PARTNERSHIP

▣ It is a voluntary association of 2 or more persons

who agrees to carry on some business jointly and
share its profits and losses.

▣ Indian Partnership Act 1932 - 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
Features

Minimum = 2

Maximum = 10 (Banking), 20 (Non Banking)

2 or more person
Members > 10/20 : Illegal association

Who can be a partner –

⮚Individual - √
⮚ Partnership Firm = X
⮚Company = √
Legal status of Partnership Firm

Partnership Firm is not a

separate legal entity
Features
Contractual relationship out of Contract. Not
by birth/ status

Agreement must be valid “Contract”

Agreement
Agreement = Writing/ Oral

⮚ Sharing of profit is must but not essential

test (Conclusive proof) of partnership.

⮚Sole proprietor sharing the profit with his

employee is not partnership unless there is
agreement.
Features

⮚ Agreement to share the profit is must.

⮚ There can be no partnership without

intention of Mutual Gain.

Sharing of profit ⮚ Sharing of profit is not a essential test

(Conclusive proof) of partnership.

⮚ Sharing profit with employees is not

partnership unless there is agreement of
partnership.
Features

Business = Lawful

Lawful Business Illegal acts like Theft, Dacoity, Smuggling

cant be called as “Partnership”

Only association without business is not

Partnership.
 Features – Implied Agency
Partnership Firm

Case 1 Case 2

Business carried on by all Or Any one of them

Working Working Working Non -Working

Partner Partner Partner Partner
Features – Implied Agency
Sachin (50%)
Principal – Being Co-
owner

Agent – Agent of
Vinod. (Representing
Vinod)

Vinod (50%) Principal – Being Co-

owner

Agent – Agent of
Sachin. (Representing
Sachin)
Features – Implied Agency
Sachin (50%)
Principal – Liable for
his own acts

Agent – Liable for the

acts of Vinod

Vinod (50%)
Principal – Liable for
his own acts

Agent – Liable for the

acts of Sachin
 Features – Utmost Good Faith
Relations between the partners are based on
Mutual Trust & Confidence
Lawful Business
Every partner is expected to act in the best
interest of other partners and firm.

Secret Profit Fraud Cheating Theft Theft Negligence

 Features – Utmost good faith
Duty of Honesty

Duty of Care
Fiduciary (Trust) Duty
Duty of Loyalty

Duty of Fairness

Examples of breach of Fiduciary Duty –

• Negligence in management
• Misrepresenting or concealing relevant information from the partnership that
results in financial damages.
• A partner involved in fraud

Remedies against breach of Fiduciary Duty –

• If a partner concealed profits other partner may recover monetary damages.
• Remaining partners may remove particular partner involved in fraud.
 Unlimited Liability

Individually Jointly Personally

Liable Liable Liable
 Unlimited Liability

Case 1 – Assets > Liabilities

Assets 20000

Other Liabilities 10000

Capital - Ratio (1:1)

Om 15000

Jay 15000

Net Liabilities = Rs.0 (20000-10000)

 Unlimited Liability
Case 2 – Assets < Liabilities
Assets 20000
Other Liabilities 45000
Capital - Ratio (1:1)
Om 15000
Jay 15000

Om = Rs.12500
Capital = Rs.15000

Net Liabilities = Rs.25000 (45000-20000)

Jay = Rs.12500
Capital = Rs.15000
 Unlimited Liability

Case 3 – Assets < Liabilities

Capital of the partner(s) is insufficient
Assets 20000

Other Liabilities 45000

Capital – Ratio (1:1)

Om 10000

Jay 30000
 Unlimited Liability

Net Liabilities = Rs.25000 (45000-20000)

Om
Jay
• Liable to pay = Rs.12500
• Can pay = Rs.10000 • Liable to pay = Rs.12500
• Personal Assets = Rs. 0 • Can pay = Rs.30000

Who will bear a the additional liability How much Jay will pay – Rs.15000
of Rs.2500 = Jay Own = Rs.12500 + Om’s liability = Rs.2500)
 Unlimited Liability

Case 4 – Assets < Liabilities

Capital of the partner(s) is insufficient
Assets 50000

Other Liabilities 100000

Capital – Ratio (1:1)

Om 60000

Jay 20000
 Unlimited Liability

Net Liabilities = Rs. 50000 (100000-50000)

Jay
Om
• Liable to pay = Rs.25000
• Liable to pay = Rs.25000 • Can pay = Rs.20000
• Can pay = Rs.60000 • Personal Assets = Rs. 0

How much Om will pay – Rs.30000 Who will bear a the additional liability of
Own = Rs.25000 + Jay’s liability = Rs.5000 = Om
Rs.5000)
 Unlimited Liability

Case 5 – Assets < Liabilities

Liabilities of the business paid out of personal assets
Assets 100000

Other Liabilities 150000

Capital – Ratio (1:1)

Om 30000

Jay 10000
 Unlimited Liability

Net Liabilities = Rs. 50000 (100000-50000)

Om
Jay
• Liable to pay = Rs.25000
• Liable to pay = Rs.25000
• Can pay = Rs.30000
• Can pay = Rs.10000
• Personal Assets = Rs.100000
• Personal Assets = Rs.0
How much Om will pay – Rs.40000
Who will bear a the additional liability of
Own = Rs.25000 + Jay’s liability =
Rs.15000 = Om
Rs.15000)
• Capital = Rs.30000
• Personal Assets = Rs.10000
 Unlimited Liability

Case 6 – Assets < Liabilities

Some of the liabilities of the business paid out of personal
assets
& loss to Creditors
Assets 100000

Other Liabilities 150000

Capital – Ratio (1:1)

Om 30000

Jay 10000
 Unlimited Liability

Net Liabilities = Rs. 50000 (100000-50000)

Om
Jay
• Liable to pay = Rs.25000
• Liable to pay = Rs.25000
• Can pay = Rs.30000
• Can pay = Rs.10000
• Personal Assets = Rs.5000
• Personal Assets = Rs.0
How much Om will pay – Rs.40000
Who will bear a the additional liability of
Own = Rs.25000 + Jay’s liability =
Rs.15000 = Om
Rs.15000)
• Capital = Rs.30000
• Personal Assets = Rs.5000
• Loss to Creditors = Rs.5000
 Restriction on transfer of interest
(share)

Particulars Consent from remaining partners

required ?
Any of the partner wants to leave the No
firm
Outsider wants to join the firm Yes. From all of the existing partners.

Wants to transfer his interest in favor of Yes. From all of the existing partners.
3rd party
 Partnership Deed
▣ Terms & Conditions of Partnership
▣ Agreement in writing –
◼ Signed by all the partners
◼ Stamped
◼ Registered (Voluntary)
▣ Govern the relationship between the partners –
◼ Rights & Duties
▣ It should not be contrary to Partnership Act
▣ Terms & Conditions cant be changed with the
consent of all the partners.
 Partnership Deed

Basics Duration Capital Profit Procedure Other

Partnership Deed
 Partnership Deed

Basics

Name Address Business

 Partnership Deed

Duration

Specific
Indefinite Specific Period
Objective
 Partnership Deed
Capital

Amount Withdrawal Interest

 Partnership Deed

Profit

Nothing is
Ratio
mentioned = Equal
 Partnership Deed
Procedure

Dissolution/ Settlement of
Admission/ Retirement/ Accounts/ Audit
Account
 Partnership Deed
Other Salary/ Commission

Allocation of Work
Valuation of Goodwill
Arbitration
Loans & Advances
 Factors influencing the Goodwill

Suitable
Location of the
Manageri Nature of the
Business al Skill Business

Risk in the
business Profit Risk
Govt.
Patent/
Trade marks ROI Regulation
 Arbitration
▣ Arbitration is the dispute settlement process
between two agreeable parties to appoint an
arbitrator to give a binding solution on the
dispute. 
▣ It is a way to settle disputes outside the courts
thereby saving time and resources at the same time
▣ Arbitration is a legal mechanism encouraging
settlement of disputes between two or more parties
mutually by the appointment of a third party
whose decision is binding on the parties referring
the said dispute.
▣ Arbitration and Conciliation Act 1996.
 Advantages of Arbitration
▣ Mineralization of court intervention

▣ Reduction in costs of dispute redressal and

resolution

▣ Expeditious and timely disposal

▣  Enforcement of awards through neutrality of

arbitrator
 Registration of the firm
▣ Registration is not mandatory.

▣ If partners so desire they can register their firm

with the Registrar of the Firm (ROF) of the
state in which main office is situated.

▣ Registration may be done either –

◼ At the time of formation or
◼ Any time thereafter
 Registration Procedure
▣ Firm –
◼ Name
◼ Principal place of Business
◼ Other place(s) of business Registration
▣ Partner – does not provide
◼ Full Name a legal entity
◼ Address to the
◼ Date of Joining
▣ Duration
Partnership Firm
Consequences of Non registration of the
Partnership Firm
▣ Un registered partnership firm can’t take action
against its partners.
▣ Partners of unregistered firm can’t take action
against the firm and other partners.
▣ Unregistered firm can’t take action against 3rd
party
▣ Partners of unregistered firm can’t take actions
against 3rd party.

There are certain exceptions to it.

Consequences of Non registration of the
Partnership Firm

Registration or Non registration of the firm

does not affect the rights of the 3rd party to
sue the unregistered firm or its partners.
Exceptions -
▣ Right of the Partner –
◼ To dissolved the firm
◼ For Accounts of dissolved firm
▣ Power of the Official Assignee/ Receiver to realized
the property of insolvent partner (Insolvency Act,
1920)
▣ Rights of the Firm/ Partners having no place of
business in India (Act is not operative)
▣ Claim < Rs.100
▣ Right to sue 3rd party for infringement of a patent
right.
▣ Right of the 3rd party to sue the unregistered firm or its
partners.

Important - Suit for Non Contractual rights or Statutory rights

Merits -

Only agreement, No
Easy to dissolved
other documentation
Registration is not
Simple & Inexpensive
compulsory

Easy Formation
Merits -

High creditworthiness
New partners can be
due to Personal, Joint
easily admitted
& Unlimited liability

Larger
Financial
resources
Merits -

High creditworthiness
New partners can be
due to Personal, Joint
easily admitted
& Unlimited liability

Larger
Financial
resources
Merits -
Direct relation
between Efforts &
Partner = Owner/ Losses are shares so
rewards
Manager risk is reduced

Direct
Motivation
Merits -

Partner will take

Fear of unlimited
personal interest
Mgt is cheaper
liability

Close
supervision
Merits -

No Govt. control
Not answerable to
No legal restrictions
anyone outside

Flexibility
Merits -

No Audit
No publication of No report to be filled
Accounts with Govt.

Secrecy
Merits -

Mutual
consent
Dissenting
Democratic
partner can
Mgt
easily retire
Protection
of
Minority
interest
Merits -

Partners
Balanced working in
decisions common
interest

Cooperation
Merits -

Requirement of
Easy admission of
Finance & Mgt can be
new partners
easily meet

Scope for
expansion
De-merits -

Ltd financialLtd technical/

resources
administrative skills
Limit on max no. of Lack of Professional
partners mgt

Ltd resources
De-merits -

Individual/ Joint
Restrict
& initiative/
Personal Liability growth

Unlimited
liability
De-merits -

Insanity, Ineligibility,
Instability
Death

Uncertain life
De-merits -
Lack of
confidence,
Unity/
Harmony
Delayed
Equal rights decision/
inefficiency

Conflicts
De-merits -

Every partnerLiable
is a for the acts of
agent of the firmother partners

Implied
Authority
De-merits -

Problem of liquidity of
Consent from ALL
Investment

Restriction on
transfer of
interest
De-merits -

No Govt. control
No legal formality No publication of A/c

Reduced Public
confidence
De-merits -

Business secrets are known

to ALL the partners

Lack of
secrecy
De-merits -

Suitable for
Professionals

Small &
Medium size Traders
Org.

Suitability
 Types of
Partnership

Particular
General LLP At Will
Objective
 Active/
Working

Sleeping/
Quasi Dormant

Types
of
In
Profit Partners Secret
only

Sub-
Partner
Limited Minor
 In
Particulars Working Sleeping Secret Limited Sub Profits
Partner only

Unique Active Inactive Unknown Limited Not a Getting

Feature partner Partner to liability. (Not partner profit
outsiders a partner in in real only.
real sense) sense Money &
G/w

Capital Yes Yes Yes Yes No Yes

contributio
n
Role in Mgt Yes No Yes No No No

Profit / Loss Yes Yes Yes Yes No Only

sharing Profit
Liability Un-Ltd Un-Ltd Un-Ltd Limited NA Un-Ltd
(Capital &
Profit)
Known to Yes No No Yes No Yes
outsiders
 Nominal/ Ostensible/ Quasi

Quasi

No Capital No part in Mgt No P&L

 Nominal/ Ostensible/ Quasi
Only lends his
Partner by
Name/ Reputation
Estoppel

Represents himself
as a Partner

Quasi Knowingly allows

himself to be
represented as a
partner.

Partner by Liable to outsiders

Holding out for the Debts of the
firm.
 Estoppel

Liable to
By his words By Conduct
outsiders
 Holding out

Declared as a Does not deny even

Liable to outsiders
Partner after aware of it
 Minor as a Partner
▣ Minor < 18

▣ Not qualified to enter into Contact

▣ May be admitted for the benefit of the firm

with mutual consent of all the partners.

▣ Management –
🢭 Entitle to share of the Property/ Profit
🢭 Can inspect the books
🢭 Exception - Can’t take active part in Mgt (No
representative capacity to bind the firm)
 Minor as a Partner

▣ Liability :
◼ Limited = Capital + Profit
◼ Not Personally Liable

▣ Case against the firm = Can’t file a suit/case

except when he want to disassociate from the
firm.

Minor Can’t form a new Partnership

 Minor as a Partner
After becoming MAJOR (Minor’s choice - 6 Months to decide)

Public Notice within 6 months

No Notice within 6 months Want to Continue Want to leave

Normal Partner Rights & Liabilities will continue to be

Personally liable for
- All future liabilities.
- Past liabilities from the date of his
admission for the benefit of the firm
- Can take active part in the firm
same upto the time on which he gives
public notice.
(Not liable for any acts of the firm done
after the date of notice.)
 Partnership Firm
Advantages

Ease of Flexibility in Less

Secrecy
Formation operations Documentation

Dis-advantages

Limit on no. of Unlimited Implied

Uncertain Life
Partners Liability Authority
 Company
Advantages

Separate Legal status Perpetual Succession Limited Liability

Dis-advantages

Excessive Govt.
Legal Formalities Documentation
Control
Partnership
Firm
LLP Company

Advantages
 LLP
▣ Governed under LLP Act, 2008
▣ Registration is mandatory
▣ Body Corporate –
◼ Separate Legal status
◼ Perpetual Succession
▣ Liability of Partners – Limited to agreed
contribution
◼ No Partner is liable for unauthorized or independent
actions of another partner.
◼ Unlimited in case of act with the intention to defraud
others or for any fraudulent purpose.
 Partnership vs LLP

Basis Partnership LLP

Governed by The Indian The
Partnership Act, 1932 Limited Liability
Partnership Act, 2008

Body Corporate No Yes

Separate Legal Entity No Yes
Perpetual Succession No. Death/ Disability/ It has a perpetual succession
Insolvency/ Unsoundness
may affect the existence

Liability Unlimited Limited. Except in case of

Intention fraud or wrongful
act of omission or commission
by the partners.
 Partnership vs LLP

Basis Partnership LLP

Registration Optional Mandatory
Creation By Agreement By Law
Mutual Agency Partners are agents of the Partners are agent of the
firm and remaining LLP and not of other
partners. partners.
Minor Can be admitted for the Can’t be admitted.
benefit of the firm
Can foreign national No Yes
become partner
No. of Partners Minimum = 2 Minimum = 2
Maximum = 10/20 Maximum = No limit
 LLP vs Company
Basis Company LLP

Governed By The Companies Act, 2013 The LLP Act, 2008

Objective Can be formed by Profit or Can be formed only for

Service motive Profit motive
No. of Members Minimum = Minimum = 2
Pvt = 2 (OPC = 1) Maximum = No limit
Public = 7
Maximum =
Pvt = 200
Public = No limit
 LLP vs Company

Basis Company LLP

Liability Limited to the amount remainin Limited. Except in case of

unpaid on each share (FV)
Name Private Limited/ Limited
Intention fraud or
wrongful act of omission
or commission by the
partners
Limited Liability
Partnership/ LLP
 LLP : Advantages

Separate legal Entity Perpetual Existence Limited Liability

No maximum limit on Body corporate can be

partners partner in LLP
 LLP : Dis - advantages

Registration, Less credit standing

Documentation, Less secrecy due to limited liability
Formalities of partners

Less flexibility due to Unlimited liability in

legal formalities exceptional cases