Introduction

Partnership results from a contract and is governed by the Partnership Act 1932. The partnership
is also governed by the general provision of the Indian Contract Act on such matters where the
Partnership Act is silent. It is expressly mentioned that the provision of India Contract Act which
is not repealed will be applicable on Partnership until and unless such provision is in contrary to
any provision of Partnership Act, 1932. The rules of contract regarding the capacity to contract,
offer, acceptance etc will also be applicable to the partnership. But the rules regarding the status
of minor will be governed by the Partnership Act, 1932 since Section 30 of the Act talks about
the position of the minor.

Nature of Business

It is a business organization where two or more persons agreed to join together to carry out the
business for the purpose of earning the profits. It is an extension of a sole proprietorship. It is
better than sole proprietorship because in sole proprietorship the business is carried out by the
individual with limited capital and limited skill. Due to the limited resources of a single individual
carrying a sole proprietorship, a larger business requiring more resources and investment than
available to the sole proprietor cannot be thought of such business. On the other hand in
partnership, a number of partners join together with their capital to form an agreement and carry
out a business jointly.

Meaning

According to Section 4 of the Partnership Act,1932

“Partnership is the relation between persons who have agreed to share the profits of a business
carried on by all or any one of them acting for all”.

Essential requirements of a partnership

• It must be an association of two or more persons.

• There must exist an agreement between the partners.
• There must be a business undertaking or a commercial activity that is lawful.
• The motive must be to earn the profit and share between the partners.
• The agreement must be to carry out the business jointly or by any of them
acting on the behalf of all i.e., there must be mutual agency.
Examples:

A and B buy 100 tons of oil which they agree to sell for their joint account. This forms a partnership
and A and B are considered as partners.

A and B buy 100 tons of oil and agreed to share it among them. It does not form a partnership as
they had no intention to carry out business.

Number of members

Any two or more persons may form a partnership. There is no limit imposed on the minimum and
the maximum number of partners under the Partnership Act,1932. According to Companies Act
2013, the maximum number of 100 must not exceed in case of partnership and minimum is 2
partners.

If in any case, it exceeds the maximum limit then it will amount to the illegal association under
Section 464 of Companies Act,2013. According to Section 11 of Companies Act the maximum
number of partner in case of:
 • Banking purpose-10 persons
• Other purposes- 20 persons

Agreement

The partnership is an agreement in which two or more person has decided to carry out business
and share the profit and losses equally. To create a legal relationship it is necessary to form a
partnership agreement.

The partnership agreement becomes the foundation or the basis on which it is based. It can be
either written or oral. The written agreement is known as a partnership deed. Partnership deed
mainly consists of the following details:

• Name and address of its firm and business

• Name and address of its partner
• Capital contributed by each partner
• Profit and loss sharing ratio
• Rate of interest on capital, loan, drawings etc
• Rights, duties and obligation of partners
• Settlement of accounts on the dissolution of the firm
• Salaries, commission payable to partners
• Rules to be followed in case of admission, retirement and death of a partner
• Mode of settlement on disputes among partner.
• Any other affecting the rights of the partners
Business (Section 12)

The partnership must be created for the purpose of carrying the business which is legal in nature.
Co-ownership of property does not amount to the partnership. As per the definition given in
Section 2(b), a business includes any trade, occupation or profession. It is any kind
of occupation that is not something done just for pleasure. It is an operation
conducted by a particular method that is continuous, and from which income or
profits can be derived.

Mutual agency (Section 13)

The business is to be carried by all of them or by any one of them on behalf of all. It gives two
assumptions

Each partner is entitled to carry out the business. The mutual agency exists between the partners.
Each partner is a principal as well as an agent for the other partners.he is bound by the acts of
other partners as well as can bind others by his own act.
Sharing of profit

The agreement is to share profit and losses among the partners. The sharing of profit and losses
can be according to the ratio of the capital contributed or equally.

It helps to distribute the burden among the partners in the case when the partnership suffers
losses.

Liability of partnership

All the partners are jointly liable for paying the debts of the firm. The liability is unlimited which
means that the partner’s private assets can be disposed of for the purpose of paying the debts of
the firm.

Test of partnership

Section 6

Section 6 of the Indian Partnership Act provides the mode of determining the
existence of a partnership. The following are the provisions in Section 6:

1. While determining whether an association of persons is a firm or if a person

is a partner to a firm, the real relation shown by relevant facts between the
parties must be examined.
2. Sharing profits from a property held by persons jointly does not
automatically qualify such persons as partners.
3. A person can hold a receipt of the share in profits or receipt of payment that
is contingent upon the profits, but that does not make him a partner. The
following are such persons:
• Servant or agent who receives remuneration or commission.
 • Widow or child of a deceased partner who receives an annuity.
• Moneylender to the partnership business.
• The previous owner or part owner who has consideration for the sale of the
goodwill of the business or share of it.

Real criteria for determining partnership

It is clear from Section 6 that the sharing of profits is not the ultimate test for
determining whether a partnership exists. The existence of a partnership depends
on the actual intention of the parties and the contract drawn up by them. In some
cases, an alleged partner might have a share in the profits of the business, but that
does not by default make him a partner.

The earlier position was that the share of profits is the criteria for determining
partnership, as held in the case of Waugh v. Carver (1973). The House of Lords
overruled this decision in the case of Cox v. Hickman (1860). In this case, Lord
Crownworth held that the real test of partnership is mutual agency among the
members of the particular association. However, the factor of share of profits
cannot be eliminated. Share of profits is certainly an important piece of evidence
that helps to determine the existence of a partnership, but not the ultimate test.

Kinds of partnership

The various types of partnership are based on two different criteria.

With regard to the duration of the term of partnership:

Partnership at will

when no fixed period is prescribed for the expiration of partnership then it is a partnership at will.
According to Section 7 two conditions need to be fulfilled:
 • No agreement about the determination of the fixed period of partnership
• No clause with respect to the determination of partnership.

Partnership for a fixed period

When the partners fixed the duration of the partnership firm then after the expiration of the fixed
period the partnership comes to an end. When the partners decided to continue with the
partnership even after the expiry of the fixed period then it becomes a partnership at will.

On the basis of the extent of the business carried by a partnership

Particular Partnership (Section 8)

When the partnership is created for completing any project or undertaking. When such an
undertaking or project have been completed then partnership comes to an end. The partners
have a choice to continue with the firm.

General Partnership

when the partnership is created for the purpose of carrying out the business. There is no
particular task that has to be completed. The task is general in nature.

Scope of Partnership Act (Section 5)

The partnership arises from the contract but not from the status. The intention of partners is a
question of the partnership. the partners may exercise any of its power at time but must not
exercise in the pursuance of illegal, fraudulent or misconduct.

If any of the partners have made the contract without the consent of all other partners then the
question as to the validity of such contract arises. If all the partners have accepted or ratified the
contract then no question as to the validity of such contract arise.
With the consent of all the partners, the partnership can become a member of another firm.

Partners

The member of a partnership is called partners.it is not mandatory that all the partners are the
same or all the partners participate in the conduct of the business or share the profit or losses
equally. The partners are classified depending on the nature of work, the extent of liability, etc.
There are basically six types of partner:

• Active/managing partner: The partner who takes participation in the conduct of the
business daily. This partner is also called an ostensible partner.
• Sleeping/Dormant: He does not participate in the conduct of the business but he is bound
by the conduct of all the partners.
• Nominal partner: He is a partner to the firm only by his name. In reality, he has no
significant or real interest in the firm.
• Partner in profit only: The partner who agrees to share the profit but does not suffer
losses. He is not liable for any liabilities in case of dealing with the third party.
• Minor partner: A minor cannot be a partner according to the Indian Contract Act, but he
can be admitted to get the benefit of all the partners gives the consent. His will share the
profit equally but his liability will be limited in case of loss of the firm.
• Partner by estoppel: it means when the person is not a partner but he has represented
himself by conduct, or words to another person to be the partner then he cannot deny
afterwards. Even though he is not a partner but he becomes the partner by holding out or
by estoppel.

Relation of partner with one another

All the partners have a right to create their own terms and condition with regard to the affairs of
the business in the partnership deed. The Indian Partnership Act has prescribed the provision to
govern the relation of partners and this provision is applicable in case when there is no deed. The
various rights of the partners are explained below:

• Right to determine the relationship by contract (Section 11)

The partnership deed determines the general administration of the partnership like what will be
the profit-sharing ratio, who will do what work etc. The partnership contains the rights and duties
of the partners.
Such a deed can be made either expressly or by necessary implication. For example, if one
partner looks into sales daily and other partners do not object to it, his conduct will be presumed
as the right of all the partners in the absence of written agreement. So it can be concluded that
all partners create a right for their own.

Section 27 of the Indian Contract Act,1872

Agreement in restraint of trade is void

All the agreements which restrain the person from carrying any lawful profession, trade or
business are void.

But Section 11 of the Partnership Act states that the partners can restrain each other from
carrying a business other than the firm. but such restraint must contain in the partnership deed.

Rights of the Partners

• Right to take part in the conduct of the firm’s business: Section 12(a)
provides that every partner has the right to be involved in the conduct of the
firm’s business. All partners have the right to manage the firm’s business.
• Right to express opinion: Section 12(c) provides that all partners can
freely express their opinion in matters concerning the firm’s business.
However, before a decision is made based on an opinion of a partner, the
consent of other partners must be obtained.
• Right to have access to books of the firm: Section 12(d) of the Act
provides that every partner has the right to look into the books of the firm,
whether the books concern the accounts of the firm or not.
• Right to profit: As per Section 13(b), all partners must equally share profits
earned through the business.
• Right to interest on capital: Section 13(c) provides that on an agreement,
the partners of a firm have the right to claim interest on the firm’s profits
from the capital.
• Right to interest on advances made by partner: In some cases the firm
may need extra money apart from the capital. In such cases, a partner may
make advances to the firm and he may also claim interest on such advances.
 • Right to indemnity: Section 13(e) of the Act provides that a partner may
make some payments and incur liabilities while acting on behalf of the firm.
The firm shall indemnify a partner in respect of such payments and liabilities,
whether it was made in ordinary course of business or in emergency.
• Right to dissolve the partnership: Section 44 provides that a partner has
the right to file a suit to dissolve the partnership. The court may dissolve firm
on any of the grounds given below:
1. Unsoundness of mind of a partner, where the suit shall be brought by
another partner or the next friend of the unsound partner;
2. Permanent incapability of another partner to perform his duties;
3. Another partner is guilty of conduct that prejudices the business of the firm;
4. Committing breach of agreement by another partner by wilfully or
persistently;
5. Transfer of interest in firm by another partner to a third person;
6. Business of firm cannot be carried on due to losses;
7. Any other ground which makes it just and equitable to dissolve the
partnership.
• Section 46 provides that after dissolution, a partner has the right to wind up
the business of the firm. On dissolution, every partner or his
representative is entitled, as against all the other partners, to have the firm’s
property applied in payment of debts and liabilities of the firm, and then have
the surplus distributed among the partners or their representatives.
• Right to not get expelled: Section 33 provides that all partners have right
to not get expelled except on certain grounds and they must be given
reasonable warning and opportunity of explanation before the expulsion.
• Right to prevent introduction of new person: Section 31 provides that
every partner has the right to prevent the introduction of a new partner
without his consent to the firm, unless the agreement has expressly provided
that such introduction is permitted.
• Right to retire: Section 32 of the Act provides that a person has right to
retire with the consent of other partners, unless the requirement of consent
is waived by the agreement. The partners can retire by simply providing a
notice to other partners in partnerships at will.

Relations of partners to third parties

Section 18 to 22 of the Act talks about the relation of partners third parties
Section 18 prescribes that the partners are an agent of the firm for the purpose of conducting the
affairs of the business. The partners act as the principal and agent as well. when he performs the
act in his own interest he is the principal and when he does in the interest of another partner then
he is an agent. He is not an agent for the dealings or the transactions between the partners
themselves.

Section 19 states that any act which is performed by the partners in the usual course of its
business binds the firm itself. The authority to bind the firm is implied authority

Section 20 states that partners can make a contract to restrict or expand the implied authority of
a partner.

Section 21 states that if any act is done by any partners in case of an emergency which a prudent
man would do, then such acts need to bind the firm.

Section 22 specifies that if any act is done by any partner then it must be done in the name of
the firm or in such manner which binds the firm.

Duties of partners

• Duty of greatest common advantage: As per Section 9 of the Act, it is

incumbent upon the partners to carry on their business for the greatest
common advantage of the firm. The partners must act so that all the
 partners benefit and secure the maximum profits. No partner should act for
their personal gain.
• Duty of good faith: As per Section 9, the partners must act just to each
other. The relationship of partnership is on mutual trust and hence, there
must be good faith between them. A partnership is of fiduciary nature and
thus, at every stage of a partnership, the partners must act just and faithful
to one another.
• Duty to render true accounts: Partners of a firm have a duty to render
true accounts as per Section 9. A partner of a firm must keep and render
true and complete accounts of the partnership firm’s business. He must make
it available to other partners or their representatives when required.
• Duty to render full information: As per Section 9, partners of a firm have
a duty to provide true and full information regarding the business. Partners
are agents of each other and hence, partners must communicate all
information regarding the running of the business in a complete and truthful
manner to each other.
• Duty to not carry another business: As per Section 11(2) of the Act, a
partner must not conduct a business other than that of the firm. Partners can
restrain one another from carrying on another business, provided that such
restraint is reasonable.
• Duty to act diligently: As per Section 12(b), a firm’s partner must act
diligently in the business.
• Duty to perform without remuneration: As per Section 13(a), every
partner must perform and attend to the firm’s business without expecting
remuneration. There is a presumption that all partners are to work for the
common advantage of the firm.
• Duty to share losses: As per Section 13(b) of the Act, partners must share
losses in the proportions as provided by the partnership agreement. If the
agreement does not provide it, it must be shared in the proportion that they
share the profits.
• Duty to indemnify for wilful neglect: As per Section 13(f), a partner shall
indemnify his firm for any of the losses caused to it due to his wilful neglect
during the course of the business. Wilful neglect refers to an act that is
deliberate and intentional.
• Duty to not assign his rights: No partner can assign his rights in a
partnership firm to a third person in order to make him a partner.
• Duty to act within authority: Every person has to act within the authority
that he has conferred upon him as per the partnership agreement.
• Duty to account private profits: Section 16(a) provides that no partner
can use the partnership firm’s property for private use, or use any profits
derived from the partnership business for his own advantage. If the property
 of profits of a firm is ever used for personal advantage, it must be accounted
for.
• Duty not to compete: Section 16(b) states that no partner of a firm can
carry on another business simultaneously, except with the consent of other
partners. On the failure of obtaining the consent, he must account for all the
profits he made as a result of that and must compensate for the losses
sustained by the firm if any.
• Duty to properly use the firm’s property: Sections 14 and 15 of the Act
provide that the property of the firm must be used solely for the purpose of
the firm’s business and not for private purposes. The term ‘property of the
firm’ covers all properties and rights and interests in a property originally
acquired by the firm for the purpose of running the business. The goodwill of
the business is also a property of the firm.

When do Rights and Duties change?

The existing relationship between the partners come to an end when there is a change in the
constitution of the firms. Such changes in the constitution of the firm may occur due to the
following reasons (Section 17)

• Expiration of term of the firm.

• Carrying out the additional business other than agreed upon.
• Changes in the composition of members due to admission, retirement or the death of a
partner.
The duties and rights of partners remain the same until there is any change in agreement but
such right and duties may vary or modified by creating a fresh agreement.

Status of a minor

Section 30 states the legal provision related to the minor according to Section 18 of the Indian
Contract act 1872, no person below the age of 18 years can enter into the contract which implies
that no minor can enter into a contract. But Section 30 states that the minor cannot be a partner
in a partnership firm but he can be admitted to benefit from the partnership firm. The minor will be
liable to get only the benefits from the partnership but is not liable for any losses or liability. The
minor can be admitted to the partnership only with the consent of all the partners.

There are various rights that are granted to the minor.

Various rights are as follows:

• Right to inspect the books of account

• Rights to share the profits from the firm
• Rights to sue any partner or all for his share of benefit or profit
• He has a limited liability which means his personal assets may not be disposed of to pay
the firm debts
• A minor has a right to become a partner on attaining the age of 18 years.
Liabilities of a minor

• A minor has Limited liability. If minor is declared as insolvent his share will be kept in the
possession of official liquidator.
• If after attaining the age of 18 years he decided to become the partner then he has to give
public notice within 6 months of attaining the majority. If notice not given then minor will
become liable for all the acts of others until the notice is given
• When a minor partner becomes the major he will be liable for the acts of all partners to
the third parties.
• If he decided to become a full-time partner then he will be considered as a normal partner
and will take part in the conduct of the business.

Liabilities

• Liability of partners for the acts of the firm (Section 25): All the partners is jointly and
severally liable for the acts of the firms. He is liable only for those acts which are done at
the time he is a partner.
• Liability of a firm for the wrongful act of partner (Section 26): When any wrongful act
or omission is done by any of its partners in the ordinary course of its business or with
the consent of others partners then the firm is liable to the same extent as a partner.
• Liability of a firm for the misapplications by partner (Section 27): when any partner
acting as an agent receives the money from the third party and misapplies it or the firm
receives the money and money are misappropriated by any of its partners then the firm
is liable to pay for the loss suffered.

How is registration done?

Section 58 explains the procedure of the registration of a partnership firm.

 • Making an application to Registrar: Any of its partners can send an application along
with the prescribed fee and copy of partnership deed o the registrar of the area in which
any place of business is proposed to be situated or is situated. Such a statement shall be
signed by all of its partners. Such a statement should contain:
• Name of the firm
• Principal place of business
• Any other place where the business is carried on
• Duration of partnership firm
• Name and address of all partners of a firm
• The date on which each partner joined the firm
• Verification: Each partner who has signed the statements needs to be verified.
• The name of the firm shall not contain any name resembling the name of Crown, Emperor,
king, Royal, Emperors’, or any other words implying or expressing the sanction of the
government.
Section 59 states that when the Registrar is satisfied that the conditions of Section 58 are
complied with then he shall record an entry of the statement in a register called the Register of
Firms, and shall file the statement.

Non-registration of partnership firm

In India, it is not compulsory to register the partnership and no penalty is being imposed for non-
registration but if we talk about English law it is compulsory to register partnership firm and if it is
not registered then the penalty is imposed. Non-registration leads to a certain disability in
accordance with Section 69 of the Act.

Effect of non-registration (Section 69)

• No suit can be initiated in civil court by the firm or other co-partners against the third party
• In case of breach of contract by the third party; the suit cannot be brought in any civil suit.
The suit must be filed by the one whose name is registered as a partner in a register of
the firm.
• No partners can claim a relief of set-off.
• Any action which is brought out by the third party against the firm having a value of Rs
100 cannot be set off by the firm or any of its partners.
• An aggrieved person cannot sue against firms or other partners
Generally, no action can be brought against the firm or the partners but there is an exception to
it. In a case when the firm is dissolved it can bring a suit for the realization of his share in the
firm’s property.
Non-registrations do not affect the following rights

• A third party can bring a suit against the firm

• Right of the partners or firm to claim a relief of set off the claim for the value which does
not exceed Rs 100
• Power of official liquidator, official assignees to release the property of insolvent partners
and brings a legal action
• Partner right to claim for the realization of his share in case of dissolution of the firm

Introduction or Admission of partner (Section 31)

As per Section 31, no person can be introduced as a new partner to the firm
without the consent of other partners. This is, however, subject to the provisions in
the agreement of partnership and Section 30, which deals with minor partners.

Modes of introduction

The following are the modes of introduction of a partner:

1. With the consent of all partners

2. Introduction as per the contract between partners
3. A minor admitted to the benefit of the partnership becoming a partner

Rights of incoming partner

1. Right to manage partnership business

2. Right to access books of firm
3. Right to capital, profit and loss
4. Right to dissolve partnership
5. Right to indemnification of losses
Liabilities of incoming partner

A partner’s liabilities are only with respect to transactions subsequent to becoming

a partner. The same is provided under Section 30(2). However, the incoming
partner and co-partners can enter into an agreement where it provides that the
incoming partner can be held liable for obligations of the firm prior to his arrival.

Retirement of partner (Section 32)

Section 32 of Act talks about the retirement of partners. When the partner withdraws from the
partnership by dissolving it then it is dissolution but not a retirement.

Any partner may retire:

• When there is a partnership at will, by serving a notice to all the existing partners
• When there is an express agreement among the partners
• When the consent of all the partners is given

Liabilities of retired partner

A retired partner continues to be liable for the acts of firms and other partners till he or any other
partners give public notice about his retirement. When the third party does not know that he was
a partner and deals with the firm; then in such case a retired partner is not liable. if it is a
partnership at will then there is no requirement to give public notice about his retirement.

The outgoing partner may enter into an agreement to not carry similar business or activities within
a specified period of time.
Expulsion of partner (Section 33)

A partner can be expelled only when below three conditions are satisfied:

• Expulsion of the partner is necessary for the interest of the partnership

• Notice is served to the expelled partner
• An opportunity of being heard is given to the expelled partner
If the above three conditions are not fulfilled then such expulsion will be considered as null and
void.

Insolvency of a partner (Section 34)

When a partner is declared as insolvent by the court, it leads to the following consequences:

• He ceases to be the partner of a partnership firm from the date of adjudication

• His estate which is in possession of official liquidator ceases to be liable for any acts of
the firm whether the partnership subsequently dissolves or not
• Partnership ceases to be liable for any act of insolvency partner

Liability of estate of a deceased person (Section 35)

Generally, the partnership comes to end on the death of a partner but if there is a contract between
partners to continue with the partnership on the death of a partner then surviving partner continues
with the business after clearing the deceased partner estate from any liability for the future acts
of the firms.

Liability of outgoing partner (Section 36)

The outgoing partner is restricted to perform acts like:

 • Using the name of the firm
• Representing himself as a partner
• Make the customer of the firm in which he was a partner as its own.
The outgoing partner may enter into an agreement not to carry similar business or activities within
a specified period of time. After the specified period, the outgoing partner is allowed to carry on a
similar business or advertise it.

Liabilities of outgoing partner to subsequent profits

(Section 37)

When the any of the partners ceases to be a partner or dies and remaining partner continues with
the business without settling the accounts then the outgoing partner is liable to get a share from
the profit earned by the firm since the date he ceases to be a partner.

The share may be attributable to the use of a share of his property or 6% interest per annum on
the amount of share in his property.

The surviving partner has the option to purchase the share of the deceased partner and if they
purchase it then the deceased partner has no right to get the profit derived from such property.

Dissolution of a firm

Section 39 to 44 deals with the Dissolution of a firm.

Sometimes circumstances arise when the firm gets dissolved. Sometimes a firm is dissolved
voluntary or by the order from the court. There are various modes prescribed under Section 39 to
44 for the dissolution of a partnership firm. Even when the partnership is dissolved then it gives
certain rights and liabilities to the partners.

Lets us understand the concept of dissolution in detail through the Powerpoint Presentation
given below.

Dissolution of a firm ( Section 39 to Section 44)

Liability of partners in Different Situations

Liabilities of partners after the dissolution of the

partnership firm (Section 45)

The partners are liable for the acts of the firm to the third party until public notice is given. A
partner who is declared as insolvent, or who is retired, the estate of a person who dies, or who
was not known as a partner at the time of dealing with the third party will not be liable for the act.

Wind up the Business Post-Dissolution (Section 46)

When the firm is dissolved every partner has a right to apply for the firm’s property in the payment
of debts and liabilities. If there is any surplus it needs to be distributed among the partners.

The partners have mutual obligations and rights until the affairs of the firm is wound up.

Settlement of partnership account (Section 48)

When the partnership has dissolved the accounts of the partners needs to be settled under the
usual course of business. Various modes can be used for the settlement of accounts.

If there is a deficiency in capital or loss is incurred when it is paid out of profit. If profit is not
sufficient or no profit is earned then it is paid out by the capital and by the partners if necessary.
The partners contribute to the proportion of the profit sharing ratio.

The asset of the firm and the capital contributed by the partners to meet up the deficiency in the
capital is applied in the following order:
 • Repayment to third parties
• The amount which is due to him from the capital
• The amount which is due to him on account of capital
• And if any amount is left then it is distributed among all the partners in their profit sharing
ratio.

Paying Firm Debts and Separate Debts (Section 49)

In a case when there are joint debts from the firm and the separate debts from the partner then
joint debts from the firm is given priority and if any surplus is left then separate debts from the
partner is to be paid off.

The property of the individual partners is applied firstly for the payment of separate debts.

Personal Profit Earned After Dissolution of Firm

(Section 50 and Section 53)

When the firm is dissolved by the death of the partner and business is carried out by the existing
partners or his legal heirs then they have to account for the personal benefit earned before winding
up the partnership.
Section 53 states that if there is no contract the partner can restrain other partners from carrying
similar activities, or using the firm’s name or firm’s property for their own benefit until the winding
up process is complete.

Return of Premium on the Premature Dissolution of

the firm (Section 51)

When the firm is dissolved before the expiry of a fixed period, then a partner paying a premium
can receive a return of a reasonable part of the premium. Such rules are not applicable in a case
when the partnership is dissolved by:

Misconduct of partner paying a premium (Section 52)

Post an agreement in which there is no clause for return of premium.

Contract Rescinded for Fraud or Misrepresentation

When the partnership arising from the contract is rescinded due to fraud and misrepresentation
then the party who has rescinded the contract will be liable as:

After the debt of the firm is paid the lien on remaining assets. He will be treated as a creditor for
the payment of any debts made by him.

An indemnity from the partners guilty of misrepresentation or fraud against all debts of firms.
Sale of Goodwill After Dissolution of Firm (Section 55)

The goodwill is treated as an asset. The goodwill is included in the assets while settling the
account after the dissolution of the firm. The goodwill may be sold separately or with other assets.
Once the firm is dissolved and goodwill is sold then any partners can carry on a similar business
or advertise a business competing with the buyers of the goodwill. The partners are prohibited
from doing the following acts:

• To use the name of the firm

• To represent himself as carrying the business
• To solicit the customers of the firm dealing before dissolution.

Conclusion

Partnership is a very common type of business which is prevailing in the country. It has many
advantages for the company. This Act is a complete Act as it covers all the aspect related to the
partnership.

Introduction

A partnership is basically a contract wherein two or more people agree to carry out
a business together. A partnership can be considered as a joint venture as opposed
to a “sole proprietorship” wherein a single person carries out his business with his
individual resources, skills and efforts. The major disadvantage of being a sole
proprietor is that since there is only a single person involved in the business, it is
difficult for him to manage the huge resources and investments in the business.

On the other hand, in a partnership, a number of persons are involved and they can
pool their resources in order to form and manage a much larger business.
Moreover, if there is a loss in the business, it can be divided amongst the partners
of the partnership firm.
A partnership is an agreement between two or more people who wish to share
profits and losses for the partnership firm. However, in a partnership, all the
partners do not participate in all the activities of the firm for profits and losses
equally. The nature of a partnership varies depending upon the extent of liability of
the partners and their participation in the firm. The main purpose of this article is to
discuss the various types of partners in a partnership.

Definition of partners

According to Section 4 of the Indian Partnership Act, 1932 (hereinafter mentioned

as the Act), a partnership is defined as a relationship between two or more people
who have entered into a mutual agreement between themselves to share the
profits and losses in the business which is carried on by all or any of them acting for
all the partners. Therefore, people who have entered into an agreement with one
another are individually known as partners.

According to the definition in Black Law dictionary, a partner is a member of a firm

or co-partnership who has united with others in order to form a partnership in
business.
Types of partners in the Partnership Act

The types of partners under the Act can be studied under the following heads:

• Active partner
• Incoming partner
• Outgoing partner
• Minor partner
• Partner by holding out
• Dormant partner
Before we delve in detail about the types of partners, it will be apposite to mention
certain other partners which are not explicitly mentioned under the Act. Yet they
are often used in common parlance to denote their position in a partnership. They
have been discussed in the later part of the article under the following heads :

• Nominal partner
• Limited partner
• Partner in profits only
• Secret partner

Active partner

The term active partner is explicitly not mentioned in the Act but it denotes those
partners who are carrying on the business of the partnership. An active partner is
responsible for managing the affairs of the firm. While acting for the firm, he acts
as an agent of the other partners too as partnership thrives on the mutual trust and
confidence amongst the partners. He may take up different roles such as manager,
advisor, organiser and controller of affairs of the firm.

The main function of an active partner is to look after the overall functioning of the
business. Hence, if he wishes to retire from the firm, he is required to give a public
notice to the remaining partners. The purpose of this public notice is to absolve
himself from liability and acts done by the other partners after his retirement. If he
doesn’t issue a public notice declaring his retirement he would be held liable for the
acts done by other partners post-retirement also.
Rights of an active partner

• Right to take part in business: The partners have the right to take part in
the conduct of business of the firm under Section 12(a) of the Act. It is in the
nature of a joint venture where every partner is given the opportunity to
contribute towards the progress of the firm. The right to take part in the
business is an important aspect of partnership which allows the partners to
have a say in the way the business is carried and suggest measures to
maximise profits.
 • Right to have access to books: Section 12(d) of the Act allows every
partner the right to have access to the books of accounts of the firm and also
inspect and copy them. The books can be inspected by the partner himself or
his agent but he can be restrained by the firm from utilising the information
received if it can cause damage to the reputation of the firm or harm its
business.
• Majority rights: Every partner has the right to be consulted in matters of
business policy which may relate to an ordinary matter or fundamental
matter. Ordinary matters relate to matters regarding execution of the
business. Fundamental matters relate to questions regarding alteration or
addition to the business or admission of a new partner. In the case of any
difference of opinion with regard to ordinary matters, it has to be decided by
the majority of partners. However, if there is a change in the nature of
business, the consent of all partners are required.
• Right to profits: Section 13(b) states that the partners of a firm are entitled
to share the profits earned between them equally unless an agreement has
been signed that stipulates the share of their profits. Also in the case of
contribution to be made by the partners for losses, it should be made
equally.
• Right to interest: Section 13(d) states that where a partner has advanced
money, exceeding the amount agreed to be paid by him for the purpose of
business of the firm, he is entitled to receive interest on the sum advanced at
the rate of six percent. The interest has to be paid from the profits made by
the firm.
• Right to remuneration: Under Section 13(a) of the Act, the partners are
not entitled to receive any remuneration or salary for their contribution in
business. Their position is not the same as a regular employee of the firm.
However, the partnership agreement may contain provisions for
remuneration to its partners.
• Right to indemnity: Section 13(e) of the Act provides that in case any
payment is made or any liabilities are incurred by a partner, he is entitled to
be indemnified by the firm. This right to indemnity can be claimed in two
situations. Firstly if the partner has made payments in the ordinary course of
conduct of business. Secondly, a partner is entitled to recover the expenses
incurred by him in the case of an emergency, for doing any act which is
necessary for protecting the firm from loss.

Duties of an active partner

• Duty of good faith: Section 9 of the Act provides that the partners are
bound to act in a truthful and just manner. They are to furnish true accounts
 and disclose full information about any matter that is likely to affect the firm.
The business of the firm must also be carried out so that it is advantageous
for all the partners.
• Duty not to compete and account for personal profits: Section 16(b) of
the Act states that a partner must not carry out any business that is
competitive or similar to that of the firm. Also a partner is not allowed to
derive any profit by carrying out a transaction which would not have been
possible had it not been for his connection with the partnership firm.
However, a partner is not precluded from carrying out any business or transaction
which is independent of the business of the firm and does not have any bearing
upon it.

• Due diligence: Section 12(b) of the Act states that the partners of a firm
must act in a diligent manner in respect of its affairs. Section 13(f) states
that it is the duty of the partners to act in a responsible way so that the firm
is able to function properly and earn substantial profits.
In case of any loss that is caused to the firm by virtue of the negligent act of the
partners in the conduct of business, he will be liable to indemnify the firm in respect
of the losses. The term negligence here refers to wilful negligence which means to
act irresponsibly without any proper regard for the welfare of the firm.
 • Duty to use property for firm purposes: Section 15 of the Act states that
it is the duty of the partners that the property of the firm must be used only
for the purposes of business of the firm. If any damage is caused to the
property in the course of personal use, he has to indemnify the firm for the
same.

Liabilities of an active partner

• An active partner has unlimited liability in respect of losses incurred by the

firm for any act of its partners.
 • An active partner must be honest in their dealings with their co-partners as
well as third parties. If a partner acts fraudulently and causes any loss to the
firm, he will be liable to the firm to make good the damages incurred under
Section 10 of the Act.
• An active partner is liable to render any profits made by him, to the firm by
making use of the property of the firm or the firm name.

Related case laws

Pulin Bihary Roy and Ors vs. Mahendra Chandraghosal and Ors (1921)

Facts

In this case, the partnership named Joint Salt Bond Business was involved in the
business of importing salt from foreign countries and reselling them in Chittagong.
The partnership consisted of Krishnadas Sanatan Brojendra Kumar Ray, Krishna
Kumar Ghosal, Ramkumar Radhaballabh Saha and Gangadas Seal and their
respective shares in the firm were predetermined.

The partners managed the business by taking turns, where the first quarter was
managed by the Ghosals, the second quarter by the Seal, the third quarter by the
Shas and the fourth by the Rays. The amount of salt sold and the price fixed by
each of the partners in their respective quarters was kept in a record book.

At the end of each quarter, there used to be an adjustment of accounts in order to

pay off the amount due amongst the partners. The plaintiffs started a separate salt
business but it was contended by them that the other partners were also carrying
separate businesses and they cannot be held liable to render the profits.

Issues

Whether the plaintiff could be held liable to render the accounts to the defendants,
for a separate salt business started by them.
Judgement

The Calcutta High Court held that if a partner carries on a business that is similar
and competing to that of the firm, without the consent of the other partners, he is
liable to render the profits to the firm and is also bound to pay compensation if any
loss has been incurred. This is in consonance with Section 259 of the Indian
Contract Act, 1872 and the rules of partnership. The evidence clearly shows that
the partners were engaged in a business that was similar to that of the firm. They
had breached their duty of not carrying a competing business and hence were liable
to pay the profits to the firm.

Sasthi Kenkar Bandopadhya and Ors. vs. Man Gobinda Chandra and Another (1919)

Facts

In this case, a suit for dissolution of partnership and accounts was filed. The
defendants were the managing partners who were sued on the ground of
negligence and contribution for losses were claimed against them. The contention of
the plaintiffs were that the defendants had failed to claim the price of coals from
certain firms as a result of which one of the claims had become time barred and the
other could not be realised as the debtors had become insolvent.

Issues

Whether the defendants could be held liable for contributing to the losses on the
ground of gross negligence.
Judgement

The Patna High Court held that the defendants were liable for the claim which had
become time barred because they were not diligent enough to pursue it within the
time limit. As regards the insolvency of the other firm, the knowledge of their
insolvency was received by the defendants much later and hence they had not
acted negligently.

Incoming partner

An incoming partner refers to a partner who has been newly admitted into the
partnership. Section 31 of the Act deals with the process of introduction of new
partners. It states that a person cannot be introduced into the firm as a partner
without obtaining the consent of all the existing partners.

Rights and duties of an incoming partner

The rights and duties of an incoming partner are the same as that of an active
partner. A partner who has been newly inducted into a firm must carry on the
business diligently. He will be entitled to receive an equal share in the profits made
by the firm. At the same time, an incoming partner has the duty to render true
accounts of the business to the other partners. He must apply the property and
capital of the firm for legal purposes only.
Liabilities of an incoming partner

Section 31(2) provides that a person who has been newly inducted into the
partnership, will not become liable for acts done by the firm before he became a
partner. An incoming partner becomes liable for any debts that incurred by the firm
after the date of his admission.

However, an agreement can be made between the new partner and the remaining
partners that he will be liable for the debts incurred before his admission. But this
agreement is binding between the partners only and third parties are not allowed to
sue the new partner for acts of the firm before his admission. In order to make the
new partner liable for past debts, two things must be satisfied.

Firstly, the newly constituted firm must accept that the new partner is liable for the
past debts. Secondly, the creditors of the firm must be notified about the change in
the constitution of the firm, who have to accept the terms of the new arrangement
expressly or impliedly. Whether a creditor has impliedly consented to the terms can
be understood if he continues to deal with the firm after reconstitution or brings a
suit against the new firm regarding any issue.

Related case laws

B.M Devaiah vs. Canara Bank and Onr. (2002)

Facts

In this case, a partnership under the name of M/S Simon Enterprises was carried on
by Mrs. Kitty Mandanna and Shri C.P Muthanna. It was involved in the hotel and
restaurant business. The firm took a loan from the plaintiff bank by executing a
promissory note and property was also mortgaged to secure the loan.

The firm informed the bank after a few months, that a new partner Mr. B.M Devaiah
has been inducted as a partner. When the firm failed to pay the outstanding dues in
respect of the loan amount, the bank filed a suit for recovery against all the three
partners. The new partner contended that he could not be made liable for the loan
amount as Section 31 of the Act states that an incoming partner cannot be held
liable for acts of the firm before he joined it.

Issues

Whether the new partner could be held liable for the past debts of the firm?

Judgement

The Karnataka High Court held that the evidence adduced by the firm clearly shows
that the reconstituted firm had taken over the liability for acts of the firm before the
reconstitution. Mr. Devaiah had made efforts towards the discharge of the debt
which confirms that he had accepted his liability in respect of the outstanding loan.
His contention that Section 31 of the Act would be applicable to him is not
maintainable. He further contended that the payments were made because he was
threatened by the bank that in case of failure to pay off the loan, a suit for recovery
would be instituted is also not tenable.

Outgoing partner

An outgoing partner is a partner who voluntarily retires without dissolving the firm.
He leaves the existing firm, therefore he is called as an outgoing or retiring partner.
Section 32 of the Act provides for the various modes of retirement of a partner. A
partner can retire either by obtaining the consent of all the other partners or
according to the terms of the agreement set out at the beginning of the partnership
or in case of a partnership by will, by giving notice to the other partners in writing
that he intends to retire.

Insolvency and death of a partner act as a cessation of being a partner in a firm,

hence, they are also considered as outgoing partners. In case of insolvency, the
estate of an insolvent partner no longer remains liable for acts of the firm done
after he has been adjudicated as insolvent under Section 34 of the Act. Similarly, in
the case of the death of a partner, his property cannot be held liable for acts done
after his death under Section 35 of the Act.

Rights of outgoing partner

The rights of an outgoing partner are provided under Section 36 of the Act. It states
that an outgoing partner is allowed to carry on a business that is competing in
nature to that of the firm in which he was a partner. He may also advertise about
his business, as all of this is necessary to set up a new venture and an important
part of the right to freedom of trade. But he is prohibited from doing the following
things:-

• He cannot use the name of the previous firm.

• He cannot represent to his customers that he is still associated with the
previous firm.
• He is not allowed to solicit the customers of the previous firm in which he
was a partner.
Section 36(2) also encompasses an important aspect of partnership law. It allows a
partnership firm to enter into an agreement with a retiring partner, restraining him
from carrying on a similar business to that of the firm for a specific period or within
a specified local limit.

Such an agreement falls within the exception to Section 27 of the Indian Contract
Act,1872 which deals with agreements in restraint of trade. An agreement of this
nature is valid under the Act as it allows a firm to protect its business. All that is
necessary is that the agreement must be reasonable and specify the period of
restraint or the geographical limits.
Section 37 of the Act lays down the rights of an outgoing partner in case where the
firm is continued by the remaining partners. If a partner leaves the firm or dies and
the partnership business is carried forward by the surviving partners, without there
being a final settlement of accounts between the outgoing partner and the other
partners, he is entitled to receive a share of the profits made by the firm by making
use of his share of the firm property. However, if the surviving partners purchase
the share of the deceased or outgoing partner, then he will not be able to claim a
share in the profits.

Duties of an outgoing partner

• An outgoing partner must pay off his share of debts before leaving the firm.
• An outgoing partner must give public notice of his retirement to third parties
so as to absolve himself of the acts of the firm done after his retirement.
• It is the duty of an outgoing partner to give full account of his dealings with
third parties to the other partners and return the assets of the firm which
were in his possession.

Liabilities of an outgoing partner

Section 32(2) states that a retiring partner can be released from his existing debts
incurred for the acts done by the firm before his retirement by entering into an
agreement with the other partners and the creditors. In such a case, the remaining
partners must agree amongst themselves that the retiring partner shall be released
from his liabilities. At the same time, the creditors must also be informed about the
retirement of the partner and they have to agree to the reconstituted firm as its
debtor. Only then the retiring partner is absolved from his liability.

Section 32(3) states that a retiring partner is liable to third parties for all his debts
and obligations incurred before his retirement. However, he can be held liable for
his future obligations, if at all he fails to give a public notice stating his retirement
from the partnership firm. A retired partner cannot be held liable to any third party
if that person enters into business with the firm without knowing that the retired
partner was a partner.
Minor partner

A minor is a person who has not attained the age of majority in the law of the land.
Section 3 of the Indian Majority Act,1875 states that a person who has attained the
age of 18 years is considered to be a major. It is pertinent to note that, Section 11
of the Indian Contract Act,1872 prohibits a minor from entering into an agreement,
as the agreement entered by a minor is considered void ab initio.

Thus a minor cannot be regarded as a partner in a firm because a partnership

essentially stems from a contract, and a minor is incompetent and cannot enter into
a contract.

Rights of a minor partner

• Section 30 of the Act allows a minor to enjoy the benefits of partnership

when a set of rules and procedures are complied with in accordance with the
law. Section 30(1) states that a minor can be admitted to the benefits of a
partnership after obtaining the consent of all the partners.
• Section 30(2) states that a minor is entitled to the shares of property and
profits of the firm, which has to be stipulated through an agreement. He will
also be entitled to have access to and inspect and copy any accounts of the
firm.
• Section 30(4) states that a minor is not entitled to sue the partners for
accounts or payment of shares of his property or profit unless he is severing
his connection with the firm. In such cases, the valuation of the amount of
his share shall be made in accordance with the rules contained in Section 48
of the Act.

Duties of a minor partner

• Section 30(5) states that a minor, on attaining majority or on obtaining the

knowledge about his admittance into the benefits of partnership, should give
a notice within six months as to whether he has decided to become a partner
of the firm or not and the notice will determine his position in the firm.
However, if he fails to give the notice before the expiry of the six months, he
will be inducted into the firm as a partner.
• Section 30(6) stipulates that if a person who has been admitted to the
benefits of a partnership during his minority claims that he did not have the
 knowledge of such admission even after the expiry of six months from the
date of attaining majority, the burden of proving such a fact on the person
who is claiming it.
• The provisions, if he chooses not to continue into the firm as a partner, have
been provided under Section 30(8). In such a case, his rights and liabilities
as a minor continue up to the date on which he gives public notice and his
shares shall not be liable for acts of the firm after such date. He will also be
entitled to institute a suit against the firm for his share of property and
profits.
Liabilities of a minor partner

• Section 30(3) sets out the liability of a minor partner when he has not
attained majority. It states that only the shares of the minor will be liable for
any act of the firm and he will never be personally liable.
• Section 30(7) provides that the rights and liabilities of a person who is
inducted as a partner after the cessation of his minority. He is subjected to
the same rights and liabilities as that of a regular partner. He becomes
personally liable for the acts of the firm since the date of his admittance into
the firm. His share in the property and profits continue to remain the same
unless it is altered by agreement.

Related case laws

Commissioner of Income-Tax, Bombay vs. M/S Dwarkadas Khetan and Co. (1960)

Facts

In this case, a partnership was entered between four people out of which one of
them was a minor. But he was admitted as a full-time partner, subjected to all the
rights and liabilities as applicable to all partners. The Registrar of Firms granted a
certificate indicating that the minor was a full-time partner and not one who was
admitted to the benefits of partnership. However, the Income Tax officer refused to
register the firm under the Income Tax Act, 1961 and his decision was upheld by
the Income Tax Appellate Tribunal. The High Court reversed the decision of the
Tribunal. An appeal was preferred by the Commissioner of Tax before the Supreme
Court.

Issues

Whether a partnership deed which mentions a minor as a full-time partner in a firm

can be registered under the Income Tax Act?

Judgement

The Supreme Court held that a minor cannot be considered as a full-time partner
by virtue of Section 30 of the Act. A minor can be allowed to sign the registration
application as all partners are required to sign it during the process of registration.
But he cannot be treated as a full-time and competent partner. A partnership deed
which goes beyond this interpretation is incorrect and would be invalid for the
purposes of registration under Section 26A of the Income Tax Rules, 1962.

State of Kerala vs. Laxmi Vasanth (2022)

Facts

In the case, the respondents, Lakshmi Vasanth and J. Raj Mohan Pillau were minors
when they were inducted into the partnership firm named M/s. Malabar Cashew
Nuts and Allied Products. After reconstitution of the partnership firm in 1976, they
were removed as partners. The Sales Tax Department was aware that they have
been removed from the firm. Both the respondents attained majority in the years
1987 and 1984 respectively.

The concerned department made a demand for sales tax against the partnership
firm as well as both the respondents for the period between 1970-71 to 1995-96.
The learned Single Judge set aside the demand made against the respondents. An
appeal was filed against the judgement which was dismissed by the Division Bench
of the High Court. Aggrieved by the order, the state filed an appeal before the
Supreme Court.

It was contended on behalf of the state that the respondents on attaining majority
had not given any notice as required under Section 30(5) of the Act. Hence they
were still considered as partners of the firm and as such liable to pay the dues. The
respondents contended that since they had been removed from the firm in 1976
which was within the knowledge of the department, they were no longer a part of
the firm on the date of attaining majority. Therefore, Section 30(5) was not
applicable to them.

Issues

Whether the respondents could still be considered as part of the firm and held liable
for its debts?

Judgement

It was held that Section 30(5) becomes applicable only when a person is inducted
into a partnership during his minority and continues till he becomes a major. On
attaining majority, he is required to give notice within six months, as to whether he
intends to continue in the firm or not. On failure to give notice, he is considered to
be a partner of the firm and the provisions of liability under Section 30(7) will be
applicable. Where the minor ceases to be a partner at the time of attaining
majority, Section 30(5) will not be applicable and cannot be held liable for dues of
the firm when he was a minor partner.

Partner by holding out

Apart from the aforementioned partners, a person can also become a partner by
holding out under Section 28 of the Act. It refers to a person who has made a
representation by words, actions or conduct to third parties that he is a partner in
the firm and on the basis of that representation, the other person has given credit
to the firm.

Thus, he has become a partner by holding out even though he is actually not a
partner. It is pertinent to note that, though he does not contribute to the capital or
management of the firm but on the basis of his representation in the firm he is
liable for the credits and loans obtained by the firm.

There are two essential conditions for establishing the doctrine of holding out –

1. Firstly, the person must have made a representation by words, actions or

conduct that he is a partner in the firm. An express representation may be
made when a person allows the firm to use his name in its title or signboard
as can be seen in the case of Bevan vs. National Bank Ltd.(1906) 23 T.L.R.
65. In this case, a person named Malcolm Wade used to manage the
business of another person B.
The business was carried out in the name of Malcolm Wade & Co. It was held that
since Mr. Wade had permitted the firm to use his name in its title, a representation
was made to the third parties that he was a partner in the firm and was liable to
every person who would act on that representation and give credit.

2. Secondly, the other party must substantially prove that he had knowledge of
such representation and he acted on it. Thus, in order to hold a person liable
under this doctrine, it is necessary that the representation must have
reached the plaintiff and he must have acted upon it. The fact that the
defendant did not know that the representation made by him had come to
the knowledge of the plaintiff is immaterial.
Rights of a partner by holding out

A partner by holding out is not subjected to the same rights as those enjoyed by
the other partners. He merely allows his name to be used in the name of the firm or
makes a representation to third parties that signifies that he is a partner in the
firm. He is not involved in the day to day conduct of business of the firm.
Duties of a partner by holding out

If a partner is aware that his name is being used by a firm to which he has not
consented, he must give public notice to its customers in order to absolve himself
from being held liable by holding out.

Liabilities of a partner by holding out

A partner by holding out will be liable like the other partners to third parties, if they
have given credit to the firm on the basis of his representation. However, if the
third party, despite knowing of the representation does not act upon it or does not
believe it to be true or gives credit to the firm irrespective of the representation
made, the case of holding out is not made out. In such cases, he cannot be held
liable for any loss incurred.

Effect of the doctrine of holding out in certain cases

• Retirement of a partner: The doctrine of holding out continues to apply in

case of a partner who has retired without giving public notice. In such a case,
he continues to be liable to its customers because they have given credit to
the firm without knowledge of his retirement. The customers can choose to
sue the old firm or the new firm constituted after his retirement, but he is not
allowed to sue both.
• Death of a partner: Section 28 does not apply in case of a partner who is
no longer alive because in case of his death, his estates cannot be held liable
for the acts of the firm done after his death under Section 35 of the Act.
Therefore, even if the firm continues to use his name in the affairs and title
of the firm, the doctrine is not applicable.
• Insolvency of a partner: When a partner becomes insolvent, he ceases to
be a partner from the date of his insolvency and his liability also comes to an
end. His estates cannot be held liable for any act done by the firm after his
insolvency under Section 34 of the Act, hence the doctrine of holding out
does not apply even if he has not given notice.
• Dormant partner: A dormant partner is one who does not take an active
part in the business of the firm hence his existence is not known to the
customers. Although his liabilities are the same as that of the other partners,
in case of his retirement he is not required to give public notice and the
doctrine of holding out will not be applicable.
Difference between partner by holding out and partner by estoppel

There is a fine line of distinction between a partner by holding out and partner by
estoppel. In the case of the former, a person who is actually not a partner allows
his name to be used in the name of the partnership business or makes a
representation to its customers that he is a partner in the firm. Here the firm along
with the person who held himself out are liable to the customers who advanced
capital based on the representation.

Whereas, in case of partner by estoppel, a person himself represents to third

parties that he is a partner of the firm where he is actually not so. In this case, the
rule of estoppel becomes applicable and he is not allowed to go back on his word
and say that he is not a partner. He alone will be held liable to those persons who
gave credit on the basis of his representation.

Related case laws

K. Venkatasubbamma and Ors vs. K. Subba Rao Nuna Venkatarami Setti and Ors
(1964)

Facts

In the case, a pronote was executed in favour of a partnership firm for the purpose
of business which was attested by the managing partner and two other partners.
Few payments were made by the partners in order to pay off the money. In the
meantime, one of the attesting partners died and the partnership was considered as
dissolved in the eyes of law. But the business was carried on by the managing
partner. He also made payments towards the pronote.

A suit was instituted against the firm for payment of the money advanced through
the pronote, in which the legal representatives of the dead partner were held liable.
They contested the suit on the ground that by virtue of Section 45 of the Act, the
estates of a deceased partner cannot be held liable for acts of the firm done after
his death. It was also contended that Section 28(2) of the Act makes it amply clear
that if the partnership business is continued in the old name, after the death of a
partner, his legal representatives and estates cannot be held liable for acts done
after his death
Issues

Whether the legal representatives of the deceased partner could be held liable for
acts of the firm after the death of the partner.

Judgement

The court held that the legal representatives of the deceased partner are not bound
by the payments or acknowledgments made by the managing partner. The proviso
to Section 47 clearly states that a deceased partner, similar to a partner who has
been adjudicated as an insolvent or a dormant partner, stands on a different
footing as he cannot be held liable for acts done after his death, in case of
dissolution of the firm. Further, Section 45 of the Act which deals with the implied
authority of a partner to bind the other partners for acts of the firm, even after
dissolution cannot be invoked in such a case.

Juggilal Kamlapat vs. Sew Chand Bagri and Ors (1963)

Facts

In the case, the question of liability under Section 45 of the Act arose. Sew Chand
Bagi had three sons Moti Chand, Manik Chand and Janki Das. All of them were part
of a Hindu joint family and carried on a partnership business. After the death of
their father, the partnership was carried out jointly by the brothers which was
dissolved during Diwali, 1945.

A deed of dissolution was made on the basis of which it was decided that they were
at liberty to start their own business and would not use the name and style of the
old partnership. It was agreed between them that Manik Chand would carry on the
business under the name of “Manik Chand Bagree”, Moti Chand under the name of
“Sew Chand Moti Chand” and Janki Das was allowed to carry on the business under
the old name of “Sew Chand Bagree”.

The appellant placed an order for a number of jute bags with the firm of Sew Chand
Bagree in September, 1948. When the goods were not delivered, he claimed the
damages and referred the case to the Bengal Chamber of Commerce for arbitration.
The award was passed in his favour and accordingly an execution application was
filed by him under Order 21 Rule 50 CPC, against the respondents Manik Chand,
Moti Chand and Janki Das on the ground that they were partners to the firm. This
was contested by Manik Chand and Moti Chand.
Issues

Whether Manik Chank and Moti Chand could be held liable under the Doctrine of
holding out, for debts incurred by the firm of Sew Chand Bagree?

Judgement

The court held that in the present case, the dissolution of the firm took place in
1945 but the business was carried on by one of the partners under the same name.
The appellant entered into a contract after the dissolution took place.
Hence, he had no knowledge about Manik Chand and Moti Chand being partners of
the firm and had not dealt with it on that basis. Section 45 of the Act states that in
case of dissolution of partnership, a retired partner cannot escape liability for debts
incurred by the firm after his retirement, until public notice is given. However, if the
person dealing with the firm had no knowledge that the retired partner was a
partner of the firm, he cannot be held liable.

Thus, Manik Chand and Moti Chand, both being partners of the old firm could not be
held liable as the appellant did not know whether they were partners or not at the
time of entering into the contract with the firm of Sew Chand Bargee.

Dormant partner/ Sleeping partner

A “dormant partner” is one who does not take an active part in the management of
the partnership firm. A person may not be able to act as a full-time partner, but he
might be keenly interested in investing in the business and sharing the profits. In
such a case he can act as a dormant partner in the firm. A dormant partner like any
other partner brings share capital to the firm and has to make a contribution in
order to pay off its debts. As opposed to an active partner, the role of a dormant
partner is restricted as he is not actively associated with the decision making
process of the firm.

Rights of a dormant partner

• A dormant partner is entitled to receive his share of profits made by the firm.
• A dormant partner does not have a say in the management of the firm
business.
• A dormant partner is not allowed to withdraw remunerations from the firm as
he is not participating in the daily operations of the business. If at all the
partnership deed is providing remuneration to dormant partners, it is not
deductible under Section 40 of the Income Tax Act, 1961.

Duties of a dormant partner

Since the dormant partner is not known to the creditors of the firm, it is not
necessary for him to give public notice in case of his retirement. However, if his
name was known to some of the creditors, notice of his retirement must be given to
them in order to preclude him from being held liable by holding out.
Liability of a dormant partner

A dormant partner will be subjected to the same liabilities as the other partners. He
can be held liable for acts of the firm but his liability is limited to the extent of
contribution made by him in the capital of the firm.

Sub-partner

A sub-partner is a person who has been assigned a share of profits in a partnership

firm by a partner of that firm. He gives a part of his share to the sub-partner. In
this case, the relationship is not between the sub-partner and the partnership firm
but is between him and the partner. Therefore, a sub-partner is a non-entity of the
firm and he does not hold any liability towards the firm. A sub-partner usually
agrees to share profits which are derived from the third party. Such a partner
cannot represent himself as a partner in the original firm.

Rights and duties of a sub-partner

A sub-partner doesn’t reserve any right in the original firm. He can only claim his
agreed share of profits from the partner who has contracted him to be a sub-
partner. Similarly, a sub-partner is not subjected to any duties like the other
partners of the firm as there is no agency between him and the firm. His position is
that of a stranger with whom the profits of the firm are shared by its partner.

Liability of a sub-partner

A sub-partner is not considered as a part of the partnership firm. Hence, he is not

liable for acts done or any losses incurred by partners of the firm.
Related case laws

Commissioner of Income-Tax, Punjab vs M/S. Chander Bhan Harbhajan Lal (1966)

Facts

In this case, a partnership firm named Chander Bhan & Co. was registered in
Ferozpur in December, 1948. The firm which initially consisted of five partners was
reconstituted to include eight partners among which Gosain Chander Bhan was a
major shareholder. Another firm named Messrs Chander Bhan Harbhajan Lal,
consisting of 14 partners, was constituted by a deed of partnership at Rupar in
December, 1952.
An application for its registration was made under Section 26A of the Income Tax
Act, 1961. Gosain Chander Bhan was also a major shareholder of the firm at Rupar.
It was admitted by Harbhajan Lal that Gosain Chander Bhan was not a partner of
the firm at Rupar in his individual capacity but had joined it on behalf of the
Ferozpur firm and the amount invested in the firm came from the Ferozpur firm.

The application was rejected by the Income Tax officer on the ground that the deed
of partnership did not disclose the details of the 14 partners properly and that all
the partners of the Ferozpur firm were partners in the Rupar firm which exceeded
the limit of total number of partners allowed in a firm. The Commissioner of Income
Tax filed a petition by special leave before the Supreme Court for the purpose of
deciding certain questions of law.

Issues

• Whether the Ferozpur firm could be considered as a sub partner of the firm
at Rupar.
• Whether the Rupar firm was eligible for registration under Section 26A of the
Income Tax Act.

Judgement

The Supreme Court was of the opinion that a sub partnership comes into existence
only when there is already a partnership subsisting. It is in the nature of a
partnership within a partnership. In the present case, the Rupar firm had come into
existence after Ferozpur firm had been constituted. Hence, it is not a sub partner of
the firm at Rupar. The clause in the partnership deed of the Ferozpur firm which
stipulated that the profits and losses would be shared between the partners laid
down the liabilities amongst them in respect of Gosain Chander Bhan’s share in the
Rupar firm. Additionally, the statements made by Harbhajan Lal wherein he had
admitted that the Rupar firm consisted of fourteen partners proves the fact that the
partners of the Ferozpur firm were not part of the Rupar firm.

As to the question, whether the firm is registrable under Section 26A, the court has
held that the Income Tax officer must take into consideration whether the partner
joined the firm in their individual capacity or as representing a group of persons. In
the present case, Gosain Chander Bham had joined the firm at Rupar in
representative capacity. A partner can join a firm in representative capacity, but
that cannot be the ground for refusal of registration.

A partner can act as a Karta of a joint Hindu family or as a trustee or become a

benamdar. In such cases, he fulfils two positions. In respect of the partnership, he
acts in his personal capacity and in respect of the third parties, he acts in his
representative capacity. The fact that one of the partners of a firm seeking
registration has brought capital from another firm in which he is a partner and also
shared the profits obtained from the former firm does not imply that the
partnership is not genuine.
Other partners

Now that the major types of partners have been discussed in detail, let us have a
look at the other types of partners briefly.

Nominal partner

A nominal partner, as the name suggests, is one who allows a partnership firm to
use his name for the purpose of attracting creditors and does not contribute to the
capital. He is only lending his name to the firm and does not have a voice in the
management of the firm. Thus a nominal partner’s contribution to the firm is only in
terms of his reputation and fame, which allows the firm to secure credit and also
showcase its efficiency. For example, if a firm enters into a partnership with a
celebrity or a business tycoon, it will help in increasing its brand value, as the
creditors will associate the goodwill of the celebrity with that of the firm, thus
increasing the likelihood of investment.

This partner does not share any profit and losses in the firm because he does not
contribute any capital to the firm. However, it is pertinent to note that a nominal
partner is liable to outsiders and third parties for the acts done by other partners.

Limited partner

A limited partner is a partner whose liability is only up to the extent of his

contributions for the capital of the partnership firm. For example, if a limited
partner has invested in 30% shares of the firm, he can be held liable only to the
extent of 30% of the loss incurred by the firm. Thus, if the firm incurs a loss of Rs.
50 lakhs, his liability will be Rs. 15 lakhs.

Partner in profits only

This type of partner only shares the profits of the firm and cannot be held liable for
the losses incurred by it. Moreover, in case of any dealing with third parties or
outsiders by partners in profits, he will be liable for the acts of profit only and not
any of the liability. He is not allowed to take part in the management of the firm.
Such kinds of partners are associated with the firm for their goodwill and money.
Secret partner

In a partnership, the position of secret partner lies between the active and sleeping
partner. The membership of a secret partner in the firm is kept secret from
outsiders and third parties. His liability is unlimited since he holds a share in profit
and shares liabilities for losses in the business. He can even participate in the
business’s operations.

Conclusion

The Indian Partnership Act, 1932 contains the general provision relating to the
nature, formation of a partnership and also the rights and liabilities of each partner.
However, the general form of partnership is often disfavoured because of certain
shortcomings. The unlimited liability of all the partners in a firm for debts incurred
by any one of the partners acts as a major deterrent for people to refrain from
entering into a partnership. Moreover, the general partners are held jointly and
severally liable for the acts committed by the other partners.

Therefore, we can see that there is a shift towards Limited Liability Partnership,
which provides more flexibility to the partners. Even the Indian government has
recognised the disadvantages of general partnership and stated that there was a
need to introduce LLP in India.

Introduction

Up until a few decades, businesses were limited to being either a company,

partnership or sole proprietorship. Each kind of organisation had its own
advantages and disadvantages; for instance, Partnership and proprietorship were
easier to form and operate but did not have a limited liability which was a
prominent feature of a company. The development in the way businesses function
has resulted in the formation of a Limited Liability Partnership (LLP) which could be
termed as a fusion between the benefits of a company and a partnership. This
article will tell you all about limited liability partnerships, their advantages and the
procedure to set up an LLP.
Meaning and features of a Limited Liability Partnership (LLP)

LLP is a fairly new concept in the world of businesses. Section 3 of the Limited
Liability Partnership Act, 2008 defines an LLP as “a body corporate formed and
incorporated under this Act and is a legal entity separate from that of its partners.”
In layman’s terms, it can be understood as an amalgamation of a company and
partnership due to its business model which allows the organisation to reap the
benefits of limited liability to the partners at relatively low costs compared to
traditional models. This form of organisation is suitable for small and medium-size
businesses.

Salient features of a Limited Liability Partnership

To understand the concept of limited liability partnership, let us understand its

features which have been stated below: –
Corporate Body

It is stated under Section 3(1) of the Limited Liability Partnership Act, 2008 that an
LLP comes under the head of a ‘corporate body’. In simpler terms, it is a corporate
entity that has a legal existence and such legal existence is a result of the
registration of incorporation with a registered LLP office.

Separate Legal Entity

Section 3(1) of the Limited Liability Partnership Act, 2008, also mentions that an
LLP is a separate legal entity. The term can be understood as ‘a person recognised
by law.’ The term separate legal entity was discussed in the landmark case of
Salomon vs Salomon & Co. Ltd. (1897) wherein it was established that an entity
that has its own legal rights and obligations, separate from those running the
business operations.

Perpetual succession

Section 3(2) of the Limited Liability Partnership Act, 2008, states that an “LLP”, just
like a “joint-stock company”, has a “perpetual succession” i.e., it can only be
formed and dissolved by a legal process. This also implies that the assets and
liabilities of the LLP belong to itself irrespective of the retirement, insanity,
insolvency or even death of one or more partners. In a nutshell, no partner is
allowed to claim any part of the company in case of either continuance or winding
up.

Mutual agency

Mutual Agency can be described as a type of agreement between the partners of a

firm in which the actions of one partner are binding on the others. In the case of an
LLP, there is no mutual agency unlike in a traditional partnership firm. This implies
that all the partners simply serve as an agent to the LLP and the action of one
partner does not bind the other.
Artificial legal person

As an LLP is created by a legal process, it is assumed that it is a non-fictitious legal

person with all the rights bestowed upon an individual. It however is deemed
artificial as it has no physical existence, thereby becoming invisible, intangible and
immortal. It cannot hence exercise rights like marrying and divorcing or be
sentenced to jail or taking an oath.

Limited liability

Section 26 of the Limited Liability Partnership Act, 2008 states that every partner is
regarded as an agent to an “LLP”, i.e.,They share a relationship of principal and
agent. This however is not applicable amongst the partners as they do not serve as
each other’s agents. In a nutshell, the liability of each partner is limited to the
agreed amount in the LLP agreement.

Common seal

It is not mandatory for an LLP to have a common seal. A common seal can be
defined as an official seal of an organisation that is used to execute contracts.
However, Under Section 14(c) of the Limited Liability Partnership Act, 2008, it is
possible to create a common seal if desired under an authorised official of the
organisation.

Profit-driven

In order to form an LLP, it is crucial that the business should be formed in

accordance of law with the aim of earning a profit. This implies that a Limited
Liability Partnership cannot be formed for organisations that are charitable or not-
for-profit in nature.
Composition of a Limited Liability Partnership

In order to form a limited liability partnership, it is mandatory to have at least two

persons with no limitation to the maximum number of persons. The following
‘persons’ can be involved as partners:-

• Individuals
• Limited Liability Partnerships
• Companies
• Foreign Limited Liability Partnerships
• Foreign Companies
Apart from the above conditions, it is mandatory that one of the partners is a
resident in India.

Structure of a Limited Liability Partnership

The LLP Act states that an LLP shall be a ‘body corporate’ and a ‘legal entity’ which
is separate from its partners. It is also given that the organisation would have
perpetual succession. The term perpetual succession is defined by Merriam-Webster
as “the capacity of a corporation to have continuous enjoyment of its property so
long as it is legally in existence.”
The only factors excluding an individual from being capable of becoming a partner
of an LLP are: –

• In case an individual has been found to be of unsound mind by the Court of a

competent jurisdiction and the same holds true in present;
• In case an individual is an undischarged insolvent; or
• In case an individual has applied to be adjudicated as an insolvent and his
application is pending

Responsibilities of partners in a Limited Liability Partnership

Section 2(g) of the Limited Liability Partnership Act, 2008 states that in an LLP, a
“Partner” is regarded to be a person who becomes a “partner in the LLP in
accordance with the LLP agreement.” The partners act as an agent to the LLP and
hence are one of the most important parts in the functioning of the organisation.
Some of the important duties and responsibilities of a partner have been mentioned
below: –

1. They need to carry on their limited liability with respect to the business in a
manner which is –
• advantageous to both the business and the partner
• all the partners are faithful to each other
• to render true accounts and full information of all things affecting the firm to
any partner
2. In case of any fraud which has taken place in relation to the business due to
one partner, it is his responsibility to indemnify for the same.
 3. Notification by the partners to the Registrar of companies with regards to the
following situations: –
• Changes in LLP’s structure or business;
• Changes in partner’s names & residential addresses;
• Changes in registered office address;
• Filing of any annual return, statement of accounts and other documents
specified under the provisions of LLP Act;
• To preserve and to produce documentation related to the LLP as and when
necessary;
• To sign all the e-forms filed.
4. The documents such as the statement of accounts & solvency should be
signed by the designated partners of the company.

How to set up a Limited Liability Partnership

In order to set up a Limited Liability Partnership, one has to follow the following
steps: –

Step 1: Obtaining the Digital Signature Certificate

(DSC)

The first step is to acquire the digital signatures of all the designated partners. It is
crucial as all the documents of the LLP are to be filed online as a result of which
digital signatures are required.
Step 2: Applying for the Director Identification

Number (DIN)

The next step is to apply for the DIN of all the designated partners or those
intending to be designated partners of the proposed LLP. The application for the
allotment of DIN has to be made in Form DIR-3.

Step 3: Approval of name for the LLP

A form by the name of Limited Liability Partnership-Reserve Unique Name (LLP-

RUN) has to be filed in order to get a name that is unique in nature. A total of two
names can be proposed in the form. The uniqueness can be checked on the MCA
portal by using the free name search facility as it does not resemble any existing
business organisation or trademark. The form will be then further processed by the
Central Registration Centre under Non-STP. Straight through Process (STP) is the
procedure used by India’s Ministry of Corporate Affairs (MCA) when it comes to
approving electronic forms filed with it. The fees have to be paid in accordance with
Annexure A. A person has the provision to resubmit the form in case of mistakes
within 15 days.

Step 4: Incorporation of LLP

The form used in incorporation is known as the Form for incorporation of Limited
Liability Partnership (FiLLiP). This particular file has to be filed with the registrar of
the state in which the LLP is registered and as per Annexure A needs to be paid for
the same. In cases where the name of the LLP has not yet been approved one has
to fill it with the proposed name.
Step 5: Filing the LLP agreement

The Limited Liability Partnership act, 2008 governs the rights and duties created for
the partners and between the partners and the LLP. The final step is to file an LLP
agreement which has to be filed in the MCA Portal via Form no. 3 within 30 days of
the date of incorporation. It is crucial that this is filed on a stamp paper, the value
of which varies from state to state.

Drawbacks of setting a Limited Liability Partnership

Just as a coin has two sides, Limited Liability Partnerships have a few
disadvantages. Some of them have been enlisted below: –

Unequal partner rights

Unlike a company where each share has an equal value, each partner does not
have an equal voting value in LLP, meaning that equal rights are not employed. The
rights of a partner depends on the LLP agreement.

Heavy penalties

At first glance it may seem like an advantage that there are minimal compliances
while forming an LLP. It is crucial to note that irrespective of the LLPs business
activities, it is mandatory to file an income tax return and MCA annual return each
year. In case of failure of the same a penalty of Rs. 100 per day is levied on the LLP
which sometimes appears to be costlier than the fines paid for violations in a
company.
Funding problems

LLPs do have the concept of equity or shareholders as the organisation is simply

composed of partners, which in turn makes it impossible for the investors to fund
the business. This makes the business operations of an LLP rely on funding from
promoters and debt funding.

Difference between LLP and general partnership

Basis Limited Liability Partnership General Partnership

The Limited Liability Partnership
Regulating Act The Indian Partnership Act, 1932.
Act, 2008.
Registration Mandatory Not mandatory
No. of Partners Minimum- 2Maximum- No limit Minimum- 2Maximum- 20
A partner can bind the LLP by his
A partner can bind the firm as well as
Mutual Agency own acts but not the conducts of
other partners by his own conduct.
the other partners.
Agreement
between the LLP Agreement Partnership Deed
partners
Conversion to private Limited
Conversion to a company or LLP is a
Conversion company or Limited company is
lengthy process.
easy
Mandatory to file the annual returns
Compliance Not Mandatory to file returns.
to MCA
Liability Limited to the amount invested Unlimited liability
Winding up is either voluntary or by Winding up takes place by· Mutual
Dissolution the order of the national company agreement· Certain contingency·
law tribunal. By court order
Difference between LLP and LLC

Basis LLP LLC

The Limited Liability Partnership Act,
Regulating Act The Companies Act, 1956
2008.
Private company: Minimum – 2
No. of members/ members Maximum – 50 members
Minimum- 2Maximum- No limit
partners Public company: Minimum – 7
members Maximum – No Limit
Can be created to fulfil economic or
Motive Has to be profit-driven
non-economic motives.
Must consist of public limited or
Name Must consist of LLP in the suffix.
private limited as a suffix.
Minimum
Private company – Rs.1 lakh
contribution No provision specified
Public Company – Rs 5 lakh
required
The business is managed by the
board of directors elected by the Managed by the partners on the
Management
Shareholders under the companies basis of the LLP Agreement.
act.
Protection has been provided to the
Whistle-blowing No provision specified
whistle-blowers under Section 31.

Laws applicable on Limited Liability Partnerships in India

In India, the term Limited Liability Partnership (LLP) was first introduced in the year
2008 through a legislation of Limited Liability Partnership Act, 2008 which governs
all the LLPs in the country. With such a distinct status, the contract amongst the
partners in an LLP instead of being regulated by the Indian Partnership Act, 1932
are dealt with under this Act. One should also take note that the Central
Government has the authority to make applicable any provision of Companies Act,
1956 to LLP with suitable modifications by issuing a notification.
A brief overview of Limited Liability Partnerships functioning in other countries

Limited liability partnerships are recognized all over the world which includes
countries such as the United Kingdom, United States of America, Australia,
Singapore etc. There are two types of LLPs, they are as follows: –

1. Texas LLP model: In this model, the partners’ vicarious liability is limited to
the wrongful acts of the partnership and not for liability arising in the
ordinary course of business.
2. Delaware model: In this model, all liability is shifted on LLP and the
partners are not responsible for any action arising in tort, contract, etc.
In India, the LLP act is based more on the Delaware model than the Texas model.
In order to understand LLP at a global perspective, let us look at the following
countries: –

Japan

In Japan, Limited liability partnerships are known as ‘yūgen sekinin jigyō kumiai’.
This concept was introduced in the year 2006 with the aim to innovate the structure
of business organisations. It is interesting to observe that the LLPs in Japan do not
have the concept of a separate legal entity but merely a contractual relationship
between the partners like American LLPs. They also have a structure called ‘godo
kaisha’ which is similar to the UK LLPs.

United Kingdom

The concept of LLPs was introduced in the early 2000s in the United Kingdom. The
provisions in Limited Liability Partnerships Act ,2000 were applicable in Great
Britain and the provisions of Limited Liability Partnerships Act (Northern Ireland),
2002 were applicable in Northern Ireland which came into force in the year 2009. In
the UK, LLP is recognised as a corporate body which has a perpetual legal existence
independent of its members.
United States

The concept of LLP was introduced in the late 90s. Each state has varying laws for
LLPs bu most of the country follows Section 306(c) of the Revised Uniform
Partnership Act (1997) (RUPA) grants LLPs a form of limited liability similar to that
of a corporation however although in minority, some states hold partners in an LLP
can be personally liable for contract.

Singapore

In Singapore, the concept of Limited Liability Partnerships was introduced in the

year 2005. This legislation is inspired by both US and UK models of LLP. Just like
the UK, Singapore also regards an LLP as a body corporate.

Conclusion

Over time it has become evident that LLPs are certainly very profitable for business
purposes as it is the union of the advantages of both a joint-stock company and a
traditional partnership. It eliminates risks and encourages people to enter into
partnerships, which in turn helps in the creation of new business ventures which are
both economically and socially progressive. In a nutshell, one can say that the
versatility of the concept has proved to be one of the major factors which have
made it popular all around the world.

“Coming together is a beginning, staying together is progress, and working

together is success.”

– Henry Ford

Table of Contents
Introduction
Introduction to Partnership
Introduction to Company
Major differences
Registration
No of partners
Management
Advantages of Partnership
Advantages of Company
Conclusion

Introduction

Company and Partnership both are the forms of doing business and relevant for the
person who wants to excel in these fields. Many people get confused between these
two and consider these two separate entities as a single entity. But, if we look and
analyze the difference between Company and Partnership then we come to know a
lot about it and how these both entities are different from one another.

Companies and Partnership both are regulated by different provisions of law or we

can say that they are regulated by different Acts. The article also deals with how
working together and following the basic guidelines of the act helps in getting
proficiency in both aspects of doing business.
Introduction to Partnership

‘Partnership’ is a form of business in which there is a relationship between two or

more persons who come forward to carry out business by sharing the profit. The main
highlighting point of Partnership is that “Business carried on by all partners on
behalf of any one partner or any one partner acting for all or carrying
business for all” and it is defined in Section 4 of Indian Partnership Act, 1932.
Partnership firms are created and regulated according to the Indian Partnership Act,
1932.

As already said that Partnership firm is created by the relationship between two or
more persons rather than two by registering their firm under the Indian Partnership
Act, 1932 with the help of the Registrar of firms.

If we look at the registration of Partnership firms, then we get to know that it is

registered by the Registrar of Firms under Indian Partnership Act, 1932 rules and
regulations and the certain essential documents required by the registrar of firms for
the successful registration of Partnership firm:

• Name of the Partnership firm.

• Name and address of each partner.
• Business location.
• Tenure of Partnership firm.
• Main Office of Partnership firm where all essential decisions were taken up.
In a Partnership firm, many partners exist and there are several types of partners
which were named in the Indian Partnership Act, 1932. These include Active Partner,
Sleeping Partner or Dormant Partner, Nominal Partner, Minor Partner and Partners in
Profit. These all different members of Partnership firms have specified roles and they
all act according to their specific roles.

• Active Partner is the Partner who is engaged in day to day operation of the law
firm and involves in enhancing the productivity, effectiveness, and efficiency
of the law firm with their full effort.
• Dormant Partner is the most inactive partner and does not take part in day to
day operational activities of the Law firm. The Dormant Partner only
contributes in shares of the Partnership firm in establishing but not in
enhancing the productivity of the firm.
• Partners to Profit only is the Partner which comes together with others in
Partnership firm for sharing only profit of the firm not the losses of the
 Partnership firm and these partners do not think of other things except profit
sharing.
• Nominal Partner is the partner for name only. These Partners do not take part
in the day to day operation, neither in any profit or loss sharing of the
Partnership firm. These partners only allow the Partnership firm to use their
name for carrying out business without any capital contribution and these
types of partners do not have any share in a Partnership firm.

Introduction to Company

Company is simply an association or coming together of two or more people and

getting themselves registered under the Companies Act, 2013 with the help of the
registrar of the companies. If we look for the definition of the Company according to
the Companies Act, 2013 then it defines it as “A Company formed and registered
under the Companies Act or under any law which governs and regulates the
Companies.”

The essential and foremost thing which is required for the registration of companies
under the Companies Act, 2013 is the submission of Articles of Association and
Memorandum of Association and these both documents contain information
regarding the regulation of company and establishment of the company.

Article of Association is a form of document that specifies how the day to day
operation of a company takes place and helps in regulation of companies’ operations.
The document lays down how these operations will take place and helps in taking
decisions related to the appointment of Directors, Editorial Board and others.

Memorandum of Association is considered as a legal document that guides and

helps in the formation and registration of companies and how to deal with the
shareholders. This legal document helps companies in their legal set up.

Companies are divided into many types on different basis i.e. Classification on the
Basis of Incorporation, Classification on the Basis of Liability, Classification
on the Basis of Number of Members and Classification on the Basis of
Ownership.
Classification on the Basis of Incorporation:

• Statutory Companies are the companies that are specially created by the
Special Act of Legislature. E.g. Reserve Bank of India, the State Bank of India,
etc.
• Registered Companies are the companies that are formed and registered
earlier under the Companies Act, 1956 and now under the Companies Act,
2013.
Classification on the Basis of Liability:

• Companies with Limited Liability are the companies in which the partners
have limited liability to the extent of part of their share invested in the
companies. Partners don’t have to pay to meet liability from their own property.
• Companies with Unlimited Liability are the Companies in which the
partners are not liable only to the extent of their shares in the company, they
have to meet the debt at any cost even from their own property.
Classification on the basis of Number of Members:

• Private Company means a company which has a minimum paid-up capital

of Rs. 1,00,000 or higher than paid-up capital as prescribed and a Private
company restricts the right to transfer their right to transfer its shares.
• Public Company means any company which has a minimum paid-up capital
of Rs. 5 Lakh or such higher paid-up capital as may be prescribed and a
Public company does not restrict the right to transfer their right to transfer
its shares.
Classification on the basis of Ownership:
 • Government Company means any company in which not less than 51
percent of the paid-up share capital is held by the Central or the State
Government.
• Foreign Company is any Company which is incorporated outside India in
which a minimum of 50 percent of the Paid-up share capital is held by one or
more citizens of India.

Major differences

Company and Partnership both are two separate entities that are regulated by
different provisions of law and their establishment and registration are also different
from one another. Now, we look at what are the major differences that demark
between Company and Partnership.

Registration

In the Partnership firm, Partnership Deed is formed in which the duty and
responsibility of each member have been assigned and mentioned. The details which
are required in Partnership deed i.e. General Details (Name and Address of firm and
all Partners and many other details), Specific Details ( Interest on Capital Invested,
salaries, duties and obligations of all Partners) and all these details are required in
any condition and in absence of these details Partnership Deed can’t be made.

Registration of Partnership firms is totally optional and it is at the discretion of the

Partners of the Partnership firm.

In the context of the company, for the incorporation of a company the approval of
the name of the company by the Registrar of Companies of State or Union Territories
where the company will settle down. After the approval of the name, Memorandum
of Association and Article of Association which is considered as most important is
submitted to the Registrar of Companies for the incorporation of Companies and some
documents are submitted and then get registered earlier under Companies Act, 1956
and now Companies Act, 2013.
 Click Above

No of partners

A Partnership firm is governed by the Indian Partnership Act, 1932 and the
Partnership Act does not lay down any minimum and maximum number of required
partners. But, According to Section 464, Rule 10 of Companies miscellaneous rules,
2014 the maximum number of partners required is 100 but in this section the
minimum number of Partners required is not mentioned.

Companies Act, 2013 states the total number of members that should be available in
Private and Public companies. The maximum limit of members is 200 and the
minimum number required is 2 in Private Companies and In the case of Public
Companies, there is no maximum limit of members but the minimum number of
required numbers is 7.
Management

Management in Partnership is done or carried by all the Partners of the Partnership

firm as they are partners and all have equal rights in carrying out business. A
partnership firm can be dissolved under some circumstances i.e. Death of a Partner,
Bankruptcy of Partner, Decree of dissolution from the court and inability to
conduct business.

In a Company, regulation and management takes place with the help of a document
i.e. Article of Association which controls and regulates the day to day operation of
the company. All the activities and decisions of the company were regulated by the
help of the Articles of Association.

Advantages of Partnership

Some of the Advantages of Partnership are mentioned below with its little explanation.
They are as follows:

1. Partnership firms do not have to pay any tax which is a great relief for any
Partnership firms. Partners use to file tax returns on their own and their filing
tax return is not attached to the Firm.
2. Partnership Firms are easy to incorporate as registration is not compulsory.
3. Partnership firms include different partners due to which there is a pool of
knowledge and better discussion on any matter which enhances and lowers
the risk of bearing the loss.
4. Partnership firms have different partners which paves the way to the better
management of the Partnership firms.
There are many more advantages of Partnership which helps in effective and efficient
administration of the Partnership firms.

Advantages of Company

The company also has a lot of advantages which help in better administration of the
Company. They are as follows:
 1. Limited liability is considered the most relevant advantage of the Company.
In this, the members of the Company in case of repayment of the debt, are
only liable to repay the debt to the extent of their share in the company.
2. Perpetual succession means that the company goes continuous without
being affected by the death or insolvency of individual members. The Company
will continue to exist indefinitely until the company is shut down.
3. Separate Property of the company means the company has its own
property and assets which belong only to the name of the company, not with
any of the members of the company.
4. Capacity to sue means that the company is an artificial person who has a
separate legal entity that is incorporated under the Companies Act, 2013 have
power to sue anyone or to be sued by anyone. In this process, directors and
other members of the company are not liable.

Conclusion

Company and Partnership both are the different types of doing business and how to
deal with the day to day operational activities of the business is being analyzed.
Company and Partnership both have better prospects of development and better
functioning. As the companies and Partnership both regulated by Companies Act,
2013 and Indian Partnership Act, 1932 simultaneously but according to my point of
view, both have been outdated and need some changes in both the act so that
regulation of company and Partnership firm be more effective and it can perform in
a better way. Companies and Partnership firms are the most important one in the
business sector and their administration is considered as the most advanced and
controlled administration. These both concept of business i.e. Company and
Partnership is the most crucial one in enhancing the growth rate of a Nation with the
overall profit earned by the effective management and company as an artificial
person brings the innovative way of doing business and paves the way for the other
type of business development. At last, I will also say that the amendment in both the
act which regulates both Company and Partnership is so much necessary.
Introduction

Sometimes a situation arises where the owners and partners of a firm have to put an
end to the partnership firm either on their own or due to the external forces, the
process when the partnership comes to an end is called dissolution of the partnership.

From the legal point of view, the partnership firm is not a separate legal entity from
its partners. Partners and their business are not separate from one another.

Let us first discuss some of the terms which are important regarding this:

1. Partners: The people who have entered into a partnership with one another on
an individual capacity.
2. Partnership: It is an arrangement of two or more people to perform a business
activity and share profit and loss. In a partnership firm, the minimum members
can be two and maximum can be 20.
3. Firm: When all the partners enter into a partnership and work collectively
under an organization, it is called a Firm.
Dissolution of partnership means a process by which the relationship between the
partners is terminated and comes to an end and all the assets, shares, accounts and
liabilities are disposed of and settled.

Section 39 of the Indian Partnership Act, 1932 defines the dissolution of the firm.
The Indian Partnership Act, 1932

The Indian partnership act,1932, tells about the terms and conditions under which
one can enter into a partnership or how the partnership can be dissolved. There are
certain provision regarding the Indian partnership act, some of them are:

• Section 30– If all the partners agree, a minor may be admitted for the benefits of a
partnership.
• Section 32– Partners can retire from the firm either with the consent of all partners
or in accordance with agreement among the partners.
• Section 31– Partners can be admitted either with the consent of all partners or in
accordance with agreement among the partners.
• Section 59– Registration of the firm is optional.
• Section 42– If agreed by the partners in the partnership deed, a firm is dissolved on
the death of the partner.

Types of Partners

There are different kinds of partners in a firm:

1. Working partner: The partner who contributes his capital and actively
participates in the business activities.
2. Sleeping partner: The partner who contributes his capital but does not take
part in business activities. It is also known as a dormant partner.
3. Nominal partner: The partner who neither contributes his capital nor takes
part in the business activities of the firm. His contribution is limited but allows
other partners to make use of his name.
4. Partner by estoppel: The person is not a partner in the firm but by his action
and conduct with outsiders, he makes them believe that he is also a partner
of the firm. This happens when the partner is retired but people don’t know
about it.
5. Secret partner: The person who is a partner of the firm but his partnership
is kept a secret from the public.
6. Partner by holding out: The partner who is actually not a partner in the firm
but allows the firm to show to others that he is a partner of the firm.
 Click Above

Kinds of Partnership

1. Partnership at will: It means that such a partnership depends upon the will
of the partners and any partner can bring the partnership to an end by giving
a notice. Such a partnership is done for a particular lawful business.
2. Particular partnership: It means such a partnership is done for a continuous
business or for a particular venture.
3. Partnership for a fixed period: It means when a partnership is done for a
particular time period either for 2 years or for 5 years as soon as the period
expires the partnership automatically dissolves.
4. General partnership: It means when the partnership is done generally to
carry out a business and in which the liability of each partner is unlimited.

Dissolution of a Partnership

Before the dissolution of the partnership, let us understand the difference between
the ‘dissolution of the partnership’ and the ‘dissolution of the partnership firm’.
Dissolution of partnership means the end of the partnership business and dissolution
of partnership firm means the end of partnership business along with the firm.

The dissolution of a partnership firm means termination of every contractual

relationship between the partners and that all the operations which are being
performed in a company are suspended and all the assets and liabilities are settled
and disposed off.

Now the question arises when the partnership is going to be dissolved? There can be
different reasons for the dissolution of a partnership as when a new partner is added
or when a partner is dead or leaves the partnership, etc and the remaining partners
can continue their business. And when there is a change in the partners so the prior
partnership comes to an end and the new partnership takes place with the liability
and assets of the old one.

The partnership may be dissolved due to the following reasons:

1. Due to the death of the partner.

2. Due to the admission of a new partner.
3. Due to the retirement of a partner.
4. Due to the bankruptcy of a partner.
5. Due to the expiry of the partnership period, if the partnership is for a particular
period.

Modes of Dissolution

There are some modes by which a partnership can be dissolved and those are:

1. By an act of partners: when a partner agrees to dissolve a partnership at a

particular time. Partners can come into an agreement regarding a particular
time period maybe five years. In which partners can end the agreement at the
end of the five years. Sometimes partners can dissolve it in the middle of the
time period under specific conditions.
2. By operation of law: a partnership is the consequence of an agreement which
is governed by law. Therefore if any unlawful activity is performed so it will be
dissolved. You can make a valid partnership for illegal work.
3. By the court’s decree: a partnership can be dissolved by the court and the
court will only allow under these conditions:
a. If the partner is incapable to work;
b. If the partner is mentally unstable;
c. If the partner misbehaves which creates a bad impact on the
partnership;
d. If there is a breach of the agreement by a partner.
 4. Statement of dissolution: dissolution can be done by filing the statement to
the state’s secretary. The form must contain the information regarding the
partnership name, date and reason of dissolution.

Statutory provisions regarding the Dissolution

There are certain provisions which are mentioned in the Indian Partnership Act
regarding the dissolution are:

Section 4 defines the meaning of partnership.

Section 6 defines the modes of the existence of the partnership.
Section 45 defines the liabilities of the partner after the dissolution of a partnership.
Section 46 defines the rights of the partner regarding the business after dissolution.
Section 48 defines the modes of the settlement of the account of partners after dissolution.

Rights after Dissolution

Section 46 of the Indian Partnership Act, 1932 deals with the rights of partners after
dissolution. After the dissolution of the partnership, partners have certain rights
regarding the same:

1. Right to an equitable lien: on the dissolution of the firm, every partner is

entitled to certain rights like the right to have the property of the firm used in
payments of debts and liabilities and rights to have surplus distributed among
all the partners.
2. Right to return of premium: at the time of the partnership, partners pay an
amount in the form of premium when the partnership dissolves. Partners get
that premium according to the agreement.
3. Rights where partnership contract is revoked for fraud or for other reasons: if
a partner agrees to join a firm by fraud or by misrepresentation by the other
partners, or if he finds so he has the right to put an end to the partnership
agreement.
4. Right to restrain the use of the firm’s name or property: after the dissolution
of the partnership, the partner has a right to stop other partners from using
the same name of the firm.
 5. The right to earn personal profit by using the firm’s name: if on the dissolution,
the partner has a right to use the name of the firm as he buys goodwill of the
firm and can earn profit from it.

Liabilities after Dissolution

Section 45 of the Indian Partnership Act, 1932 deals with the liability for acts of
partners done after the dissolution. Liabilities are:

• The partners continue to be liable to the third party until the public notice of
the dissolution is given, it will not be applied to the partner who is dead or the
partner who is insolvent or to the sleeping partner or to the retired partner.
• After the dissolution of the partnership, the partner is liable to pay his debt
and to wind up the affairs regarding the partnership.
• After the dissolution, partners are liable to share the profit which they have
decided in agreement or accordingly.

Case Laws

• Narendra Bahadur Singh vs Chief Inspector Of Stamps, U.P. (1971)

In this case, the partnership was dissolved and with that, the third party (Narendra
Bahadur Singh) was given with all the assets (stocks) liabilities including all the debts
as per the account and he was entitled to use the old name of the firm and can carry
out the business with all profit and losses.
The other three parties were not entitled to any profit, losses or any other liability.
The capital, profit, and loss of the other 3 people has agreed to receive and Narendra
Bahadur Singh has agreed to pay the mentioned amount.

As to settle the amount securely, he hypothecated and charged certain property but
it was said by the court that the property of the firm is vested to all partners equally
as you are not the only owner of the firm and the settlement will be done according
to the mode of settlement under Section 48 of Indian Partnership Act.

• Santdas Moolchand Jhangiani And … vs Sheodayal Gurudasmal Massand

(1970)
In this case, there were two plaintiffs and one defendant who entered into a
partnership and carried on partnership business afterward they decided to dissolve it
and settle the accounts of partnership. The plaintiff to whom a certain amount was
payable, filed a suit for damage and when the issues were observed by the judge
said that it was not only the deed of dissolution but also a bond.

He impounded the document and asked the plaintiff to pay the deficit stamp duty. In
the end, it was said that the deed of dissolution in this matter is not liable to be
stamped as a bond and that it’s having been stamped as a deed for dissolution is
sufficient.

• B.K. Kapoor & Anr. vs Mrs. Tajinder Kapoor & Anr. (2008)
In this case, the plaintiff-respondent filed a suit for the dissolution of the partnership
and claimed that as per the terms of the agreement the plaintiff was entitled to 18%
of the profit in the first Rs.75,000, 12% in the next Rs.75,000 of book profit and 8%
in the balance amount of book profit.

As the relation was not well mentioned in the plaint due to which it was difficult to
continue the partnership. So a notice of suit issued to the petitioners who moved an
application under Section 8 of the Act claiming that the suit raised is covered under
the arbitrary agreement.

But in the end, it was held that the petitioners are seeking the dissolution on the just
and equitable ground covered under Section 44 of the arbitrary act and not as the
term of the partnership deed and therefore the matter could not be referred to the
arbitration under section 8.

• N. Guruva Reddy vs The District Registrar (1976)

In this case, Guruva Reddy, son of Chenchu Rami Reddy and other six persons and
legal heirs of Smt. P. Sri Devamma was carrying a partnership business. The legal
representative and five other partners show their desire to retire from the partnership.

A dissolution of the partnership was executed. The dissolution was executed on the
stamp paper. In the end, it was said that a charge was created in favour of the
partners in the respective amount, which are payable under the deed of the
dissolution.

Conclusion

It can be derived from the above explanation of dissolution of the partnership that
with the dissolution of the relationship between the partners they have certain rights
and responsibilities which they need to fulfil and one can claim for it with the help of
the Indian Partnership Act, 1932 as it gives certain provision regarding the same.

The act clearly provides grounds for dissolution of the partnership, so that nobody
can take advantage of the same and it also helps to maintain a good environment in
the firm.

Introduction

The most basic distinction between the dissolution of a partnership and the
dissolution of a firm is that the former is the dissolution of an operation of a
business and the latter one is the dissolution of a business relationship among the
partners. What this statement means is that the dissolution of a partnership is not
the same as the dissolution of a firm. This is because when the legally justifiable
relation present among the partners ceases, it is known as the dissolution of a firm
whereas when a partner becomes unfit for the firm the partnership of that
particular partner comes to an end with the firm but that does not mean the firm
ceases to operate. The firm may function very well on its own as per the desire of
other partners.
One of the radical differences between the dissolution of a firm and the dissolution
of a partnership is that in a situation where a partnership dissolves, no other
dissolution takes place but when a firm is dissolved, all the partnerships come to an
end as well.

As per Section 39 of the Indian Partnership Act, 1932, the dissolution of a

partnership refers to the process of terminating the professional relationship
between the partners involved in the business due to various circumstances. This
termination also puts an end to and divides all the assets, liabilities, debts,
accounts, and shares related to the partnership among the partners in the form of a
settlement deed. The main thing that highlights this Section is that even though the
process of dissolving a firm and dissolving a partnership looks similar, they are
completely different. Read this article to know the difference between a partnership
and a firm and how dissolution differs in both.

Definition of a partnership

As per Section 4 of the Indian Partnership Act, 1932, “a partnership is the relation
between persons who have agreed to share the profits of a business on by all or
any of them acting for all”. Listed below are all the essential elements required to
form a partnership as per the Indian Partnership Act, 1932:

• The existence of an agreement between partners is necessary.

 • The main motive behind forming a partnership is to earn profit and split it
among the partners.
• As per the agreement, it is necessary to abide by the fact that the agreement
must be to carry out the business jointly or in situations where that is not
possible, other partners must act on behalf of all.
Illustration: Ashish and Anish buy 200 bags together after they enter an agreement
where they will sell customized bags for their joint account. This is a perfect
example of forming a partnership and here, Ashish and Anish are considered
partners.

In a different situation, Ashish and Anish buy 200 bags and they agree to share
them among themselves. This situation will not be counted as a partnership as they
have no intention to carry out a business

In the case of N. Gurava Reddy v. the District Registrar (1976), the applicants and
6 other people along with their legal heirs of P. Sri Devamma were partners in a
business. The legal representatives along with the five other partners wanted to
retire from the partnership therefore they decided to dissolve the partnership. The
dissolution was executed on stamp papers and the decision was made in the favor
of the partners who wanted to dissolve the partnership.

Dissolution of a partnership

The abstract relationship that is legally binding between 2 or more partners is

known as a partnership. That is the reason why dissolving a partnership is like
terminating the legal relationship between partners.

There are various reasons why partners might want to dissolve a partnership such
as a retirement, incapacity of a partner due to death, insanity, or any other cause
that might cause the incapacitating role in the partnership and that is how a
partnership might come to an end voluntarily or involuntarily.

Even if one or more partners decide to dissolve a partnership, the remaining

partners have it under their discretion if they want to continue the firm, so that the
firm does not lose its existence. The only difference is that when the remaining
partners decide to not continue the firm and undertake the business further, the
firm is dissolved automatically. Another important thing to keep in mind is that
when a partnership is dissolved, the old agreement is automatically terminated and
a new agreement is used as a replacement.
Listed below is a list of ways a partnership can be dissolved:

• Admitting another partner as a replacement

• Insolvency of a partner
• Revising the profit share ratio
• Expiration of the partnership term
• After completing the goal/ venture decided while forming a partnership
• Death of a partner
• Retirement of a partner
• Dissolving the partnership via an agreement

Modes of dissolving a partnership

By operation of law

Being the consequence of an agreement, the partnership is governed by the law.

This reason alone should justify that if any unlawful activity takes place, the
partnership shall be deemed dissolved.

Illustration: A and B decide to form a partnership and sell liquor in Gujarat which is
a dry state. This partnership is valid but the object is illegal therefore this
partnership shall be considered dissolved by the law.

By the decree of a court

Using this mode of dissolving a partnership, a partner can dissolve a partnership by

approaching the court. The court can allow the dissolution of a partnership under
certain circumstances. These conditions are:
 • If the partner is not capable of working.
• Insanity and mental instability
• Breach in an agreement
• Bad behavior of a partnership results in bad image issues for the firm or
other partners
Illustration: A, B, C, and D were partners in a firm. Due to a freak accident, B was
handicapped and was unable to carry out his duties therefore all the other partners
approached the court so that they could get the necessary help which will help
them end their partnership with B.

Statement of dissolution

This is the simplest mode used to dissolve a partnership. The concerning party
needs to fill out a statement form addressing the secretary of the State. The name
of the partnership, date of filling the form, and a reason for dissolution are the most
important things to be filled in the said form.

Act of partners

Using this model, when the partners want to dissolve a partnership, the remaining
partner/ partners shall agree and decide a suitable time for the partnership to end.
Partners have the liberty to come to an agreement for things like the time period
but the remaining partner who wants to end the partnership also has the right to
dissolve a partnership before the time period ends but only under certain
circumstances.
Illustration: A, B, C, D, and E are in a partnership. A decides to end his partnership
and after discussing his decision with his partners, they decide that he will work for
another 3 weeks till they find a replacement for him. Due to a heart attack, he was
asked to rest for some time, thus, he was on bed rest before the completion of his
three weeks.

Definition of a firm

Section 4 of the Indian Partnership Act, 1932 also clarifies the meaning of a
partnership firm. As per the aforementioned section, “persons who have entered
into a partnership with one another are called individual partners and collectively
they are known as a firm”.

As mentioned above, the dissolution of a firm is different from the dissolution of a

partnership. Discontinuing all the business-related activities such as generating
profit and loss within the firm is known as the dissolution of a firm. When these
activities are stopped, the assets are usually used to pay off the debts if there are
any. Dissolution of a partnership does not amount to the dissolution of the firm but
a dissolution of a firm does amount to the dissolution of a partnership.

In the case of Malabar Fisheries and Co. v. Commissioner of Income Tax(1979), the
effect as well as impact of assets and discharging the liabilities have been stated
and explained by the honorable Supreme Court of India. The Court stated that,
“ Dissolution of a firm must, in point of time, be anterior to the actual distribution,
division or allotment of the assets that takes place after making accounts and
discharging the debts and liabilities due by the firm. Upon dissolution the firm
ceases to exist and then follows the making up of accounts, then the discharge of
debts and liabilities and thereupon distribution, division or allotment of assets takes
place between the erstwhile partners by way of mutual adjustment of rights
between them. The distribution, division or allotment of assets to the erstwhile
partners, is not done by the dissolved firm. It is not correct to say that the
distribution of assets takes place eo instanti with the dissolution of the firm or that
it is affected by the dissolved firm.”

Dissolution of a firm

As per the Indian Partnership Act, 1932, all the terms and conditions must be
abided by any partner who wishes to end the partnership. Listed below are the
provisions are given in this Act which states the different ways through which one
can end a firm:

Section 40 : Dissolution by agreement

As per Section 40 of the Indian Partnership Act, 1932, any and all firms can be
dissolved via an agreement. Legal consent from all the partners is equally
necessary as is the legality of the agreement. All the partners can dissolve the firm
without even involving the court in their process at all.

Section 41 : Compulsory dissolution

According to Section 41 of the Indian Partnership Act, 1932, all the partners are
bound to compulsorily dissolve the firm. The compulsion factor might come in the
scenario due to multiple reasons. The said reasons are:

• Insolvent partners
• Only one partner is not insolvent amongst all the other insolvent partners
• The partners are a part of illegal and unlawful activities which might include
illegal objects.
Section 42 : Dissolution on the happening of

contingencies

According to Section 42 of the Indian Partnership Act, 1932, a firm can be dissolved
by the partners only under certain circumstances. These circumstances include:

• The partnership should be ended as per the pre-decided time and after the
completion of a certain set goal/ venture.
• A firm can be dissolved if all the partners die. Although, if a partner dies, the
other partners can continue to run the firm/ business if they wish to do so
that shall be classified as dissolution of a partnership and not a firm.
• As stated above, if the partners are insolvent, then the firm can be dissolved.

Section 43: Dissolution of a firm via notice

As per Section 43 of the Indian Partnership Act, 1932, a firm can be dissolved by
one of the partners via a notice. The partner that wishes to dissolve the firm must
approach the firm with a request to issue a notice to all the other partners to
communicate the intentions of dissolving the said firm.

Section 44 : Dissolution by court

As per Section 44 of the Indian Partnership Act, 1942, a partner can dissolve the
firm by suing the other partners. Using this method, a partner can sue all the other
partners when:

• A partner can dissolve a firm if other partners are unable to perform the
promised duties. There are various reasons by which a partner shall be
 deemed incapable to perform the promised duties and medical reasons,
imprisonment for the long term, insanity, etc shall also be considered here.
• In situations where a partner transfers the entire portion of their share/
interests to a third party or in simpler words if the partner decides to breed,
the pre-decided agreement related to the firm can become the ground for the
dissolution of the firm.
• In situations where the partner hinders the reputation of the firm by their
actions which are treacherous in nature, this activity can become the ground
for all the other partners to dissolve the firm.
• When one partner becomes of unsound mind or mentally unstable, that is
when the other partners have the authority to sue the said partners so that
the court can dissolve the firm.

Differences between dissolution of partnership and dissolution of a firm

Partnership Firm
The process of ending a legal relationship The process of dissolving all the partnerships of
between a partner and the rest of the the company/ enterprise/ firm which results in
partners in a company/ enterprise/ firm. dissolving the firm is known as dissolving a firm.
When a partnership is dissolved, other When a firm is dissolved, all the business-related
partners of the firm may or may not continue activities are stopped.
the business. Courts can help the partners dissolve the firm.
Court intervention is not needed. The books need closure as the business ceases.
There is no closure needed in the books as The dissolution of a firm also results in the
the business does not cease if a partnership dissolution of partnerships.
 ends.
The dissolution of a partnership does not
necessarily result in the dissolution of the
firm.

Conclusion

The Indian Partnership Act, 1932 clears it out for us that there is a huge difference
between the dissolution of a partnership firm and the dissolution of a partnership.
As per the explanation given above, we can say that when a partnership ends, it
does not necessarily mean that the firm has been dissolved too but on the other
hand when a firm is dissolved, it means that all the partnerships have been
dissolved too.