Class Notes

BBIS 2073

Private Firm

Introduction

Private firm can be said as a business vehicle for private investment, investment made by
single owner for carrying out business activities such as industry, trade or profession. It
is equally called Sole Proprietorship. The owner of the firm is called “Proprietor”

In this type of business the sole owner makes the investment, enjoys the profit earned and
he him/herself has to suffer the loss of the business. There may be the sharing of skill and
labour but cannot be sharing of investment, risk, and profit and loss.
The proprietor can hire agents and employees required for management and operation of
the firm. In Nepal, the private firm are registered under the Private Firm Registration Act
2014 and Private Firm Registration Rule 2034

Feature of Private Firm

1. No Corporate Personality
The private firm is considered to be an extended hand of the sole owner. There is no
separate identity and personality of the firm. It doesn’t have perpetual (continuous)
succession

As the firm doesn’t have personality in the eye of law the firm cannot execute contract in
its own name, cannot sue or be sued against it in its own name cannot acquire, sell or buy
property in its own name can not open bank account in its own name, cannot issue
corporate guarantee, cannot be the promoter of any company

All the documents needs to be signed (executed) by the sole proprietor unless power of
attorney given to any third person

2. Unlimited Liability

As the firm does not have any separate personality, it has unlimited liability. That means,
the sole proprietor has to settle all the debts and liabilities of the firm even from his/her
personal property

3. Requirement of renewal

It has to be renewed in every fiscal year.

Registration Procedure

Private firm has to be registered with the concerned government authority. The Private
Firm Registration Act 2014 and Private Firm Registration Regulation 2034 prescribe the
competent registering authority
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BBIS 2073

The Act and Rules prohibits the running of business without registering with the
authority and also provides fine under the Act and Rules, only natural person can register
the private firm

The private firm carrying out industrial activities should be registered with the
Department of Industries or Department of Small and Cottage Industries
The private firm carrying out trading activities should be registered with the department
of commerce.

Steps of Registration

a. Application to be filed with the concern authority in the prescribed format and along
with the prescribed fee specifying
i. Name and address of the Firm
ii. Objectives and detail of business activities
iii. Name and details of the owner of the Firm etc
b. Examination of the application by concerned authority
c. Registration of the Firm by the concern Authority in the Register and issuance of
Certificate of Registration

Renewal Requirement

The private Firm needs to be renewed every year. It should be renewed within 35 days
from the close of each financial year. Renewal fee should be paid

Dissolution

The dissolution of private firm can be seen from two perspectives that are

1. Forced Dissolution
1. If the firm was registered submitting false details
2. If not renewed within the prescribed time
3. If detail are not submitted at the request of the authority
4. If operated against law

2. Voluntary Dissolution
If Application for dissolution is submitted by owner

Problems for Discussion

Gurans Vegetables (Private Firm) promises to pay the loan amount of Rs. 3,00,000 obtain
by Nika Group of Company Pvt. Ltd from Delta Bank Ltd in case default made by the
Company. Mr. Kalu Proprietor of the Firm signed the guarantee agreement on behalf of
the Firm. Later the company defaulted and the bank filed the petition to recover the loan
amount from Mr. Kalu. Mr. Kalu defended that he is not liable to pay loan.
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BBIS 2073

Can kalu defend so?

Mr. Ramu as the representative of Manohara Fruit (Private Firm) has signed the MOA
and AOA of the proposed company “Hygienic Vegetable Pvt. Ltd” in the capacity of
promoter. Mr. Registrar refused to register the proposed company on the ground that the
private firm cannot be the promoter

Can registrar refuse??

Partnership Firm

What is partnership?
Partnership is an agreement made between two or more persons for carrying out any
business activities by sharing
1. Investment
2. Labour and Skill
3. Profit and loss

Partnership firm is also a kind of business vehicle for private investment. As define by
Black’s Law Dictionary, 7th Edition “It is a voluntary association of two or more persons
who jointly own and carry on a business for profit”

According to Section 3 of Partnership Act of Nepal 2020

“Partnership – Business activities registered with the government authority and carried
out by all or any of them acting for all by making an agreement and under a single name
with the motive of profit”

Therefore what we can say partnership firm is a kind of business organization in which,
two or more persons agree to carry on the business, on behalf of the firm or partners and
to share profits & losses mutually. There are three major points in this definition, they
are:
1. Agreement – There must be an agreement between partners, irrespective of oral
or written.
2. Profit – The profit & loss of the business must be distributed among the
partners, in the specified ratio.
3. Mutual Agency – Each partner is an agent of the firm as well as of the other
partners who carry on the business.

The persons are known as partners in their individual capacity, while they are jointly
known as the firm. The agreement in which the terms and conditions of the partnership
are written is known as “Partnership Deed”. However, in the absence of any partnership
deed, the Partnership Act of Nepal 2020 is referred. The main objective of the creation of
the partnership is to carry on a business.

It must be noted that the partners are responsible for the acts of the firm, as there is no
separate identity of the firm itself and therefore the partners are held liable for the same.
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BBIS 2073

Moreover, the partners cannot transfer their shares without the consent of the other
partners.

Key Issues under the Partnership Firm

1. Partnership is the result of an agreement. Partnership is the creation of agreement
that may be express or implied (not in writing). Partnership is not the creation of status
i.e. it will not create any position or rank. The right, duties and liabilities of each and
every partner are governed by the terms of agreement

2. Partnership is different from Co-ownership while Co-ownership may arise from the
status, operation of law, succession or inheritance

3. Partnership is organized for carrying out business activities. It is created with the
motive of profit where business includes industry, trade or occupation/profession, unlike
charitable activities or any loose forum carried out without the objective of profit.
Investment and expectation of return are inalienable aspect of partnership

4. Sharing of profit is necessary. As partnership has joint investment, the returns earned
on the investment (profit) should be divided among the partners. The ratio of sharing of
profit is dependent upon the amount of investment or terms and conditions of the
partnership agreement. However, sharing of profit is not a final or conclusive test for
partnership. It is just a necessary condition. Every person who receive the share in profit
may not be the partners

5. Partnership is the mutual agency The Partnership is a business activities carried out
by all or any of them acting for all. Each partner is agent of other partners and as such the
act done by any partner binds each and every partner and also the firm. Each partner is
also the principal. This Mutual agency is the conclusive test of partnership

There is also the concept of limited liability partnership in some countries (LLP).
However, even LLP at least one partnership should have unlimited liability. In such LLP,
the partner who has advantage of limited liability are not held individually and
collectively liable for the liabilities of the firm beyond his/her amount of investment.

Main characteristics of Partnership

1. Agreement:-
Without agreement partnership cannot be formed. The agreement may be written or oral.
But it must be written on settle the disputes.

2. Registration:-
It is not necessary that a partnership may be registered. But in case of registered firm
many problems can be created.

3. Profit and Loss Distribution:-

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BBIS 2073

The basic aim of partnership is to earn profit. This profit is distributed among the partners
according their agreement. In case of loss also all the partners share in it.

4. Business:-
The object of the partnership it to carry on the business. It may be production or trading.
It should be according the laws of the state.

5. Unlimited Liability:-
The liability of the partner is not limited to his invested amount. In case of loss the
private property of the partner also used to pay the business obligations.

6. Entity:-
Law has not granted it any legal entity, it is not independent from the partners. It has not
separate entity from its members.

7. Share in Capital :-
According to the agreement every partner contributes his share. It is not necessary all the
partners should contribute equally. Some people provide only skill and ability to become
a partner.

8. Management :-
All the partners can participate actively in the business management. Sometimes only few
persons are allowed to handle the business affairs.

9. Co-Operation :-
For the successful partnership mutual co-operation and mutual confidence is an important
factor.

10. Partners are Agent :-

Every partner stand as an agent and principal to one another. In the position of an agent
one can do contract with other parties on behalf of the firm.

15. Dissolution:-
It is a temporary form of business. It operates at the pleasure of the partners. It is
dissolved if a partner leaves dies or declared bankrupt or insane. Partners can also
dissolve it by obtaining the degree from the court.

The Details of Dissolution of Partnership business can find in Partnership Act of Nepal
2020 under section
11 (b), 29 – 32 of Partnership Act of Nepal 2020

Problem for discussion

Mr. Father left his two sons S1 and S2 his business and three houses on equal share. S1
and S2 provided the one of the house on rend and employed the rent amount in the
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BBIS 2073

development of the business of the workshop that was attached to the houses. (Davis v.
Davis, 1894)

Is the act of renting house partnership?

Is the running of workshop and sharing the profit partnership?

Mr. Kiran provided Rs. 2 million to the P3 Partnership Firm for a term of five years. The
interest rate was agreed at 10% per annum. Beside interest, Mr. Kiran also bargained for
a sharing of profit at 5% of net profit. P1 agreed and signed the loan agreement on behalf
of the firm. However, P2 and P3 refused to share profit. They argued they were not aware
of such term and hence, had not to abide by with the terms

The issue was remained unsolved. Further, after three years, the partner decided to
liquidate the Firm. P2 and P3 were not ready pay the loan amount. They reiterated they
did not sign the loan agreement and were not bound to settle the debt

1. Is Mr. Kiran a partner of the firm?

2. Are P1 and P2 bound by the agreement sign by P1?
3. Do P1 and P2 have any liability to settle the debt?