Formation of Partnerships

A partnership is a business arrangement in which two or more people own an entity,

and personally share in its profits, losses, and risks. The exact form of partnership used
can give some protection to the partners. A partnership can be formed by a verbal
agreement, with no documentation of the arrangement at all. However, there may be
subsequent disagreements among the owners at a later date, so it makes sense to
create a written document that states how certain situations are to be handled. This
partnership agreement should at least cover the following topics:

 The rights and responsibilities of each partner

 Whether partners are designated as general partners or limited partners
 The proportions of partnership gains and losses to be apportioned to each
partner
 Procedures related to the withdrawal of funds from the partnership, as well as
any limitations on these withdrawals
 How key decisions are to be resolved
 Provisions regarding how to add and terminate partners
 What happens to partnership interests if a partner dies
 What steps to follow to dissolve the partnership
 The proportions of residual cash paid out to the partners in a liquidation

In addition to the partnership agreement, the partners must engage in a number of other
formation activities that are common to all types of businesses. These actions include:

 Register the business name

 Obtain an employer identification number
 Obtain any licenses required by governments where the partnership plans to
operate
 Open a bank account in the name of the partnership
 File an annual informational return with the Internal Revenue Service

Rights of Partners:
(a) Every partner has a right to take part in the conduct and management of business.

(b) Every partner has a right to be consulted and heard in all matters affecting the
business of the partnership.

(c) Every partner has a right of free access to all records, books and accounts of the
business, and also to examine and copy them.

(d) Every partner is entitled to share the profits equally.

(e) A partner who has contributed more than the agreed share of capital is entitled to
interest at the rate of 6 per cent per annum. But no interest can be claimed on capital.

(f) A partner is entitled to be indemnified by the firm for all acts done by him in the
course of the partnership business, for all payments made by him in respect of
partnership debts or liabilities and for expenses and disbursements made in an
emergency for protecting the firm from loss provided he acted as a person of ordinary
prudence would have acted in similar circumstances for his own personal business.

(g) Every partner is, as a rule, joint owner of the partnership property. He is entitled to
have the partnership property used exclusively for the purposes of the partnership.

(h) A partner has power to act in an emergency for protecting the firm from loss, but he
must act reasonably.

(i) Every partner is entitled to prevent the introduction of a new partner into the firm
without his consent.

(J) Every partner has a right to retire according to the Deed or with the consent of the
other partners. If the partnership is at will, he can retire by giving notice to other
partners.

(k) Every partner has a right to continue in the partnership.

(l) A retiring partner or the heirs of a deceased partner are entitled to have a share in
the profits earned with the aid of the proportion of assets belonging to such outgoing
partner or interest at six per cent per annum at the option of the outgoing partner (or his
representative) until the accounts are finally settled.

Obligations of a Partner:
(i) Every partner should carry on the business to the greatest common advantage. He
must perform his duties honestly and diligently.

(ii) A partner is not entitled to get remuneration for the conduct of business, unless
otherwise it is specially mentioned in the partnership deed.

(iii) A partner must indemnify the firm for loss suffered because of his fraudulent conduct
or willful neglect.

(iv) A partner is bound to keep and render true and correct accounts of the business.

(v) A partner cannot carry on a competing business. If he carries on such business he

shall account for and pay to the firm all profits made by him in that business.

(vi) A partner is bound to act within the scope of his authority.

(vii) No partner can make a secret profit of the partnership business by way of
commission, etc. If he does so, he must return the money to the firm.

Dissolution of Partnership by Court Order

Let us first understand that there are majorly two types of partnerships – partnership at will
and partnership for a fixed period. Partnership at will gives full freedom for any partner to
dissolve the firm after giving substantial notice. However, in a partnership for a fixed
period, the firm cannot be dissolved unless all partners agree.

So if one or more of the partners wish to dissolve a fixed partnership they have to approach
the courts. This remedy is available for all kinds of partnerships but is practically used by
partners in a partnership for a fixed period.

According to section 44 of the Indian Partnership Act, a partner can approach the court

asking for the dissolution of the firm. As per the discretion of the court, it may order a
dissolution under certain circumstances. 

1] Partner of Unsound Mind

The insanity (temporary or permanent) does not automatically dissolve the partnership.
However, the guardian of the unsound partner or any other partner can file a suit with the
court for dissolution of a partnership firm. The dissolution will be effective from the date of
the court order.

2] Incapacity of Partner

If a partner has become incapable in a permanent capacity, for example blind, paralytic etc.
then the court will dissolve the firm if a suite is filed by any partner.

3] Misconduct by Partner

If the misconduct of a partner is adversely affecting the business and their reputation, then

the court will consider dissolving the firm in response to a suit filed by any other partner of
the firm. For example, the gambling addiction of one particular partner is adversely
affecting a firm, the court can order the dissolution of the firm.

4] Breaching of Agreement
If one of the partners is persistently breaching the partnership agreement then the other
partners can approach the court. One point to note is that the partner must be repeatedly
breaching the contract, and continues to do so even after warnings. An on-off breach does
not warrant the action. But persistent breaching will result in the court ordering the
dissolution of the firm.

5] Transfer of Share by Partner

A partner cannot transfer his shares and interests of the firm to another party without the
permission of all the partners of the firm. He cannot admit a new partner in the partnership
in the firm in such a manner. So if he has sold his rights/interests the other partners can
approach the court and file for dissolution of the firm.

6] Losses

If the business is operating at a loss and the courts are convinced that the business cannot
turn a profit, it will dissolve the firm.

7] Any Other Just Cause

The list given in Section 44 is not exhaustive. There can be other reasons for the dissolution
of the firm. If the court is convinced the cause in the suit is justifiable and equitable, it will
dissolve the firm. For example, if there is a deadlock between partners that is not showing
signs of respite, the court can dissolve the firm.