Indian Partnership Act, 1932

1. Definition of Partnership (Section 4)

Partnership is defined as:

"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."

Key Elements of Definition

1. Agreement:

o Partnership arises only through an agreement, whether written, oral, or implied.

Example: A and B decide to open a bakery, agreeing to share profits and losses equally.
This is a valid partnership based on mutual consent.

2. Lawful Business:

o The business must involve legal activities.

Illustration: If A and B form a partnership to smuggle goods, it will not be considered a
partnership under the law.

3. Profit Sharing:

o Partners must agree to share profits. Loss sharing is optional but usually implied.
Example: A law firm where lawyers share profits and use them to cover operational
costs.

4. Mutual Agency:

o Each partner acts as an agent (binding others) and a principal (bound by others).
Illustration: If Partner A of a grocery shop orders goods from a supplier, the supplier can
hold all partners liable for payment.

Case Law:

• Cox v. Hickman (1860): Mutual agency is essential for a valid partnership.

2. Essentials of a Partnership

1. Association of Two or More Persons:

o Minimum of two partners is necessary.

Example: A and B form a firm, agreeing to sell electronic items.

2. Agreement:
 o Partnerships require consent between partners.
Illustration: An implied partnership can occur if two people share profits regularly
without a written agreement.

3. Lawful Business:
Example: Running a bookstore is valid, but forming a betting syndicate is not.

4. Profit Sharing:

o Sharing profits indicates a partnership. However, employees earning a commission are

not partners.
Example: A shopkeeper and his assistant share profits in a 70:30 ratio. If the assistant
has no decision-making authority, he is not a partner.

5. Mutual Agency:
Example: A, a partner, borrows money for the business without informing B and C. The firm is
bound to repay the debt.

3. Relation of Partners Inter Se (Mutual Relationship)

1. Fiduciary Duty:

o Partners must act in good faith.

Illustration: Partner A must disclose to Partner B any secret deal benefiting A personally.

2. Equal Participation in Management:

o All partners have equal say unless agreed otherwise.

Example: If one partner is appointed as the manager, the agreement should clearly
outline their role.

3. Profit and Loss Sharing:

o Partners share profits equally unless specified otherwise.

Illustration: If a firm earns ₹1,00,000 and no agreement exists, profits will be divided
equally.

Case Law:

• Blisset v. Daniel (1853): Emphasized good faith in partnerships.

4. Relation of Partners to Third Parties

1. Implied Authority:

o A partner can bind the firm for ordinary business activities.

Example: If Partner A purchases inventory for a retail store, it binds the firm.

2. Liability of Partners:
 o Partners are jointly and severally liable for debts incurred by the firm.
Illustration: If the firm defaults on a loan, creditors can recover the full amount from any
one partner.

3. Notice:

o Communication to one partner is considered communication to all.

Case Law:

• Kashinath v. Narsingh (1914): Defined acts binding on the firm.

5. Doctrine of Holding Out (Section 28)

If a person represents themselves as a partner, they are liable for the firm's actions even if they are not
actual partners.

Essentials:

1. Representation made or permitted.

2. Third party relies on the representation.

Example: A introduces B as his partner to a supplier. B is not an actual partner but is liable if the supplier
gives goods to the firm based on this belief.

Case Law:

• National Bank of India v. Sardar Bahadur (1935): Established liability under holding out.

6. Position of a Minor in a Partnership

1. Minor’s Rights:

o Share in profits and inspect accounts.

Example: A minor admitted to a trading firm can access accounts but not participate in
decision-making.

2. Liabilities:

o Limited to the extent of their share.

Illustration: If a firm suffers losses, the minor’s liability does not extend beyond their
capital contribution.

3. After Majority:

o A minor must decide within 6 months to continue as a partner or withdraw.

Case Law:

• Sain Das v. Ram Chand (1948): Clarified a minor’s rights and liabilities.
7. Dissolution of Partnership Firm

1. By Agreement:

o Partners may agree to dissolve the firm.

Example: A and B mutually decide to close their garment business.

2. By Notice:

o In a partnership at will, any partner can dissolve the firm by notice.

Illustration: Partner A sends a written notice to dissolve a partnership of consultants.

3. By Operation of Law:

o Death, insolvency, or illegality of the business.

Example: If a partner dies, the partnership dissolves unless otherwise agreed.

4. By Court:

o On grounds such as misconduct or incapacity.

Case Law:

• Firm Seth Badri Prasad v. Seth Nagarmal (1936): Highlighted dissolution by mutual agreement.

8. Registration of Partnership Firm

• Registration is optional but highly advisable.

• Effects of Non-Registration:

o Firm cannot sue third parties.

o Set-offs cannot be claimed in suits.

Limited Liability Partnership (LLP)

1. Features of LLP

1. Separate Legal Entity:

o LLP is distinct from its partners.

Illustration: The LLP can own property, sue, or be sued in its name.

2. Limited Liability:
 o Liability of partners is limited to their agreed contribution.
Example: If an LLP incurs debts of ₹1 crore, partners’ personal assets are not at risk.

3. Perpetual Succession:

o The LLP continues even if partners change.

4. No Maximum Limit on Partners:

Illustration: An LLP can have 100 partners, unlike traditional partnerships.

Case Law:

• In Re Kanakdhara Ventures LLP (2017): Clarified the separate identity of LLPs.

2. Differences Between Partnership and LLP

Aspect Partnership LLP

Regulation Indian Partnership Act, 1932 LLP Act, 2008

Legal Status No separate legal entity Separate legal entity

Liability Unlimited liability of partners Limited liability of partners

Perpetual Succession Does not exist Exists

Ownership of Property Jointly owned by partners Owned by the LLP

Taxation Taxed as a partnership Taxed as a company

Example:

• In a traditional partnership, creditors can recover debts from partners’ personal assets.

• In an LLP, only the LLP's assets can be used for debt repayment.

Case Law:

• Vijay Kumar v. A.P. State (2020): Highlighted LLP advantages over traditional partnerships.