Different Forms of Business Organisations

 Sole Proprietorship
A sole proprietorship is the most common form of business organization. It's easy to form and
offers complete control to the owner. But the business owner is also personally liable for all
financial obligations and debts of the business.As a sole proprietor you can operate any kind of
business as long as you are the only owner.

 Partnership
A partnership is the relationship existing between two or more persons who join to carry on a
trade or business. Each person contributes money, property, labor or skill, and expects to share
in the profits and losses of the business.

Each partner reports his share of the partnership net profit or loss on his personal tax return.
Partners must report their share of partnership income even if a distribution is not made.

Partners are not employees of the partnership and so taxes are not withheld from any
distributions. Like sole proprietors, they generally need to make quarterly estimated tax payments
if they expect to make a profit.

 Limited Liability Partnership

A limited liability company (LLC) is a corporate structure in the India whereby the owners are
not personally liable for the company's debts or liabilities. Limited liability companies are hybrid
entities that combine the characteristics of a corporation with those of a partnership or sole
proprietorship.

 Company
It is a business which sells goods for earning money. It is run by two or more persons together.
The profit is also divided by these persons. All its members are responsible for its debt and
operation.
There are certain which governs the working of companies. Every company has its own mission &
objectives. All its members work hard to achieve these goals.

1. The Indian Partnership Act 1932

 Historical :

The Indian Partnership Act was enacted in 1932 and it came into force on 1st day of
October, 1932[1]. The present Act superseded the earlier law relating to Partnership, which
was contained in Chapter XI of the Indian Contract Act,1872. The Act is not exhaustive
(including or considering all elements or aspects). It purports to define and amend the law
relating to Partnership.
Why parternship
1. For the creation of partnership just an agreement between various persons is all what you
require.
2. The partners are their own masters for regulating their affair.
3. For dissolution of partnership , a mere agreement between the partner is enough

4. Since all the profits are to be pocketed by the partners in a partnership firm, there is a
great incentive for the partners to make business successful .
 Act of firm: S. 2 (a): An ‘act of a firm’ means any act or omission by all the partners,
or by any partner or agent of the firm which gives rise to a right enforceable by or
against the firm.
 It is a question of fact.
 
What is a Partnership?
 S. 4, IPA: ‘Partnership’ is the relation between persons who have agreed to share the
profits of a business carried on by all or any of them acting for all.
 Persons who have entered into partnership with one another are called individually
‘partners’ and collectively a ‘firm’, and the name under which their business is
carried on is called the ‘firm name’.

Essentials
1. An association of persons;
2. Result of an agreement;
3. Organised and agreed to carry on a business;
4. To share the profits of the business; and
5. Business is to be carried on by all or any of them acting for all.

Mode of determining existence of partnership

In determining whether a group of persons is or is not a firm, or whether a person is or is not

a partner in a firm, regard shall be had to the real relation between the parties, as shown by all
relevant facts taken together.

Explanation 1 : The sharing of profits or of gross returns arising from property by persons
holding a joint or common interest in that property does not of itself make such persons
partners.

Explanation 2 : The receipt by a person of a share of the profits of a business, or of a payment

contingent upon the earning of profits or varying with the profits earned by a business, does
not of itself make him a partner with the persons carrying on the business;

 Mixed question of fact and law.

Mixed question of law and fact refers to a question which depends on both law and fact for
its solution. In resolving a mixed question of law and fact, a reviewing court must adjudicate
the facts of the case and decide relevant legal issues at the same time.

 Parties terminology not binding.

A non-binding contract is an agreement in which the parties are not legally obligated to carry
out its terms.

1. Sharing of profits or of gross returns arising from property by persons holding a

joint or common interest in that property does not of itself make such persons
partners.

2. The receipt by a person of a share of the profits of a business, or of a payment

contingent upon the earning of profits or varying with the profits earned by a
business, does not of itself make him a partner with the persons carrying on the
 business; and in particular, the receipt of such share or payment by the following does
not of itself make the receiver, a partner with the persons carrying on the business –

a) by a lender of money to persons engaged or about to engage in any business,

b) by a servant or agent as remuneration,
c) by the widow or child of a deceased partner, as annuity, or
d) by a previous owner or part owner of the business, as consideration for the
sale of the goodwill or share thereof

 Kinds of Partners

1. Active or real partner

A person who takes active interest in the conduct and management of the business of the
firm is known as active or managing partner.

2. Dormant or sleeping partner

A sleeping partner is a partner who ‘sleeps’, that is, he does not take active part in the
management of the business. Such a partner only contributes to the share capital of the
firm, is bound by the activities of other partners, and shares the profits and losses of the
business. A sleeping partner, unlike an active partner, is not required to give a public
notice of his retirement. As such, he will not be liable to third parties for the acts done
after his retirement.

3. Nominal partner

A nominal partner is one who does not have any real interest in the business but lends his
name to the firm, without any capital contributions, and doesn’t share the profits of the
business. He also does not usually have a voice in the management of the business of the
firm, but he is liable to outsiders as an actual partner.

4. Partner in profits only

When a partner agrees with the others that he would only share the profits of the firm and
would not be liable for its losses, he is in own as partner in profits only.

5. Sub-partner

A partner may associate anybody else in his share in the firm. He gives a part of his share
to the stranger. The relationship is not between the sub-partner and the firm but between
him and the partner. The sub-partner is a non-entity for the partnership. He is not liable
for the debts of the firm.

6. Partner by estoppel or holding out

If a person, by his words or conduct, holds out to another that he is a partner, he will be
stopped from denying that he is not a partner. The person who thus becomes liable to
third parties to pay the debts of the firm is known as a holding out partner. There are two
essential conditions for the principle of holding out : (a) the person to be held out must
 have made the representation, by words written or spoken or by conduct, that he was a
partner ; and (b) the other party must prove that he had knowledge of the representation
and acted on it, for instance, gave the credit.

7. Working partner

A partner in a business who takes an active part in managing it.

8. Salaried partner

A partner who owns a portion of a company and thus is entitled to part of its profit, but
who also receives a regular salary in exchange for his/her services for the company. A sal
aried partner usually works for the company exclusively, while an unsalaried partner may
have another job or other investments. A salaried partner may be a part of the company's
management team (or even its only manager) while an unsalaried partner has little or no
management role.

1. Kinds of Partnership

 Partnership at will (S. 7)

When forming a partnership if there is no clause about the expiration of such a
partnership, we call it a partnership at will. According to Section 7 of the Indian
Partnership Act 1932, there are two conditions to be fulfilled for a partnership to be a
partnership at will. These are
 There is no agreement about a fixed period for the existence of a partnership.
 No provision with regards to the determination/duration of a partnership.
So if there is an agreement between the partners about the duration or the determination
of the firm, this will not be a partnership at will. But if a partnership was entered into a
fixed term and continues to operate beyond this term it will become a partnership at will
from the expiration of this term.

 Fixed-term Partnership (Partnership for a fixed period)

Now during the creation of a partnership, the partners may agree on the duration of this
arrangement. This would mean the partnership was created for a fixed duration of time.

 Particular Partnership (S. 8)

If the partnership is formed only to carry out one business venture or to complete one
undertaking such a partnership is known as a particular partnership.
Difference Between
Partnership and HUF
Point of Partnership Hindu Undivided Family
Distinction

1. Regulating A partnership is governed by the A joint Hindu family business is governed by the principles of Hindu
Law provisions of the partnership law.
Act,1932.

2. Creation It arises from an agreement. It arises by status or operation of law.

3. Name of the The persons who form The persons who are the members of the HUF are called ‘Coparceners’.
Persons Involved partnership are called ‘Partners’.

4. Admission of No new partners is admitted A new member is admitted just by birth.

new Members without the consent of all the
partners.

5. Death Death of a partner ordinarily Death of a member in the HUF does not give rise to the dissolution of the
leads to the dissolution of family business.
partnership.

6. Management All the partners are equally The right of management of Joint family business generally vests in the
entitled to take part in the Karta, the governing male members of the family.
partnership business.

7. Number of In a partnership the maximum There is no maximum limit of members in the case of joint HUF
Members limit of partners is 10 for business.
banking business and 20 for any
other business.

8. Right of Share In a partnership each partner is A member of a joint HUF business has no such right. His only remedy
profits entitled to claim his separate lies in a suit for partition.
share of profits.

9. Authority of Every partner can, by his act, The ‘Karta’ or the manager has the authority to contract for the family
Bind the Firm bind the firm. business.

10. Liability The liability of a partner is The liability of the karta is unlimited, and the other coparceners are liable
unlimited. only to the extent of their share in the profits of the family business,
unless they take part in the act performed or transactions entered into by
the Karta.

11. Minor’s A minor cannot a A minor becomes a member of the ancestral business by the incidence of
Capacity partner,through he can acquire birth. He does not have to wait for attaining majority.
benefits of partnership, only
with the consents of all the
partners.

12. Continuity A firm subject to a contract A HUF has continuity till it is divided. The status of HUF is not thereby
between the partners gets affected by the death of a member.
dissolved by death or insolvency
of a partners.

 Partnership and Co-ownership

(i) Contract:
Partnership is based on contractual relationship among partners. Co-ownership may
be by the operation of law. On the death of father, sons become co-owners of his
property. On the other hand, partnership is the outcome of an agreement.

(ii) Object:
 The object of partnership is to enter into some business and earn profits. Co-
ownership is not meant for business purposes.

 ADVERTISEMENTS:

(iii) Transfer of Income:

No partner can transfer his interest (share) without the consent of all other partners. A
co-owner can transfer his interest at any time and without asking from other co-
owners.

(iv) Agency Relationship:

Partners can act as agents of the business. They have implied authority to bind the
firm by their acts. No agency relationship exists in co-ownership. Every co-owner is
responsible for his own deeds only.

 ADVERTISEMENTS:

(v) Division of Joint Property:

A co-owner can demand the division of property. Two co-owners may divide a plot of
land by erecting a wall on the land. In partnership the division of property cannot be
demanded. A partner can demand the payment of his share in business by way of
cash.

(vi) Right of Investment:

If a partner spends some money for the business he can demand its reimbursement.
On the other hand, if a co-owner spends money for the improvement of property he
cannot claim it as a lien on property.

 ADVERTISEMENTS:

(vii) Act:
Partnership is formed under Partnership Act, 1932 but there is no such act governing
co-owners.

 Partnership and Company

PARTNERSHIP COMPANY

The members of the Partnership firm The members of the company are called as
are called as Partners. shareholders of a company.

Enacted by
 PARTNERSHIP COMPANY

Partnership Form of business is

Company Form of business is governed by
governed by "The Indian Partnership
"The Indian Companies Act, 2013”.
Act, 1932."

Number of Members

A Company must have Minimum of 2 and

Partnership firm must have Minimum maximum of 200 in the case of private
of 2 partners and maximum of 20 company. Minimum 7 and maximum is
partners. unlimited number of members in case of public
company

Created by

Partnership Firm is Created by Company Firm is Created by Law i.e created by

Contract between two or more incorporation of a company under company
people. law.

Regulation Authority

It is regulated by the Registrar of

It is regulated by the Registrar of Companies
Firms which comes under State
which comes under Central Government.
Government.

Registration procedure

The registration of a Partnership firm The registration of Company with Registrar of

is Not Mandatory. Companies is Mandatory.

Documents Required

Partnership Deed(Agreement Memorandum of Association(MoA) and

Document) is the mandatory Articles of Association(AoA) are the main
document for creation of a documents to the incorporation of the
Partnership Firm. company.
 PARTNERSHIP COMPANY

Separate Legal Entity

Partnership firm is not a separate

A company is a separate legal entity, It is a
legal entity from partners. The
separate entity from its members, directors,
Partners of the firm are collectively
promoters, etc.
referred as a Partnership firm.

Liability of Members

The partners have Unlimited Liability

The Shareholders and promoters have Limited
in all the matters relating to
liability to Capital of the company.
Partnership Firm.

Accounts and Audit

Partnership Firm has to maintain A Company should maintain accounts and

accounts as per the conditions stated auditing of accounts by certified Chartered
in partnership deed. Accountant are Compulsory.

Common Seal

A Common Seal in the form of a stamp is

A Common Seal is not required for
required for the company for legal and
Partnership Firm.
functional purposes.

Management

Management of the activities of a

Management of the activities of a Company is
Partnership Firm is usually done by
done by Board of Directors.
the working partners.

Change of Name

The name of the Partnership Firm can The name of the company cannot be changed
be changed easily by having a easily and a prior approval of Central
discussion between partners. Government is required to change the name.
  Partnership and an Association (like, club)

Chapter-III (Ss 9-17)

Relations of Partners to One Another
Mutual Rights and Liabilities
Relations of partners to one another are governed by two fundamental principles:
1. Freedom to settle their mutual rights and duties by their own voluntary agreement
(s.11).
2. Fundamental principle of absolute good faith (s. 9).
Absolute Duties
 To carry on the business of the firm to the greatest common advantage (S. 9).
 To be just and faithful to each other (S. 9).
 To render(provide or give) true accounts (S. 9).
 To furnish full information of all things affecting the firm to any partner or his legal
representative (S. 9).
 Duty to indemnify (compensate (someone) for harm or loss.)for loss caused by fraud
(S.10).

Duties which are subject to a contract to the contrary

 Duty to attend diligently(care) to his duties in the conduct of the business [S. 12
(a)]. Read with S. 13 (f) Duty to indemnify the firm for any loss caused to it by his
wilful neglect in the conduct of the business of the firm.
 Duty not to earn personal profits from any transaction of the firm, or from the use
of the property or business connection of the firm or the firm name. Consequences: If
a partner derives any profit for himself, he shall account for that profit and pay it to
the firm [S. 16 (a)].
 Duty not to compete [S. 16 (b)] If a partner carries on any business of the same
nature as and competing with that of the firm, he shall account for and pay to the firm
all profits made by him in that business.

Duties of a Partner
 The property of the firm shall be held and used by the partners exclusively for
the purposes of the business (S. 15).
Property of the firm (S. 14). It includes:
• All property originally brought into the stock of the firm;
• Rights and interests in property originally brought into the stock of the firm;
• Property or rights and interests in the property acquired, by purchase or otherwise, by
or for the firm, or for the purposes and in the course of business of the firm;
• Goodwill of the business.
• Unless the contrary intention appears, property and rights and interests in property
acquired with money belonging to the firm are deemed to have been acquired for the
firm.
• The property belonging to any partner does not become the firm’s property by merely
use of the same for the p’ship business. It will become the firm’s property provided
there is some indication (evidence, i.e. agreement, expressed or implied) of an
intention to treat such property as the firm’s property.
 • Duty to share losses [s. 13 (b)].
• Duty to act within the scope of authority [s. 19 (1)].
• Duty not to assign rights and interest in the firm’s property (s. 29).

Rights of a Partner
1. Right to take part in the conduct of the business [S. 12 (a)].
2. Right to express opinion/ Right to be consulted [S. 12 (c)]. Ordinary matters and
fundamental matters.
3. Right to have access to and to inspect and copy any of the books of the firm [S. 12
(d)].
4. Right to remuneration (money paid for work or a service.) [S. 13 (a)].
5. Right to share equally in the profits earned, and shall contribute equally to the losses
sustained by the firm [S. 13 (b)].
6. Right to interest on capital and advances [S. 13 (c) and (d)].
7. Right to indemnity [S. 13 (e)].
8. Right to act in emergency (S. 21).
9. Right to stop the admission of a new partner (S. 31).
10. Right to retire (S. 32).
11. Right to dissolve the firm (Ss 40-44).

Effect of Change in the Firm (S. 17)

Subject to contract between the partners-
(a) After a change in the firm: Where a change occurs in the constitution of a firm, the
mutual rights and duties of the partners in the reconstituted firm remain the same as they
were immediately before the change, as far as may be;
(b) After the expiry of the term of the firm: Where a firm constituted for a fixed term
continues to carry on business after the expiry of that term, the mutual rights and duties of the
partners remain the same as they were before the expiry, so far as they may be consistent
with the incidents of partnership at will; and
(c) Where additional undertakings are carried out: Where a firm constituted to carry out
one or more adventures or undertakings, the mutual rights and duties of the partners in
respect of the other adventures or undertakings are the same as those in respect of the original
adventures or undertakings.
RELATIONS OF PARTNERS TO THIRD PARTIES

1. Nature and extent of liability of the firm for the acts of a partner (Ss 18-27).

2. A Partner is an Agent of the Firm (Section 18)

3. Partner’s Authority in an Emergency (Section 21)
4. Rights of transferee (noun form of transfer) of a partner’s interest (S. 29).

5. Position of a minor admitted to the benefits of a p’ship (S. 30).

Nature of the Firm’s Liability

 Joint and several
 For the acts of the firm
 While he is a partner (Subject to ss 32 (3) and 45).
 Liability is unlimited
Acts done within the authority of a partner
– Express Authority
– Implied Authority
 S. 19 provides:
Subject to the provisions of section 22, the act of a partner which is done to carry on, in the
usual way, business of the kind carried on by the firm, binds the firm.
The authority of a partner to bind the firm conferred by this section is called his ‘implied
authority’.

Factors determining the scope of the authority of a partner

 The nature of the business of the firm.
 Things which are usually done in carrying out the business of the firm.
 Things which are incidental to the carrying on of the business of the firm.
 The usual customs and usages of the trade/business of the firm.

 Mode of doing act to bind firm (S. 22)

In order to bind a firm, an act or instrument done or executed by a partner or other
person on behalf of the firm shall be done or executed in the firm name, or in any
other manner expressing or implying an intention to bind the firm.
 Trading and non-trading/professional firms and the ‘borrowing power’.
Restrictions on Implied Authority (Ss 19-20)
 Statutory Restrictions [S. 19 (2)]
In the absence of any usage or custom of trade to the contrary, the implied authority of a
partner does not empower him to-
(a) submit a dispute relating to the business of the firm to arbitration,
(b) open a banking account on behalf of the firm in his own name,
(c) compromise or relinquish any claim or portion of a claim by the firm,
(d) withdraw a suit or proceeding filed on behalf of the firm,
(e) admit any liability in a suit or proceeding against the firm,
(f) acquire immovable property on behalf of the firm,
(g) transfer immovable property belonging to the firm, or
(h) enter into partnership on behalf of the firm.

 Restriction or Extension by Deed (S. 20)

• The partners in a firm may, by contract between the parties, extend or restrict the implied
authority of any partner.
• Notwithstanding any such restriction, any act done by a partner on behalf of the firm
which falls within his implied authority binds the firm, unless the person with whom he is
dealing knows of the restriction or does not know or believe that partner to be a partner.

Liability for admission/representation made by a partner (S. 23)

 An admission or representation made by a partner concerning the affairs of the firm is
an evidence against the firm, if it is made in the ordinary course of business.
 Essentials. (necessity)
 Application of principles of agency.
 Simply an evidence, not conclusive proof.
 Such admission/representation does not affect relation inter se.
 Such admission/representation does not create p’ship.
Liability on notice to an active/acting partner (S. 24)
 Notice to a partner, who habitually acts in the business of the firm of any matter
relating to the affairs of the firm operates as notice to the firm, except in the case of a
fraud on the firm committed by or with the consent of that partner.
  Application of principles of agency.

Liability for torts or wrongful acts (S. 26)

 Where, by the wrongful act or omission of a partner acting in the ordinary course of
the business of a firm, or with the authority of his partners, loss or injury is caused to
any third party, or any penalty is incurred, the firm is liable therefor to the same
extent as the partner.
Liability of firm for misapplication by partners (S. 27)
 The firm is liable to make good the loss, where:
(a) a partner acting within his apparent authority receives money or property from a third
party and misapplies it, or
(b) the firm in the course of its business receives money or property from a third party, and
the money or property is misapplied by any of the partners while it is in the custody of the
firm.

Holding Out (S. 28)

 Essentials:
• Representation (by words, spoken or written; by conduct; by knowingly
permitting others, by word or conduct, to make representation).
• Knowledge of representation and acting on its faith.
o Representation is a mixed question of ‘fact’ and ‘law’.
o Not applicable to torts, crime or other wrongful act.
o Effects of holding out.
Holding out and Retirement cases
Exceptions to the requirement of public notice
 Deceased partner
 Insolvent partner
 Dormant partner

Incoming and Outgoing Partners (Chapter-V, Ss 31-38)

Incoming Partners (S. 31)
Modes of Introduction of a Partner S.31(1)
i. With the consent of all the existing partners;
ii. In accordance with the contract between the partners; (However, the person so
nominated must, after his nomination, expressly or impliedly agree to the same; and
he cannot enforce the agreement for his nomination.)
iii. In accordance with the provisions of section 30.

Outgoing Partners
A partner ceases to be a partner in the following ways:
 By retirement (S. 32)
 By expulsion (S. 33)
 By insolvency (S. 34)
 By death (S. 35)

Liability of the Retired and Expelled Partner

Liability for the acts done before retirement/expulsion: S. 32 (2)
A retiring partner may be discharged from any liability to any third party for acts of the
firm done before his retirement by an agreement made by him with such third party and the
partners of the reconstituted firm, and such agreement may be implied by a course of dealing
between such third party and the reconstituted firm after he had knowledge of the retirement.
Liability for the acts done after retirement/expulsion: S. 32 (3)
 Notwithstanding the retirement of a partner from a firm, he and the partners continue
to be liable as partners to third parties for any act done by any of them which would
have been an act of the firm if done before the retirement, until public notice is given
of the retirement:
 PROVIDED that a retired partner is not liable to any third party who deals with the
firm without knowing that he was a partner.

Rights of Outgoing Partners

 Right of outgoing partner to carry on competing business (S. 36).
 Right of outgoing partner in certain cases to share subsequent profits (S. 37).
State Government of any State, may, by notification in the Official Gazette, direct that the
provisions of this Chapter shall not apply to that State or to any part thereof specified in the
notification.
Appointment of Registrars (S. 57)
(1) The State Government may appoint Registrars of Firms for the purposes of this Act,
and may define the areas within which they shall exercise their powers and perform their
duties.
(2) Every Registrar shall be deemed to be a public servant within the meaning of section
21 of the Indian Penal Code (45 of 1860).

Application for Registration (S. 58)

(1) The registration of a firm may be effected at any time by sending by post or delivering to
the Registrar of the area in which any place of business of the firm is situated or proposed to
be situated, a statement in the prescribed form and accompanied by the prescribed fee,
stating-
(a) the firm name,
(b) the place or principal place of business of the firm,
(c) the names of any other places where the firm carries on business,
(d) the date when each partner joined the firm,
(e) the names in full and permanent addresses of the partners, and
(f) the duration of the firm.
The statement shall be signed by all the partners, or by their agents specially authorised in
this behalf.
S. 59: When the Registrar is satisfied that the provisions of section 58 have been duly
complied with, he shall record an entry of the statement in a register called the Register of
Firms, and shall file the statement.

Effect of Non-Registration (S. 69)

 (1) No suit to enforce a right arising from a contract or conferred by this Act
shall be instituted in any court by or on behalf of any person suing as a partner in a
firm against the firm or any person alleged to be or to have been a partner in the firm
unless the firm is registered and the person suing is or has been shown in the register
of firms as a partner in the firm.
 (2) No suit to enforce a right a rising from a contract shall be instituted in any
court by or on behalf of a firm against any third party unless the firm is registered and
the persons suing are or have been shown in the register of firms as partners in the
firm.
  (3) The provisions of sub-sections (1) and (2) shall apply also to a claim of set-off or
other proceeding to enforce a right arising from a contract.

Exceptions
1. Action for dissolution and accounts: The enforcement of any right to sue for the
dissolution of a firm or for accounts of a dissolved firm, or any right or power to
realise the property of a dissolved firm. S. 69 (3) (a).
2. Recovery of insolvent’s share: Official assignee, receiver or court acting for an
insolvent partner may bring an action for the realisation of insolvent's share. S. 69 (3) (b).
3. To firms or to partners in firms which have no place of business in the territories to
which this Act extends, or whose places of business in the said territories, are situated
in areas to which, by notification under section 56, this Chapter does not apply. S. 69
(4) (a).
4. To any suit or claim of set-off not exceeding one hundred rupees in value. S.69 (4)
(b).
5. Statutory and non-contractual rights.
6. Criminal Proceedings.
7. Suits by third parties.
8. Non-partnership matters.