Unstructured forms of business in India are one of the oldest and most commonly preferred forms of business formation and are still prevalent in certain sectors of the country. Traditionally, the different models of these business forms include sole proprietorships, partnership firms, Hindu Undivided Families, trusts, etc. Owing to their potential evolution and growth, certain special laws have been enacted to govern and regulate such business entities. One such business form is a Partnership Firm, and the act of law that governs it is the Indian Partnership Act of 1932, vividly outlining its application, definition, formation, partnership agreement, rights and duties of partners, partnership registration process and other such related matters.
The Partnership Act, 1932 is applicable to the whole of India except to the state of Jammu and Kashmir.
A partnership, as defined by the Partnership Act of 1932, means a relation between persons who have agreed to share profits of a business carried on by all or any of them acting for all. A minimum of two individuals are required to enter into a partnership who are capable of contract and are eighteen years of age. The persons who have agreed to such a relationship of partnership are individually called ‘partners’ and together or collectively as ‘firm’ and the name under which they carry out their business is called ‘firm name’. The said relation should arise between the partners from the way of a contract or agreement, which is known as the ‘partnership deed’, and not by virtue of birth or status in the family.
The partnership deed should either be expressed (oral or written) or implied and may be registered or unregistered.
Noteworthy Features of a Partnership Firm
The salient features of a partnership firm prove favourable and make it a suitable option for entrepreneurs to start and undertake their business operations. This gives the partners outright flexibility and convenience in decision-making, management and control functions.
Let us briefly glance at these features.
- A written or spoken mutual agreement between partners defining the terms of profit sharing and rights and duties is the foundation of a partnership firm. A partnership deed may even be implied by way of action of the partner.
- A partnership firm has no legal status as per Indian laws. Unlike a company or a limited liability partnership, a partnership firm is not a separate entity and the partners are deemed to be the same as the firm.
- As mentioned above, firm and partners are not different, therefore, the extent of their liabilities is unlimited, not just restricted to the amount of unpaid capital or investment. They are jointly and severally liable for the acts, debts and losses incurred by the firm, exposing them to personal financial risks.
- The registration is not mandatory for a partnership firm but it is always recommended to enable itself to enjoy the benefits under the laws.
- An individual cannot be his own partner and so, a partnership firm cannot be formed with a single partner. A minimum number of two partners is a must and maximum may be up to fifty, according to law.
- There is a mutual agency in a firm of partnership which means every partner is both a principal and agent of the firm and as such, the acts of one partner binds the firm as well as the other partners.
- The profits of the firm are shared in a pre-determined and pre-agreed ratio and there is a specific clause to it in the partnership deed. In case no profit sharing ratio is specified, then in such a case, profits are shared equally amongst all partners.
- Partnership firms are not concerned. This means, unlike a limited liability partnership or a company form of business, partnership firms end with the death of the partners.
What are the Prerequisites to Forming a Partnership Firm?
A few important essentials need to be kept in mind before forming a partnership firm, without which such a firm shall be declared null and void and cease to exist in the eyes of the law.
- There must be, at all times, a minimum of two individuals to enter into any kind of partnership.
- There should be an agreement whether express (oral or written) or implied amongst all the partners specifying all the important details relating to the firm and business.
- The partnership deed may or may not be registered.
- The deed must clearly mention the ratio in which the profits of the firm will be shared by the partners and in case no ratio is agreed upon, the profits will be divided between them equally.
- All partners must have a valid PAN, and the firm’s PAN is proof of its existence.
- There must be a registered place of office for the firm’s business.
- The partners must be eligible to come into a partnership, meaning a partner is a person who is above eighteen years of age, capable to enter into contract and not disqualified or debarred by law.
- Before anything else, there must be an intention to become a partner and a mutual agreement to share the profits of the firm and be liable for its losses and debts.
- A clear consent must be obtained from each partner, which may be express (oral or written) or implied.
What are the Different Types of Partnership Deeds?
The Indian Partnership Act of 1932 provides a flexible and co-operative structure that is particularly appropriate and a common choice for micro, small and medium sized businesses. The types of partnerships may depend upon several factors such as types of agreement, type of business, duration of business and its objectives.
Let us know and discuss the below types of partnership deeds:
-
General Partnership
This is the most common and usual kind of partnership where the liability of the partners is unlimited and they actively take part in the daily operations of the firm’s business. They share the profits earned in an equal ratio or as agreed upon in the partnership deed.
A limited liability partnership concern is the one where the liabilities of the partners is limited only up to the amount of the unpaid share in the capital of the firm and not beyond. The firm is a separate entity with a separate legal status from its partners and is governed by the Limited Liability Partnership Act of 2008. However, in some cases, it includes both general partners with unlimited liability and partners with limited liability.
-
Fixed Term Partnership
The partnership which has a fixed term of its business and is formed for a definite period is a fixed term partnership. This means that on the expiry of the said period, the partnership among the partners shall come to an and the firm shall no longer exist. The term partnership is specifically defined in the partnership agreement.
-
Partnership at Will
When there is no fixed term for which the partnership shall continue to exist, such a partnership is known as partnership at will. It continues as long as the partners desire and mutually agree.
-
Specific Partnership
A specific partnership is the one which is formed for a certain and specific purpose and same is mentioned in the agreement. It comes to an end only after achieving the said objective for which the firm was originally formed and the partners agreed. It is also known as ‘particular partnership’.
-
Joint Venture
A joint venture is a partnership formed only for a particular project or activity. It is temporary in nature and the agreement by which it is formed is usually known as a joint venture agreement. It ends with the completion of the project or business venture. A joint venture may be between two individuals or entities or even in combination thereof.
What are the Types of Partners?
After understanding the types of partnership deeds, it is also equally necessary to know the types of partners in these firms. Partners may choose their roles as a specific type of partner according to the type of partnership, nature and scale of their business undertakings and the period of their business operation. The below information will help us to understand what these types are:
- Active partner – An active partner, also known as ‘Managing Partner’, is the one who actively participates in the day-to-day business operations of the firm.
- Nominal Partner – A person who has not invested in the capital of the firm but only lends his name as a partner in the firm is called a nominal partner.
- Sleeping Partner – A sleeping partner, also known as a ‘Dormant Partner’, is the one who has invested in the capital of the firm but has no active involvement in the daily operations of business.
- Partner in profits only – As the name suggests, any person who agrees to become a partner only for the purpose of sharing profits is a partner in profits only.
- Minor partner – A person who is below eighteen years of age and, with the consent of all partners, is admitted as a partner and shall be a partner only for the benefit of the firm. A minor is not personally liable, but his share of profit is liable for the firm’s debts. He will actually become a partner only after fulfilling the requirements on the attainment of his majority, as prescribed under the Partnership Act of 1932.
- Partner by estoppel – If a person holds himself out as a partner or represents himself as a partner through his words or behaviour or conduct when, in reality, he is not a partner by agreement, then such a person is a partner by estoppel and is liable for the debts incurred on the basis of his such misrepresentation.
- Sub-partner – When an existing partner associates another person in his share of profits of the firm then such other person is a sub-partner. The relationship between the partner and sub-partner does not extend to the firm and the sub-partner is not liable for the debts of the firm.
- Incoming or new partner – When all the existing partners consent to admit a new partner in the firm then such new partner is called as an incoming partner.
- Retiring partner or outgoing partner – When an existing partner notifies all the other partners and the public at large of his intention to retire or leave the firm then such a partner is a retiring partner of the firm.
- Secret partner – When an individual is not openly known as a partner nor does he address the firm to any external parties, he is a secret partner of the firm. He possesses the same rights, duties and liabilities as those of the other partners present in the firm.
Conclusion
Each types of partnership deeds caters to distinct business demands, which are determined by the characteristics and needs of the business, the dynamics between the partners and the extent of the firm’s goals and objectives. The choice of type of partnership firm is influenced by various aspects, including control and liability duration of the business.
The success of any partnership firm registration depends upon clear agreements, mutual understanding and effective collaboration amongst the partners. To sum up, a partnership firm is a versatile and rather straightforward business form that enables two or more individuals to work together, share resources and split profits and liabilities.
Bibliography
- www.mca.gov.in
- Indian Partnership Act, 1932.
- www.rof.mahaonline.gov.in
- www.services.india.gov.in