Formation of a partnership firm

A partnership may be formed by oral or by written agreement or an agreement of partnership can be inferred from the conduct of the parties. The following basic facts must be borne in mind by the persons desirous of entering into an agreement of partnership: The successful working of a partnership depends upon mutual confidence and utmost good faith among the partners because each partner is an agent of others and binds them to the fullest extent of their fortunes. All the essential elements of a valid contract must present. There must be free consent of the parties who must be competent to contract and the object of the partnership should not be forbidden by law of immoral or opposed to public policy. The mutual rights and obligation of partners must be discussed in details and should be put in black and white in the shape of a partnership deed before the partnership is actually started. The partnership should be registered as soon as it is formed with the registrar of firms of the area. Partnership Deed The document in which the respective rights and obligation of the members of a partnership are set forth is called a partnership deed!. The deed should cover the following points: ". The name of the firm and the names and address of partners who compose it. "". #ature of business and the town and place where it will carried on. """. $ate of commencement of partnership. "%. The duration of partnership. %. The amount of capital to be contributed by each partners and the methods of raising finance in future if so re&uired. %". The ratio of sharing profits and losses. %"". "nterest on partners! capital' partners! loan' and interest' if any' to be charged on drawings. %""". (alaries' commissions etc' if any' payable to partners. "). The method of preparing accounts and arrangement for audit and safe custody of cash etc. ). $ivision of task and responsibility' i.e. the duties' power and obligations of all the partners. )". *ules to be followed in case of retirement' death the admission of a partner. )"". +xpulsion of partners in case of gross breach of duty or fraud. )""". ,an -artner carry on a competing business or any other business whether competing or not. (ection ../01 clearly provides that the $eed may provide that a partner shall not carry on any business other than that of the firm while he is partner' notwithstanding anything contained in section 02 of the "ndian contract Act where agreements in restraint of trade are void. )"%. The circumstances under which the partnership will the partnership will stand dissolved. )%. Arbitration in case of dispute among the partners.

The terms laid in the $eed may be varied by consent of all the partners' and such consent may be expressed or may be implied by a course of dealing. Duration of Partnership 3rom the duration point of view the partnerships may be classified into the following two categories: Partnership at will: - According to section 2 of partnership act 4here no provision is made by contract between the partners for the duration of their partnership' or for the determination of their partnership' the partnership is 5partnership6at6will5. Particular partnership: - According to section 7 of partnership act A person may become a partner with another person in particular adventures or undertakings. Kinds of partners There may be various types of partners in a partnership firms which are as follows: .1 Active or Actual Partners: - -artners who take an active part in the conduct of the partnership business are called Active or Actual partners. 01 Sleeping or dormant partners: 6 (ometimes' however' there are persons who merely put in their capital /or even without capital they may partners1 and do not take active part in the conduct of the partnership business. They are known as (leeping! or dormant! partners. 81 Silent partners: 6 Those who by agreement with other partners have no voice in the management of the partnership business are called silent! partners. 91 Partner in profits only: 6 A partner who has stipulated with other partners that he will be entitled to a certain share of profits without being liable for the losses' is known as a partner in profits only:. ;1 Sub-partner: 6 4hen a partner agrees to share his share of profits in partnership firm with an outsider' such an outsider is called sub6partners. <1 Partner by estoppels or holding out: 6 According to section 07 of partnership act "f a person represents to the outside world by words spoken or written or by his conduct or by lending his name' that he is a partner in certain partnership firm' he is the estopped from denying his being a partner' and is liable a partner in that firm to any one who has on a faith of such representation granted to the firm.

Dissolution of partnership firm

The -artnership act distinguishes between: 6 Dissolution of firm. Dissolution of partnership. (ection 8= of -artnership act provides that the dissolution of partnership between all the partners of a firm is called the dissolution of a firm. 4hen one or more partners cease to be partners of the firm but others continue the business in partnership it is called dissolution of partnership!. odes of dissolution of a firm: !. "y agreement: - According to section 9> of -artnership act A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners. #. "y $otice: 6 4here the partnership is at will according to section 9> of partnership act' the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolved the firm. %. &n the happening of certain contingency: 6According to section 90 of partnership act (ubject to contract between the partners a firm is dissolved /a1 if constituted for a fixed term' by the expiry of that term: /b1 if constituted to carry out one or more adventures or undertakings' by the completion thereof: /c1 by the death of a partner: and /d1 by the adjudication of a partner as an insolvent. '. (ompulsory dissolution: 6 A firm is dissolved /a1 ?y the adjudication of all the partners or of all the partners but one as insolvent' or /b1 by the happening of any event which makes it unlawful for the business of the firm to be carried on or for the partners to carry it on in partnership : -rovided that' where more than one separate adventure or undertaking is carried on by the firm' the illegality of one or more shall not of itself cause the dissolution of the firm in respect of its lawful adventures and undertakings. ). Dissolution "y court: - According to section 99 of -artnership act at the suit of a partner' the ,ourt may dissolve a firm on any of the following grounds' namely:6 /a1 that a partner has become of unsound mind' in which case the suit may be brought as well by the next friend of the partner who has become of unsound mind as by any other partner: /b1 That a partner' other than the partner suing' has become in any way permanently incapable of performing his duties as partner: /c1 that a partner' other than the partner suing' is guilty of conduct which is likely to affect prejudicially the carrying on of the business regard being had to the nature of the business: /d1 that a partner' other than the partner suing' willfully or persistently commits breach of agreements relating to the management of the affairs of the firm of the conduct

of its business: or otherwise so conducts himself in matters relating to the business that it is not reasonably practicable for the other partners to carry on the ?usiness in partnership with him: /e1 that a partner' other than the partner suing' has in any way transferred the whole of his interest in the firm to a third party' or has allowed his share to be charged under the provisions of rule 9= of @rder ))" of the 3irst (chedule to the ,ode of ,ivil -rocedure' .=>7' or has allowed it to be sold in the recovery of arrears of land revenue or of any dues recoverable as arrears of land revenue due by the partner: /f1 That the business of the firm cannot be carried on save at a loss: or /g1 on any other ground which renders it just and e&uitable that the firm should be dissolved. (onse*uence of Dissolution: !. (ontinuing liability of partners after dissolution: 6 According to section 9; of partnership act /.1 #otwithstanding the dissolution of a firm' the partners continue to be liable as such to third parties for any act done by any of them which would have been an act of the firm' if done before the dissolution' until public notice is given of the dissolution : -rovided that the estate of a partner who dies' or who is adjudicated an insolvent' or of a partner who' not having been known to the person dealing with the firm to be a partner' retires from the firm' is not liable under this section for acts done after the date on which he ceases to be a partner. /01 #otices under sub6section /.1 may be given by any partner. #. (ontinuing authority of partners for purposes of winding up: 6 According to section 92 of partnership act After the dissolution of a firm the authority of each partner to bind the firm' and the other mutual rights and obligations of the partners' continue notwithstanding the dissolution' so far as may be necessary to wind up the affairs of the firm and to complete transactions begun but unfinished at the time of the dissolution' but not otherwise : -rovided that the firm is in no case bound by the acts of a partner who had been adjudicated insolvent' but this proviso does not affect the liability of any person who has after the adjudication represented himself or knowingly permitted himself to be represented as a partner of the insolvent. %. +ight of partners to enforce winding up: 6 According to section 9< of partnership act @n the dissolution of a firm every partner or his representative is entitled' as against all the other partners or their representatives' to have the property of the firm applied in payment of the debts and liabilities of the firm' and to have the surplus distributed among the partners or which representatives according to their rights. '. ,iability to share personal profits: 6According to (ection ;> of partnership act so long as the affairs of the dissolved firm are in process of winding up' it is still the duty of every partners not to make any personal profit out of transactions concerning the firm. A partner therefore must account to the firm for every benefit so derived by him and must share it with other partners. ). +eturn of premium: 6According to section ;. partnership act 4here a partner has paid a premium on entering into partnership for a fixed term' and the firm is dissolved before the expiration of that term otherwise than by the death of a partner' he shall be entitled to repayment of the premium or of such part thereof as

may be reasonable' regard being had to the terms upon which he became a partner' and to the length of time during which he was a partner' unless 6 /a1 the dissolution is mainly due to his own misconduct' or /b1 the dissolution is in pursuance of an agreement containing no provision for the return of the premium or any part of it. -. +ight where partnership contract is rescind for fraud etc: - According to section ;0 of partnership act 4here a contract creating partnership is rescinded on the ground of fraud or misrepresentation of any of the parties thereto' the party entitled to rescind is' without prejudice to any other right' entitle 6 /a1 to a lien on' or right of retention of' the surplus of the assets of the firm remaining after the debts of the firm have been paid' for any sum paid by him for the purchase of a share in the firm and for any capital contributed by him: /b1 to rank as a creditor of the firm in respect of any payment made by him towards the debts of the firm: and /c1 to he indemnified by the partner or partners guilty of fraud or misrepresentation against all the debts of the firm. .. +ight to impose restriction: 6 According to section ;8 of partnership act After a firm is dissolved' every partner or his representative may' in the absence of a contract between the partners to the contrary' restrain any other partner or his representative from carrying on a similar business in the firm6name or from using any of the property of the firm for his own benefit' until the affairs of the firm have been completely wound up : -rovided that where any partner or his representative has brought the goodwill of the firm' nothing in this section shall affect his right to use the firm6name. According to (ection ;9 of partnership act -artners may' upon or in anticipation of the dissolution of the firm' make an agreement that some or all of them will not carry on a business similar to that of the firm within a specified period or within specified local limits. ode of setting Accounts upon Dissolution "n settling the accounts of a firm after dissolution' the following rules shall' subject to agreement by the partners' be observed : /a1 Aosses' including deficiencies of capital' shall be paid first out of profits' next out of capital' and' lastly' if necessary' by the partners individually in the proportions in which they were entitled to share profits: /b1 the assets of the firm' including any sums contributed by the partners to make up deficiencies of capital' shall be applied in the following manner and order : /i1 in paying the debts of the firm to third parties: /ii1 in paying to each partner rateably what is due to him from the firm for advances as distinguished from capital: /iii1 in paying to each partner rate ably what is due to him on account of capital: and /iv1 the residue' if any' shall be divided among the partners in the proportions in which they were entitled to share profits.

Sales of /oodwill after dissolution According to section ;; of partnership act the rules relating to sale of goodwill upon dissolution of a firm are as follows: .. 4hile winding up the affairs of the firm after dissolution' the goodwill shall' subject to contract between the partners' be included in the assets' and it may sold either separately or along with other property of the firm. 0. After the sale of goodwill any partner of the dissolved firm a1 ,an carry on a business competing with that of the buyer!s goodwill and b1 can advertise such business. ?ut any partners of the dissolved firm may make an agreement with the buyer that such partner will not carry on a business similar to that of the firm with a specific period or within specified local limits' provided by restrictions imposed are reasonable. 8. "n the absence of a contract to the contrary' the seller of goodwill' that is partners of the dissolved firms cannot .. Bse the firm name 0. *epresents themselves as carrying on the business of the old firm' and 8. ,annot solicit the customers of the old firm.