Business Law

The Indian Partnership Act, 1932

Definition
Sec.4 of the Indian Partnership Act, 1932 defines, the term ‘partnership’ as under;
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.
Elements \ Characteristics \ Features of a Partnership
a. Association of two or more persons
b. Agreement between the persons
c. Common business
d. Share profits/losses
e. Business carried by all or any of them acting for all.
Each of these elements is explained below in detail;
1. Association of two or more persons
The term ‘person’ does not include firms or companies. It simply means a natural
person who is otherwise competent to contract. At least two persons should join together to
constitute a partnership because a person cannot become a partner with himself.
2. Agreement
The relation of partnership arises out of an agreement and is not a product of status as
in joint Hindu family business. It also does not arise by operation of law as in case of co-
ownership. Such an agreement between the partners may be express or implied i.e., it may be
in writer; words or may be inferred from the course of conduct of the parties to the agreement.
3. Business
Partnership is formed for carrying on some lawful business. The term ‘business’
includes every trade, occupation and profession.

4. Sharing of profits
To constitute a partnership, the parties must have agreed to carry on a business, and to
share profits in common. It is open to one or more partners to bear all the losses of the business.
5. Mutual Agency
The partnership business may be carried on by all the partners or any of them acting for
all. This is the most essential or cardinal principle of partnership. Each partner is the agent of
the firm as well as of the other partners. He can act on behalf of the firm and can bind it by his

Dr. J Bhavani, Faculty, VIT Business School, Vellore Institute of Technology

acts done in the usual course of business. Similarly, each partner is a principal for all other
partners and may be bound by the acts of the other partners. The relationship among partners
is governed by the law of agency and the partners are largely regulated by the law of a principal
and an agent.
Classification of partnership
I. On the basis of Duration
a. Partnership at will
It is a partnership firm in which its duration not fixed but can be dissolved by any one
of the partners at his will at any time. Thus, a partnership at will.
b. Partnership on the basis of duration
It is a partnership in which its duration is fixed and cannot be dissolved by any partner
at his will. Such a partnership is dissolved at the expiry of the fixed period.
II. On the basis on extent of business
The partners are also liberty to carry on one or more adventures or undertaking is a
business.
III. On the basis of liability
a. Limited Liability
b. Unlimited Liability
Classification of Partners
1. Actual or Active Partners
Actual partner is one who becomes partner by agreement and takes active part in the
conduct of the partnership business. He is also called ostensible or working partner.
2. Dormant or Sleeping Partner
A dormant partner is one who is neither nor known to the outsider. He is also called as
secret partner.
3. Nominal Partner
A nominal partner is one who has no real interest in the business. He is entitled to share
the profits of the business. A nominal partner only lends his name to the firm and his name is
used in the firm as if he is an actual partner.
4. Partner by Estoppels or holding
A partner by estoppel is one who represents himself to be a partner in the firm, but in
reality he is not so.
5. Sub – Partner

Dr. J Bhavani, Faculty, VIT Business School, Vellore Institute of Technology

 A sub partner is one who shares the profit of another partner. Sometimes, a partner of
a firm agrees to share his own share of profits with an outsider.
6. Minor Partner
A minor partner is one who is below the age of 18 years. It may however, be noted that
a minor can’t be a full-fledged partner in a firm. He can be admitted to avail the benefits of an
already existing firm.

Rights of partners
 Right to take part in business
 Right to be consulted
 Right to access to accounts
 Right to share in profits
 Right to interest on capital
 Right to interest on advances
 Right to be indemnified
 Right to the use of partnership property
 Right to partner as agent of the firm
 No new partner to be introduced
 No liability before joining
 Right to retire
 Right not be expelled
Duties of partners
 To carry on business to the greatest common advantage
 To observe faith
 To indemnify for fraud
 To attend to duties diligently
 Not to claim remuneration
 To share losses
 To indemnify for willful neglect
 To hold and use property of the firm exclusively for the firm
 To account for personnel profits
 To act within authority
 To be liable jointly and severally

Dr. J Bhavani, Faculty, VIT Business School, Vellore Institute of Technology

  Not to assign his rights
 Duty not to compete with the business of the firm.

Partnership Deed
The partnership is created by agreement
The agreement may be oral or writing, the agreement can be inferred from the conduct
of the parties. In India this agreement may be oral or writing. It is in the interest of the partners
as well as business itself, which the agreement should be in writing. Through this agreement,
the rights and duties of the partners are determined. This agreement is known as Partnership
Deed.

Contents of Partnership Deed

1. Name and address of the firm
2. name and address of partners
3. scope and nature of the business
4. duration of partnership
5. ratio of profit and loss. In the absence of any contract to the contrary, the profit sharing
ratio will be equal
6. amount of capital contributed by each partner
7. method of maintaining account books
8. audit of account books
9. interest on capita, if payable from the firm, to the partners
10. Commission and salaries of partners. In the absence of any contract to the contrary, no
partner(s) is entitled to get salary commission for the firm’s work.
11. The amount of drawings and interest thereon.
12. control over rights
13. allotment of work
14. method relating to admission of new partner and retirement of partners
15. death of partner and his legal executor
16. method of valuation and goodwill
17. dissolution of partnership
18. relinquishment of partnership relations
19. bank account

Dr. J Bhavani, Faculty, VIT Business School, Vellore Institute of Technology

 20. arbitration clause
When the partners have decided to enter into a deed of partnership, it would to stamp
according to the provisions of the Indian Stamp Act, 1894. The deed of partnership (or deed of
dissolution) need not be registered. It is not a public document like a memorandum of
association of a company and only binds third parties so far they have notice of it.

Modes of Dissolution of a firm

Dissolution without the Intervention of the court
a. dissolution by agreement between all the partners
b. compulsory dissolution by operation of law dissolution of the happening of certain
contingencies
c. dissolution of partnership at will by notice

Dissolution by agreement
A firm may be dissolved with the consent of all the partners, or (ii) accordance with a
contract between the partners. The consent required for dissolution should be the consent of all
the partners. So a majority of the partners have no power to dissolve the firm against the wishes
of the minority.
DISTINCTION BETWEEN PARTNERSHIP AND COMPANY
BASIS OF PARTNERSHIP JOINT STOCK
S. No.
DIFFERENCE FIRM COMPANY
1. The Acts Partnership firm is Companies are governed
governed by the Indian mainly by the provisions of
Partnership Act, 1932 the Companies Act,
1956/2013
2. Registration Registration is optional Registration is compulsory
3. Number of members Minimum of two persons Minimum number of
and maximum number is members
restricted to 10 in the Public – 7 persons
case of banking business Private – 2 persons
and to 20 in other types Maximum number of
of businesses members
Public – unlimited

Dr. J Bhavani, Faculty, VIT Business School, Vellore Institute of Technology

 Private – 200 excluding
members or employees
4. Legal status No separate legal It is an artificial person
existence created by law
5. Liability Liability of a partner is Limited to the unpaid amount
joint, several and of shares held
unlimited
6. Transfer of shares A partner cannot transfer Shares are fully transferable
his interest in the firm
without the consent of all
other partners
7. Management Management of a firm is Board of directors elected by
carried on by all or by the members carry out the
any of them acting for all management
8. Stability A partnership firm is not A company is stable as it is
stable, it can be affected totally unaffected by any
by death, insanity or such contingencies
insolvency of any one or
all its partners
9. Procedural Both for formation and Both the formation and
complexities dissolution, the winding up are subject to
procedures are simple many legal formalities
10. Financial resources The capital contribution The scope for mobilizing
as well as the finance that larger resources is very wide
can be raised tend to be
limited
11. Membership In a partnership only In a company, an institution
individuals can become can also become a member
its members by purchasing its shares
12. Nature Partnership is the A company is an artificial
relation between persons person
who have agreed to share

Dr. J Bhavani, Faculty, VIT Business School, Vellore Institute of Technology

 the profits or losses of a
business
13. Mutual relationship of In the partnership, each The members of the company
the members partner is an of agent of are not its agents or
the others representatives
14. Audit Audit of accounts is not It is essential for every
except uncertain company to get its accounts
circumstances annually audited by chartered
accountant
15. Dissolution Partnership can be Legal formalities for winding
mutually dissolved at up are many
time

Web links
 ebook.mca.gov.in/default.aspx
 https://nptel.ac.in/courses/109105098/
 https://nptel.ac.in/content/storage2/nptel_data3/html/mhrd/ict/text/109105098/lec12.pdf
 https://www.classcentral.com/course/swayam-legal-compliance-for-incorporating-startup-
5773
 https://www.simpletaxindia.net/2013/11/16-video-on-companies-act-2013-on-all.html
 Classification of company: https://www.udemy.com/course/basics-of-indian-companies-
act-2013/
 http://www.freebookcentre.net/Law/Law-Books.html
 http://197.14.51.10:81/pmb/DROIT/1405899646.pdf
 www.mooc-list.com/tags/business-law
 https://www.mooc-list.com/course/business-law-wma
 http://cde.annauniv.edu/mbaqp/pdf/First%20Semester/DBA1607/MBA%201607.pdf
 https://www.scribd.com/doc/115935555/DBA1607-LEGAL-ASPECTS-OF-BUSINESS-
pdf
 https://www.scribd.com/document/369243344/LEGAL-ASPECTS-OF-BUSINESS-pdf
 http://osou.ac.in/eresources/DIM_COURSE_1_BLOCK_4.pdf
 http://www.cii.co.uk/media/874535/J03%202009-10.pdf

Dr. J Bhavani, Faculty, VIT Business School, Vellore Institute of Technology