LECTURE -06

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LAW OF PARTNERSHIP
FORMS OF BUSINESS 2

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01/23/202
 SOLE PROPRIETORSHIP

 PARTNERSHIP

 COMPANY
 Law of Partnership 3
 The law of partnership is contained in the
Partnership Act, 1932.

 It came into force on 1st October 1932.

 It extends to whole of Pakistan. [Sec. 3]

Meaning of Partnership

A partnership is a voluntary association of two or

more persons who contribute money, property, time

and skill to carry on business for profit and to share

the losses of the business.

Some Definitions of Partnership 4

USA PARTNERSHIP LAW:

 An association of two or more persons who carry on as
co-owners, a business for profit.

PARTNERSHIP ACT 1932:

 SECTION 4:

“ Partnership is the relation between persons who

have agreed to share the profit of business

carried on by all or any one of them acting for all.”

 Partner and Firm 5

Partner:
 Persons who have entered into partnership with one
another are called individually partners.

 Generally, the word partner means a person who

has agreed to share profit of the business.

Firm:
 Persons who have entered into partnership with one

another are collectively called Firm.

 Test of Partnership 6

 Following features may determine the existence of

PARTNERSHIP

1. There must be a Contract

2. Between two or more persons

3. Who agree to carry on Business

4. With the object of Sharing Profits

5. The business must be carried on the business by all or

any of them acting for all. [ Mutual Agency ]
Advantages of Partnership 7
1. Ease of Formation. 2. Larger Capital

3. Better Management. 4. High Credit

Standing.

5. More Participation. 6. Skilled Employees

7. Public Relations. 8. Flexibility.

9. Quick Decision Making. 10. Sharing of Risk.

11. Protection of Minority. 12. Possibility of

Expansion

13. Spirit of Cooperation. 14. Business Secrets.

15. Personal Supervision 16. Easy Dissolution.
Disadvantages of Partnership 8

1. Unlimited Liability. 2. Risk of

Dissolution

3. Possibility of Disagreement 4. Limited Resources.

5. No transfer of Ownership. 6. Lack of Authority

7. Lack of Public Confidence. 8. Lack of Harmony.

9. Lack of Secrecy. 10.

Authority of Partner.
 Types of Partnership 9

1. Partnership at Will:
 When partnership is formed for unlimited period.

 Partnership was formed for limited period but it

continued after expiry of that period.

 Partnership was formed for particular project/purpose

but it continued after the completion of project/purpose.

 Any partner can terminate it any time, by giving

notice of termination.
Types of Partnership CONT… 1
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2. Particular Partnership:
 Partnership formed to do a Particular Business or for
a Particular Period.

 It dissolved immediately on the completion of that

particular business or period. For example:

For Working a Coalmine or

Producing a Film.
Types of Partnership CONT… 1
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3. Limited Partnership:
 Some partners are with limited liability.
 There is at least one partner with unlimited liability.
 The firm must be registered.
 Limited partner cannot take active part in the
management of the firm.
 They can inspect the books of the firm any time.
 They can give suggestions and recommendations.
 A new partner can be admitted to the firm without
the consent of the limited partner.
 Kinds of Partner 1
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1.Active Partner

2.Dormant or Sleeping Partner

3.Nominal Partner

4.Senior Partner

5.Junior Partner

6.Partner in Profit Only

7.Secret Partner

8.Minor Partner
 Partnership and Joint 1
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company:
1. Legal Entity :
 A partnership firm has no legal entity distinct from the partners.
 A registered company is a judicial person distinct from its
members.
2. Number of Members :
 In Banking business number of members must not exceed 10 and
in case of any other business, it must not exist 20.
 A private company may have maximum 50 members and minimum
2. In case of public limited minimum 7 and no upper limit specified.
3. Transfer of shares :
 Transfer of shares is possible only with the consent of all partners.
 In company transfer of shares is possible as per provisions
contained in its Articles. In public company whose shares are quoted in a
stock exchange, shares can be transferred without any restrictions
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4. Agency :
 In a firm, each partner acts for all and thus each
partner represents all, as well as the firm. Hence each partner
is an agent of the other partners, as well as of the firm.
 In case a company, members are not agents of the
other members or of the company.
5. Distribution of Profits:
 In partnership distribution of profits is must between
partners as per partnership deed.
 There is no compulsion in a company to distribute profits. If
company earns profits, then some part of profits but not the
entire profits become distributable only when dividend is
declared.
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6. In case of dissolution:
 Firms property is joint property of all partners, in case of dissolution
or insolvency liability is paid off initially from joint property and
thereafter from partners personal property if required.
 In case of company, members’ property and company’s property
are separate, in case of dissolution only refund of capital is allowed.
7. Extent of liability:
 In a partnership, the liability of partners is unlimited. Therefore
each partner is liable to pay debts of a firm incurred in the course
of business of the firm and those debts can be recovered from his
private property.
 The liability of shareholder is limited to the amount, if any, unpaid
on his shares, in the case of company limited by shares, but in case
of a guarantee company, the liability is limited to the amount for
which he has agreed to be liable. However, there may be
companies where the liability of members is unlimited.
Partnership and Hindu
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Undivided family (HUF): 6
1. Creation :
The relation of partnership is created by an agreement.
The right in HUF is created by status i.e. by birth in the family
2. Management :
In Partnership, all the partners are equally entitled to take part in
business.
In HUF all power vests with Karta, the senior most or governing
male member of the family.
3. Liability :
In Partnership, the liability of partner is unlimited.
In HUF, liability of Karta is unlimited and other co-partners are
liable to extent of their share in profits of the family business.

4. Governing Act :
Partnership firm are governed by Partnership Act, 1932.
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5.Asking for accounts details :
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Partners are allowed to ask details of accounts, in case of
separation from firm, he can also file suit against firm for accounts
and ask for dissolution for firm.

In joint family business, a member is not entitled to ask for

accounts of the family business.
6. Death :
Death of partner may lead to dissolution of partnership.
Death of members of HUF does not give rise to dissolution of
family business. HUF continues till its divided.
7. Minor :
A minor cannot become a partner, but minor can be admitted to
the benefits of partnership, only with consent of all the partners.
In HUF business, minor becomes member by incidence of birth. He
does not have to wait for attaining majority.
Partnership and Co- 1
ownership: 8
1. Partnership arises out of agreement, contract expressed or implied.
Co-ownership may arise either from agreement or by operation of law like
inheritance.
2. Profit and losses must be shared in Partnership.
Profit sharing is not necessary in co-ownership. (E.g. 200 sq. ft land received by A
& B inheritance, selling of A’s part of land at high profit doesn’t bind A to share
profit with B).
3. Agency relationship is there among partners.
Co-owners are not agent of each other.
4. Share in Partnership can be transferred only after consent of other partner.
Co-ownership, co-owners may transfer his interest, share or rights without
consent of other co-owners.
 Rights of a Partner 1
Category RIGHT TO
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A Share profits
1
To take part in the conduct of business
2
To be consulted
3
To access to books
4
B
Remuneration/Salary
5
Interest on Capital
6
Interest on Advances
7
C
To retire
8
To stop admission of a new partner
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 Duties of Partners 2
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1. To Carry on Business. 2. To be Just &
Faithful.
3. To Render Accounts. 4. To Provide
Information

5. To Attend Diligently. 6. To Indemnify.

7. To share Losses 8. To Accounts

for Profit.

9. Accounts for Personal Profit.

10. To indemnify for Willful Neglect.

11. To Use Firm’s Property for Firm.

 Liabilities of Partners 2
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1. Liability of Partner for Acts of Firm

Every partner is individually and jointly liable to third

parties for all the acts of the firm. It means that if the
assets of the firm are not sufficient to meet the
claims of third parties, partners have to satisfy the
remaining claims out of their personal property.
[Sec. 25]
 Liabilities of Partners 2
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2. Liability of Firm for Wrongful Act

The firm is liable to the same extent as the partner

for any loss or injury caused to third parties for the
wrongful acts of a partner in the ordinary course of
the business of the firm. [Sec. 26]
 Liabilities of Partners 2
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3. Liability of Firm for Misapplication

If any partner or the firm receives money or other

property from a third person in the normal course of
business and the same is misapplied, the firm will
be liable to make good the loss. [Sec. 27]

4. Liability of Retiring Partner

Every retiring partner is liable for all such debts and

liabilities of the firm which have been contracted
before his retirement.
Dissolution of Partnership 2
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Dissolution of Partnership 2
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1. Dissolution By Agreement:

It is a general principle that contract may be

discharged or terminated by mutual consent.
2. Compulsory Dissolution:

Section 41 provides two circumstances in which

partnership compulsorily or automatically
dissolved;

i. Insolvency of all or all but one partner.

ii. Happening of any event which makes

Dissolution of Partnership 2
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3. Contingent Dissolution:

Subject to contract between the partners; a firm is

dissolved on the happening of any of following
contingencies.

i. Expiry of the term for which the firm was constituted.

ii. On the completion of project or purpose for which

the firm was formed.

iii. On death of partner.

iv. On insolvency of partner.

Dissolution of Partnership 2
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4. Dissolution by Notice:
• When the partnership is at will, the firm may be

dissolved by any partner giving notice in writing to

all the other partners of his intention to dissolve the
partnership.

• The partnership will be dissolved from the date

mentioned in notice.

• If No any date is mentioned, it will dissolve from the

date of communication of the notice. [sec.44]

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QUOTE OF THE DAY 8

“It takes many good deeds

to build a good reputation and
only one bad one to loose it”

BENJAMIN FRANKLIN
THANK YOU