Features of the partnership firm

The essential functions and characteristics of a partnership are:
• Agreement: The organization arises out of a contract between two or
more persons.
• Profit sharing: There should be an agreement among the partners
to share the profits of the business.
• Legitimate business: The business to be carried on by a partnership
must always be legal.
• Membership: There must be at least two persons to form a partnership.
The maximum number is 20. But in the case of the banking business, the
maximum is ten members.
• Unlimited liability: The liability of every partner is unlimited, joint, and
several.
• Principal-agent relationship: Every partner is an agent of the firm. He
can act on behalf of the firm. He is responsible for his acts and also for the
deeds done on behalf of the other partners.
• Corporate management: The firm and the partners are one. When a
contract is made in the name of the firm, all the partners are responsible
for it individually and collectively.
• Non-transferability of shares: A partner cannot transfer his stock of
interest to others without the consent of the other partners.

CONCLUSION

According to the above definition of a partnership firm, we can describe the

following characteristics of a partnership firm:-
• There should be a proper contract between the partners which shall state
all the terms and conditions of the partnership firm. The agreement clearly
will show the rights and liabilities of the partners, capital to be employed by
the partners, the interest on money of the partners, the salary and other
remuneration to the partners, the admission of new partners, the
dissolution of the partnership firm, etc.
• Nothing is definite in Indian Partnership Act in respect of several
partnership firms, but as per the Company Act, there should not be more
 than ten persons in case of banking business and 20 persons in other
business. Otherwise, the partnership shall be deemed illegal.
• The partnership firm should be formed for doing business, and the aim of
the business firm should be to earn a profit. For example, Mr. X and Mr. Y
agreed to go on a pleasure trip and agreed to divide the expenditure 50:50;
it is not a business. Hence, it will not be treated as a partnership firm.
• The profit should be divided between the partners after the end of the
financial year as per the agreement. The benefit cannot be carry forwarded
in case of the partnership firm.
• The business can be carried out by one partner or a few partners or by all.

OPTION / SUGGESTION

There are different sorts of business to business partnerships that every

business proprietor, perhaps follow to develop their businesses. The great motto
is behind any business associations is to find out new customer leads and
transform entirely into enhanced revenue and sales for all organizations.
Partnership in business facilitates companies to progress in processes speedily
and reduces all financial crisis-related to obtaining new clients. A successful
collaboration provides capability in particular sectors and also increase the
production of products accessible more services to the customers. Though, lots
of companies do not succeed abruptly after contracts are approved, just because
of failure to fix divergence that takes place during the execution of the business
deal. However, all small matter can twist into big dilemmas that exterminate
every successful business partnerships. But there are significant benefits to the
partnerships that ensure that the organization provides essential value to both
parties’ relationships. Building business associations with retailers generally
create a tremendous economic sense along with help to pursue sole business
opportunities.
Building an effective and lasting business partnership is not an easy task ever,
but when you come to the right place and the right people, it’s great to associate
or enhance the right relationship as a partner in the business. Maintain open and
transparent communication between you and your team members and partner of
your organization that will help further stay remain with mutual agreement.
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