CENTRE FOR DISTANCE AND ONLINE EDUCATION

CENTRE FOR DISTANCE AND ONLINE EDUCATION

Live Session – Session No. 4

BCOM103 – Corporate Legal Environment

Unit No. 4: Partnership Act, 1932
B.Com. Semester-I
SURAJ AGARWAL
M.COM, M.B.A, UGC NET
(Qualified)
FACULTY CDOE, SMU
Learning Outcomes

1 2 3 4
Describe joint Describe the Distinguish between Know accounting
venture. features of joint joint ventures and treatment in joint
ventures. consignment sales. ventures.
Meaning of Partnership .
According to the Indian Partnership Act, 1932, a partnership is defined under Section 4 as “the relation
between persons who have agreed to share profits of a business carried on by all over or any of them
acting for all.”
A partnership has the following important features:
1. Existence of business: The objective of a partnership must be to do some type of business with the
intention of earning some profit.
2. Number of persons: There must be at least two or more people to form a partnership firm.
3. Sharing of profits: The profits and losses generated by the firm are to be shared among the partners
in an agreeable proportion.
4. Agency: Each partner is an agent of the other partners.
5. Unlimited liability: If the property or the assets of the firm are insufficient to meet the claims of the
creditors, the private property of the partners can be attached to meet the claims of the creditors.
6. Restriction on transfer of ownership: A partner cannot transfer his or her share in business to an
outsider without the consent of all other partners.
7. Duration of the partnership: The existence of the partnership firm continues at the pleasure of the
partners.
Advantages of Partnership.
A partnership form of business has certain advantages, which are as follows:
1. Easy to form – A partnership business can be formed easily without any legal formalities.
2. Availability of large resources –The partners can contribute more capital, more time and more effort
to the business.
3. Better decisions –Since all partners participate in decision-making, there is less scope for reckless and
hasty decisions.
4. Flexibility in operations –At any time, the partners can decide to change the size or scope of their
firm’s business or the area of its operation. There is no need to follow any legal procedure. Only the
consent of all the partners is required.
5. Sharing risks – In a partnership firm, all the partners share the business risks proportionately.
6. Protection of interest of each partner – In a partnership firm, every partner has an equal say in
decision-making. If any decision goes against the interest of any partner, they can prevent the decision
from being taken.
7. Benefits of specialisation – Since all the partners are owners of the business, they can actively
participate in every aspect of the business as per their knowledge and specialisation.
Disadvantages of
Partnership.
In spite of all the advantages discussed above, a partnership firm also suffers from certain limitations. Let
us discuss all these limitations in detail:
1. Unlimited liability – All the partners are jointly as well as severally liable for the debt of the firm, to an
unlimited extent. Thus, they share the liability among themselves, or sometimes, any one of them can
be asked to repay all the debts, even from personal property.
2. Uncertain life – The partnership firm has no legal entity separate from its partners. It comes to an end
with the death, insolvency, incapacity or retirement of any partner.
3. Lack of harmony – In a partnership firm, every partner has an equal right to participate in the
management. Due to this feature, there is a possibility of friction and quarrels among the partners.
4. Limited capital – Since the total number of partners cannot exceed 20, the capital to be raised is
always limited. It may not be possible to float a very large business in partnership form.
5. No transferability of share – A partner cannot transfer his or her share of interest to outsiders,
without the consent of other partners. This creates inconvenience for the partner who wants to leave
the firm or sell a part of his or her share to others.
Types of Partners

Active Partner: A general partner who takes an active part in the day-to-day affairs of the business is
known as an active partner. This partner is also termed as a working or managing partner.
Dormant or Sleeping partner: This partner does not take any part in the day-to-day affairs of the
business, but contributes capital to the business and shares its profits and losses.
Nominal Partner: This partner neither invests capital nor does he participate in the profits and losses of
the firm as a regular partner. He lends his name to enhance the goodwill of the firm.
Minor partner: The minor partner is a partner who has not completed the age of 18 years .However, he
can be admitted to the benefits of the firm with the consent of all the partners.
Secret partner: He is otherwise an active partner in the firm, but his membership is kept secret from
outsiders, including the creditors of the firm.
Partner by Estoppel or Holding out: The Partnership Act defines such a partner as a person, who, by
written or spoken words, represents himself or knowingly permits himself to be represented as a partner.
Actually, he is not a partner but is deemed to be one by his activities.
Partners in profits: This partner shares the profit of the firm, but is not liable for losses.
Partnership deed
A partnership deed is a written agreement that contains terms and conditions regarding the relationship
of the partners with each other. There is no prescribed format for a partnership deed, but it must be
adequately stamped and signed by all the partners. Partnership deeds are drawn to avoid
misunderstandings and undesirable litigation.
A correctly drafted partnership deed contains the following points:
1. The name of the firm and the names of the partners.
2. The place where the head office is situated and where the firm’s business is carried on.
3. Nature and kinds of business operation.
4. The amount of capital contribution by the partners.
5. The commencement and the duration of the partnership.
6. The proportion in which the profits are to be shared.
7. The provisions for interest on capital, if any.
8. Nature of loans and advances and the provisions for interest on loans.
9. The amount of withdrawal to be made by the partners to any partner for this special service to the
firm.
10. Provisions for maintenance of books of accounts and the procedure of audit of accounts.
Registration procedure
The whole process of registration is divided into two parts:
1. Submission of application: The application for registration of the firm is submitted to the Registrar of
Partnership Firms on a prescribed printed form. This statement is to be signed by all the partners. It
contains the following particulars about the firm:
a. The name of the firm
b. The place of the firm.
c. The names of any other places where the firm carries on business.
d. The partner's date of joining the firm.
e. The full name and permanent address of the partners.
f. The duration of the firm.
The application form containing the above particulars should be signed and verified by each partner. The
Registrar will go through the details furnished and, if satisfied with legal compliance, shall issue a
certificate of registration.
2. Certification: On receipt of the application for registration, the Registrar examines the particulars given
in the statement. If the Registrar is satisfied with the information supplied, the Registrar records the name
of the firm in a register called the Register of Firms. A registration certificate is then issued to the partners.
Effect of registration
A registered firm enjoys the following advantages over an unregistered firm:
1. Terms of agreement: The terms of the agreement are made clear to each partner in writing. Such terms
are customarily drawn by a lawyer.
2. Basic legal document: If an issue arises among the partners, it becomes a basic legal document to be used
as a validation for arriving at any decisions.
3. Income tax: If a firm is registered with the income tax authority, the profit of the firm is divided among the
partners. The tax is charged on the income of the partners individually. In the case of an unregistered firm,
the firm pays tax. The partners of the registered firm, therefore, get the privilege of lower assessment.
4. Benefits to the firm: A registered partnership can file suits against outsiders. It can also file a suit against a
partner for misconduct.
5. Benefits to retiring partner: A retiring partner is not held liable for the debts of the firm after the date of
his retirement.
6. Benefits to incoming partner: A new or incoming partner gets complete information about the registered
firm from the Registrar’s office.
7. Benefits to the creditors: The partner of a registered firm cannot deny his membership of the firm. The
creditors of the firm, thus, can hold one or all the partners liable for the payment of the debts.
Effect of non-registration

1. No suit by a partner against the firm or any other partner: A partner of an

unregistered firm cannot file a suit against the firm or any other partner for
enforcing any legal commitments through the court.
2. No suit by the firm against third parties: An unregistered firm cannot take any
legal action against third parties to recover its dues.
3. Third party can file a suit: A third party can, however, file a suit against the firm
for the recovery of dues even if the firm is unregistered.
Dissolution
When a partnership firm is wound up between all partners, it is called dissolution.
A firm may be dissolved in the following ways:
1. By consent – A firm may be dissolved at any time with the consent of all the partners. This applies to all
cases, whether the firm is for a fixed period or at will.
2. By agreement – A firm may be dissolved in accordance with a contract between the partners. Partners can
consent to dissolution regardless of what their previous agreements are.
3. Compulsory dissolution – Insolvency of all, or all but one partner, or illegality of business are considered as
base grounds of compulsory dissolution because they operate to bring about such necessary dissolution that
there can be no agreement to the contrary.
4. Contingent dissolution – A firm is dissolved on any of the following contingencies if the firm is constituted
for a fixed period, by the expiry of that term. If the firm is constituted to carry out one or more adventures or
undertakings, when they are completed.
5. By the death of the partner.
6. By the adjudication of a partner as insolvent.
7. By notice
8. When the partnership is at will, it may be dissolved at any time by any partner by giving notice of his
intention to dissolve it.
Human resources slide 9

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