Partnership Firm

Partnership is defined as a relation between two or more persons who have agreed to share the profits of a business carried on by all of them or any of them acting for all. The owners of a partnership business are individually known as the "partners" and collectively as a "firm". Its main features are :-

A partnership is easy to form as no cumbersome legal formalities are involved. Its registration is also not essential. However, if the firm is not registered, it will be deprived of certain legal benefits. The Registrar of Firms is responsible for registering partnership firms. The minimum number of partners must be two, while the maximum number can be 10 in case of banking business and 20 in all other types of business. The firm has no separate legal existence of its own i.e., the firm and the partners are one and the same in the eyes of law. In the absence of any agreement to the contrary, all partners have a right to participate in the activities of the business. Ownership of property usually carries with it the right of management. Every partner, therefore, has a right to share in the management of the business firm. Liability of the partners is unlimited. Legally, the partners are said to be jointly and severally liable for the liabilities of the firm. This means that if the assets and property of the firm is insufficient to meet the debts of the firm, the creditors can recover their loans from the personal property of the individual partners. Restrictions are there on the transfer of interest i.e. none of the partners can transfer his interest in the firm to any person(except to the existing partners) without the unanimous consent of all other partners. The firm has a limited span of life i.e. legally, the firm must be dissolved on the retirement, lunacy, bankruptcy, or death of any partner.

A partnership is formed by an agreement, which may be either written or oral. When the written agreement is duly stamped and registered, it is known as "Partnership Deed". Ordinarily, the rights, duties and liabilities of partners are laid down in the deed. But in the case where the deed does not specify the rights and obligations, the provisions of the THE INDIAN PARTNERSHIP ACT, 1932 will apply. The deed, generally contains the following particulars:-

Name of the firm. Nature of the business to be carried out. Names of the partners. The town and the place where business will be carried on. The amount of capital to be contributed by each partner. Loans and advances by partners and the interest payable on them. The amount of drawings by each partner and the rate of interest allowed thereon. Duties and powers of each partner. Any other terms and conditions to run the business.

Following are the characteristics of Partnership Firm: 1. Number of Partners : Minimum number of person required to start a partnership firm is two and maximum limit is 10 in case of banking business and 20 in case of all other types of business. 2. Contractual relationship : A written agreement known as partnership deed which is signed by all the partners, binds them in a contractual relationship. 3. Voluntary Registration : Registration of partnership firm is not compulsory. Since the registration provides various benefits to the firm thus it is desirable. 4. Competence of Partners : Every partner must be competent enough to enter into the partnership agreement. He should not be minor (in some cases minor can be admitted only to the benefits of the partnership), lunatic or insolvent. 5. Sharing of Profit and Loss : In partnership firm all the profits and losses are shared by the partners in any ratio as agreed. If it is not given then they share it equally. 6. Unlimited Liability : Liability of partners of a partnership firm is unlimited. They are jointly held liable for the debts and losses of the firm. 7. Legal Status : Partnership firm has no distinct legal status separate from its partners. 8. Transfer of Interest : No partner can transfer its interest in the firm to anybody without the consent of other partners. 9. Principal-Agent Relationship: This relationship is based on mutual trust and faith among the partners in the interest of the firm. Business of the firm may be carried on by all the partners or any one of them acting for all. According to this, every partner is an agent when he is working on behalf of other partners and he is the principal when other partners act on his behalf.
Advantages

Ease of formation Greater capital and credit resources Better judgement and more managerial abilities

Disadvantages

Absence of ultimate authority Liability for the actions of other partners Limited life Unlimited liability

Partnership is an appropriate form of ownership for medium sized business involving limited capital. This may include small scale industries, wholesale and retail trade; small service concerns like transport agencies, real estate brokers; professional firms like charted accountants, doctors' clinic, attorney or law firms etc.

Agreement of partnership
As stated above a partnership is constituted by an agreement between the partners. The agreement may be in writing or oral. But from the practical point of view and particularly in view of the provisions of other

Acts such as the Income Tax Act as well as Partnership Act an oral partnership is not practicable, and therefore, a partnership agreement is necessarily required to be in writing. Therefore, the mere fact that two persons as joint owners either as heirs or legatees are carrying on a business it does not necessarily mean that they are partners and if they want to carry on the business in partnership, then a Partnership agreement in writing becomes necessary. For example, if a person dies leaving a running business and his heirs continue to carry on such business, it will not be a business carried on in partnership and if they want to do so they will have to enter into a regular agreement of partnership. Being an agreement and an agreement enforceable at law, such an agreement must fulfill the basic requirements of a valid contract, as required by the Contract Act. Therefore, a minor or a mentally handicapped person cannot enter into a partnership agreement though by virtue of the provisions of thePartnership Act a minor can be admitted only to the benefits of the partnership. But that only means that a minor can have a share in the profits of the business, but he cannot become a partner, and cannot execute any agreement of partnership. Similarly if a partnership deed provides that on the death of a partner his heirs or any one or more of them should be admitted as partners or partner in place of the deceased partner even in such a case on the death of a partner his heirs or any of them do not become partners automatically on such death. But a fresh agreement of partnership will have to be executed between the existing partners and the heirs or heir of the deceased partner and if the heir is a minor the new partnership will stand postponed till the minor attains majority or if the surviving partners are more than one, the minor can only be admitted to the benefits of partnership.

Period of partnership
A partnership can be for a fixed period of time or it may be limited to a particular adventure as provided in Section 8 or it may be for a duration at the will of the partners. Where the period of the partnership is not fixed and the partnership is not for a particular adventure then under section 7 of the Act the partnership shall be deemed to be a partnership at will.

Rights and duties of partners

Sections 9 & 10 of the Act lay down the basic duties of every partner and the said duties are not subject to any contract to the contrary. Therefore, partners are bound to carry on the business of the firm to the greatest common advantage, to be just and faithful to each other and to render accounts and full information of all things affecting the firm to any partner or his legal representative and every partner is bound to indemnify the firm for any loss caused to it by fraud in the conduct of the business of the firm. Subject to this the mutual rights and duties of partners may be decided by contract between the partners, either express or implied. Subject to any contract to the contrary such duties and rights of each partner are provided in Sections12 and 13 of the Partnership Act.