Indian Partnership Act 1932

Section 4, defined partnership as “the relation between persons who have agreed to share
the profits of business carried on by all or any of them acting for all”. Partnership “as an
association of two or more persons to carry on as co-owners a business for profit”.
According to J. L. Hanson, “a partnership is a form of business organisation in which two
or more persons up to a maximum of twenty join together to undertake some form of
business activity”. Now, we can define partnership as an association of two or more persons
who have agreed to share the profits of a business which they run together. This business
may be carried on by all or anyone of them acting for all.
Main Features:
1. More Persons: There should be atleast two persons subject to a maximum of ten persons
for banking business and twenty for non-banking business to form a partnership firm.
2. Profit and Loss Sharing: There is an agreement among the partners to share the profits
earned and losses incurred in partnership business.
3. Contractual Relationship: Partnership is formed by an agreement-oral or written-among
the partners.
4. Existence of Lawful Business: Partnership is formed to carry on some lawful business
and share its profits or losses. If the purpose is to carry some charitable works, for
example, it is not regarded as partnership.
5. Utmost Good Faith and Honesty: A partnership business solely rests on utmost good
faith and trust among the partners.
6. Unlimited Liability: Like proprietorship, each partner has unlimited liability in the firm.
This means that if the assets of the partnership firm fall short to meet the firm’s
obligations, the partners’ private assets will also be used for the purpose.
7. Restrictions on Transfer of Share: No partner can transfer his share to any outside
person without seeking the consent of all other partners.
8. Principal-Agent Relationship: The partnership firm may be carried on by all partners or
any of them acting for all. While dealing with firm’s transactions, each partner is entitled
to represent the firm and other partners. In this way, a partner is an agent of the firm and
of the other partners.
Advantages of Partnership
1. Easy Formation: Like sole proprietorship, partnership form of organisation can be
formed without legal formalities. No formal documents are required to be prepared. An
agreement which may be oral or written is sufficient to enter into partnership form of
organisation. Even the registration of partnership is not compulsory.
2. Large Resources: The partnership form of organisation enjoys large resources than a
sole proprietorship so that the scale of operation can be enlarged to get the benefit of
large-scale economies. More partners can be taken into partnership if capital needs are
large. The partnership firms can also arrange money from the outside sources.
3. Flexibility: The business is, abundantly mobile, flexible, and elastic being free from legal
restriction on its activities. The partners can introduce any change they consider desirable
to meet the changed circumstances.
4. Combined Skill and Balanced Judgment: The partnership enjoys the benefit of the
ability, experience, and talents of the partners. This is the best advantage partnership
enjoys over the sole proprietor because everything is done by mutual consultation.
5. Sharing of Risk: Any loss sustained by the firm will be borne by all the partners equally
with the benefit that the burden borne by each partner will be much less whereas the sole
proprietor has to bear the entire loss of the business.
6. Maintenance of Secrecy: The partners of partnership firm can keep the business to
themselves. In case of a company, nothing is secret. A partnership firm is not expected to
get its accounts audited and published as is necessary for a joint stock company.
7. Prompt Decisions: The partners of partnership firm exercise joint responsibility and
meet frequently. This enables them to take decisions promptly, which is conducive to
taking advantage of sudden opportunities.
8. Unlimited Liability: The fact that the liability of each partner is unlimited and each
partner individually is liable to the full extent of his private fortune acts as a great check
against reckless speculation.
9. Easy Dissolution: Dissolution of the partnership concern is very easy. The partnership
can be dissolved on the death, lunacy or insolvency of a partner. There are no legal
formalities involved in the dissolution.
Disadvantages of Partnership:
1. Lack of Harmony: There is always likelihood of lack of harmony amongst the partners.
Difference of opinion very often results in disharmony and lack of management each
partner tries to blame the other partner about his dishonest dealings and working against
the interest of the firm. This result in disruption and ultimate dissolution of the firm.
2. Instability: The partnership form of organisation may come to an abrupt end on the
death, lunacy or insolvency of the partner. The partnership may also be closed if a single
partner expresses his desire to dissolve the partnership or to get it dissolved by the order
of court. The lack of trust among the partners may lead to dissolution of the firm.
3. Restriction on Transfer of Interest: In partnership, no partner can transfer his interest
to the third party. If he wants to do so, he will have to seek the consent of all the other
partners. In case of a company, any shareholder can transfer his shares to the third party
without the consent of other shareholders.
4. Liability after Retirement: In partnership form of business organisation, the retiring
partner continues to be liable for all acts done when he was a partner.
5. Unlimited Liability: Every partner is jointly liable for the debts of the firm. The
dishonesty of one partner can damage the entire business & put others in serious trouble.
6. Uncertain Future: The firm will have to draw the shutters down in case of death,
insolvency, lunacy of any one of the partners. New partners can be inducted into a firm,
only when all existing partners agree unanimously. Bringing someone from outside
enjoying the trust of everyone is not an easy job.
7. Not a Legal Entity: a partnership firm has any legal entity separate from the members. It
dies upon the death of a partner or upon separation between them. Partners are
responsible for all the debts of the firm.
Types of Partnership:
(A) According to Objectives:
1. Partnership at Will: Such partnership exists on the will of the partners, i.e., it can be
brought to an end whenever any of the partners gives notice of his intention to do so.
This kind of partnership is formed to conduct the lawful business for an indefinite
period.
2. Particular Partnership: A particular partnership is formed for undertaking a particular
venture. It comes to an end automatically with the completion of the venture.
(B) According to Tenure:
1. Partnership for Fixed Term: Such a partnership is for a fixed period of time say 2
years, 5 years or any other duration. The partnership comes to an end automatically at
the expiry of the period.
2. Flexible Partnership: Partnerships which are formed neither for a fixed period nor for
any particular venture are called flexible partnerships.
(C) According to Nature:
1. General Partnership: In the absence of agreement, the provisions of the Indian
Partnership Act 1932 are applicable for general partnerships in which the liability of
each partner is unlimited.
2. Limited Partnership: In limited partnership some or all except one partner have a
limited liability to the extent of capital contributed by them. All the partners in
partnership cannot have limited liability.
(D) According to Legality:
1. Legal Partnership- When the partnership is formed in accordance with the Partnership
Act of 1932 and the Indian Contract Act, it is known as Legal Partnership.
2. Illegal Partnership- Partnership becomes illegal when it violates the provisions of any
law of the country or when the requisite number of partners goes below the minimum
limit or beyond the maximum limit.
Kinds of partners
1. Active Partner: A partner who is actively engaged in the conduct of a business is known
as active partner. He may be called a working partner. He takes an active part in the
management and administration of the business. His liabilities are unlimited.
2. Sleeping or Dormant Partner: A sleeping partner is one who contributes capital, shares
profits and contributes to the losses of the firm but does not participate in the working of
the business. He is liable for the liabilities of the firm like other partners. The term
‘sleeping partners’ implies one who is neither an active partner nor known to the public
as a partner.
3. Nominal Partner: A nominal partner is one who does not contribute any capital or share
in profits but lends his name and credit to the partnership firm. A nominal partner is
liable to third parties who deal with the firm on the supposition that he is a partner in the
firm.
4. Partner in Profits Only: A partner sharing the profits of the business without making
himself responsible for losses, if any, is known as partner in profits only. He contributes
capital and is also liable to the third parties like other partners. Such partners are not
allowed to take part in the management and administration of the business.
5. Minor as a Partner: A minor cannot become a partner in the partnership firm because
according to Indian Contract Act, a minor cannot enter into a contract. However, a minor
may be admitted to the benefits of partnership with the consent of all the partners.
6. Incoming Partner: A person who is admitted as a partner in an existing partnership is
called an incoming partner. A new person can be taken as a partner with the consent of all
the partners.
7. Outgoing Partner: A partner leaving the existing firm is known an outgoing or retiring
partner. An outgoing partner is liable for the debts and the obligations incurred before his
retirement and will be liable for future obligations only if he fails to give public notice of
his intention to retire from the partnership firm.
Rights of Partners
1. Right to take part in the conduct of business: Each partner has the right to participate
in the conduct of the business of partnership. It is also possible that a partner might only
invest money in the business and give the right to conduct the business to other partners.
It is essential that a partner has the right to participate in the conduct of his business.
2. Right to express opinion: In case there is a disagreement on a business-related issue in
the normal course of business, it is settled by a consensus among the partners. But, before
consensus is reached, each partner has the right to express his opinion. If the matter is
related to the policy or profitability of the business, a consent amongst partners.
3. Right of access to accounts: Every partner has the right to access the books of account
of the firm, examine the books and take a copy of any account.
4. Right to share in profit: Every partner is entitled to share in the profit of the firm
equally. Different proportions can be stipulated in the partnership deed. -Section 13(b)
5. Interest on capital: No partner has the right to get interest on the capital invested by him
in the firm. But if any interest is paid to the partners by agreement, it is only payable out
of the profits of the firm -Section 13(c)
6. Right to interest on additional capital or loan: If a partner has invested more than his
share of the capital, or has advanced any money as a loan to the firm, he has the right to
get interest on the additional capital or loan to the firm at the rate agreed upon. If no rate
of interest has been agreed upon, the partner has a right to receive interest at the rate of
six percent. -Section 13(d)
7. Right to indemnity: If a partner, in the normal course of business, or in an emergency
with the intention of protecting the firm from any loss, has done some act that a person of
normal intelligence would do to protect his interest, and has incurred some expense or
taken on some obligation, he has the right to be indemnified by the firm for such act.
Section 13(e)
8. Right in the firm’s property: As a rule, each partner is a joint owner of the firm’s
property and, unless there is an agreement to the contrary, each partner is presumed to
have an equal share. Such property includes all property purchased with firm’s money,
and is used exclusively for the conduct of the firm’s business.
9. Right to leave the firm: Every partner has the right to leave the firm with the consent of
other partners. In a partnership at will, a partner has only to give a notice of his intention
and leave the firm.
Duties of Partners
1. To work for maximum common interest: Mutual interest is the cornerstone of a
partnership. It, therefore, becomes the duty of a partner to conduct the business of
partnership for the maximum common interest of the partners. -Section 9
2. To be faithful to other partners: Every partner owes it to himself to be just and faithful
to other partners. –Section 9
3. To give correct accounts: It is the duty of partners to render true or correct account to
the partnership firm. It is also his duty to let the other partners inspect such accounts and
take copies, if they so desire. -Section9
4. To give correct information: Each partner is an agent of the other, and as such, is
obliged to give correct and full information to the other partners about the conduct of the
firm’s business. –Section9
5. To indemnify for fraud: If the firm or any partner thereof is put to a loss on account of
fraud by a partner in the conduct of the firm’s business, the liability of the partner who
has committed such fraud is absolute, and he is bound by law to compensate the firm or
the partner for such loss. -Section 10
6. To work diligently: Each partner is expected to work diligently in the conduct of the
firm’s business. -Section 12
7. To work without remuneration: Unless there is an agreement to the contrary, a partner
is duty-bound to work without remuneration in conducting the business of the partnership
firm. –Section 13(a)
8. To share the loss: Just as the partners have a right to share the profit of a business they
also have an obligation to share the loss equally or as defined in the partnership
agreement. –Section 13(b)
9. To give account of personal profit: If a partner has earned any secret profit by using the
name of the firm, it is his duty to return such profit to the firm. Section 16
10.Not to transfer rights and interests: Partnership is based on trust and good faith and a
partner is selected on that criterion. A partner, therefore, does not have the right to
transfer his rights and interests to another person without the consent of other partners.
-Section 29(b)
11.To work within his authority: Every partner must do such acts that are within his
authority. He must not go beyond his authority to do any act.
12.To maintain secrecy: It is the duty of the partner to keep the trade secrets of the firm
intact so that the competitors do not take advantage of the firm’s potential capacity to do
business.
Registration of Partnership
A Partnership is one of the most important forms of a business organization, where two or
more people come together to form a business and divide the profits thereof in an agreed
ratio. A Partnership is easy to form, and the compliance is minimal as compared to
companies.
Name given to the Partnership firm: Any name can be given to a partnership firm as long
as you fulfill the below-mentioned conditions:
 The name shouldn’t be too similar to an existing firm doing the same business,
 The name shouldn’t contain words like emperor, crown, empress, empire or any other
words which show sanction or approval of the government.
How should be the agreement between partners formed?
Partnership deed is an agreement between the partners in which rights, duties, profits shares
and other obligations of each partner is mentioned. Partnership deed can be written or oral; it
is always advisable to write a partnership deed to avoid any conflicts in the future.
Following details are required in a partnership deed: 
1. General Details:
 Name and address of the firm
 Name and address of all the partners
 Nature of business
 Date of starting of business Capital to be contributed by each partner
 Capital to be contributed by each partner
 Profit/loss sharing ratio among the partners
2. Specific Details:
Apart from these, certain specific clauses may also be mentioned to avoid any conflict:
1. Interest on capital invested, drawings by partners or any loans provided by partners to
firm
2. Salaries, commissions or any other amount to be payable to partners
3. Rights of each partner, including additional rights to be enjoyed by the active partners
4. Duties and obligations of all partners
5. Adjustments or processes to be followed on account of retirement or death of a partner or
dissolution of firm.
6. Other clauses as partners may decide by mutual discussion
Is it necessary to register a partnership firm?
 Indian Partnership Act, 1932 governs the partnerships. Registration of partnership firm is
optional and at the discretion of the partners.
 Registration of partnership firm may be done at any time – before starting a business or
anytime during the continuation of partnership.
 It is always advisable to register the firm since a registered firms enjoy special rights
which aren’t available to the unregistered firms.
How to register the partnership firm? An application form along with fees is to be
submitted to Registrar of Firms of the State in which firm is situated. The application has to
be signed by all partners or their agents.
Documents to be submitted to Registrar are
 Application for registration of partnership (Form 1)
 Specimen of Affidavit
 Certified original copy of Partnership Deed
 Proof of principal place of business (ownership documents or rental/lease agreement)

If the registrar is satisfied with the documents, he will register the firm in Register of Firms
and issue Certificate of Registration. Register of Firms contains up-to-date information on
all firms and can be viewed by anybody upon payment of certain fees