Nature of the Partnership Firm

What is partnership firm?

Meaning of Partnership firm: – When two or more people join hands to set up an enterprise or business and share its profits and losses, they are said to be in Partnership or Partnership Firm . Persons who have entered into partnership with one another to carry on a business are individually called “Partners“; collectively called as a “Partnership Firm”; and the name under which their business is carried on is called the “Firm Name”. Section 4 of the Indian Partnership Act 1932 explains partnership as an association between people, who have agreed to share the profits of an enterprise made by all or one of them who is acting for all.

Those who have partnered with each other are independently termed as ‘partners’ and collectively as ‘firms’. The name under which the business is conducted is called the ‘name of the firm’. A partnership enterprise has no separate legal entity, other than that it includes partners.

For example: –

• ‘X’ and ‘Y’ buy 100 bales of cotton which they agree to sell on their shared account. ‘X’ and ‘Y’ will become partners, for the sale of such cotton.
• There are two partner and they entered into an agreement to start a legitimate business (legal business) with the aim of making a profit, which would be shared according to the agreement. That business can be managed by all partners or any one partner acting for all.

What are the essentials of the Partnership Firm?

The essentials of the partnership firm are as follows: –

1. Two or more persons: –
   1.  In order to start partnership, there must be at least two individuals with common goals. In other words, the minimum number of partners in an enterprise should be 2.
   2. A partner should be a person who is competent to contract. A minor or a person of unsound mind are not eligible to become a partner.
   3. The Indian Partnership Act, 1932 does not impose a limit on the maximum number of partners in a firm. However, the Indian Companies Act, 2013 adheres to the limits of multiple partners in a firm: –
      • For banking business, the partner must be less than or equal to 10.
      • For any other business, the partner must be less than or equal to 20.
      • If the number of partners exceeds the limit, the partnership becomes invalid.
2. Agreement: –
   1. This is the result of an agreement between 2 or more people to regulate the business and share its profit and loss. The agreement becomes the basis of cooperation between the partners.
   2. Such an agreement is in writing. An oral agreement is equally valid. To avoid disputes, it is always good if the partners have a copy of the written agreement.
3. Sharing of profit and losses: –
   1. Another important component of a partnership is the sharing of profit and loss of business concerns by agreement between partners.
   2. Although the definition laid down in the Partnership Act has allowed people to agree to share the profits of a business, the sharing of losses is implicit. Therefore, it is important to share the profits and losses.
4. Mutual Agency: –
   1. The business of a partnership firm can be carried out by all partners or any of them. This statement has two important implications: –
      • To participate in the conduct of the affairs of their business, each partner is entitled.
      • The second is that there exists a mutual agency relationship between all the partners.
   2. For all other partners, each partner carrying on the business is the principal and agent. All the partners will bound for the act of one partner done in the conduct of business. And is also bound by the acts of other partners in relation to the business of the firm.
5. Liability of Partnership: –
   1. Each partner is jointly liable with all other partners. And also when a partner is severely liable to the third party for all the work done by the firm. Partner’s liability is not limited. This means that to pay off the debt of the firm, its personal assets can also be used.

What is Partnership Deed?

Meaning of Partnership Deed: – An agreement between partners to pursue a business, partnership comes into existence. A partnership agreement can be in writing or it can be oral. The Partnership Act does not require that the agreement be in writing. But when the agreement is in writing, it is called a ‘partnership deed‘. The partnership deed must be duly signed, stamped and registered by the partners.

The partnership deed consist of the following details: –

• Names and addresses of the firm and its core business;
• Names and addresses of all partners;
• The amount of capital contributed by each partner;
• Accounting period of the firm;
• Start date of partnership;
• Rules regarding operation of bank accounts;
• Profit and loss sharing ratio;
• Rate of interest on capital, loan, withdrawal etc.
• The manner of appointment of auditors, if any;
• Salary, commission etc., if payable to any partner;
• Rights, duties and obligations of each partner;
• Treatment of losses arising from the insolvency of one or more partners;
• Settlement of accounts upon dissolution of the firm;
• Method of settlement of disputes between partners;
• Rules to be followed in case of admission, retirement, death of partner; And
• Any other matter related to the operation of the business. Generally, all matters affecting the relationship of partners are covered in the partnership deed.

Different types of partnership firms

1. Partnership at Will
   1. If there is no clause establishing a partnership upon the termination of such partnership, it shall be referred to as a partnership.
   2. If a partnership is established and continues to operate beyond a fixed period, the partnership will become a partnership at will after the end of that period.
   3. As per Section 7 of The Indian Partnership Act, 1932, two conditions have to be fulfilled for partnership in order to become a partnership at will and they are: –
      • There is no agreement on a fixed term for the existence of a partnership.
      • No provision has been made for establishing a partnership.
2. Particular Partnership
   1. A partnership can be formed for a ongoing business or for a specific purpose. If a partnership is formed only to complete a company or to complete an undertaking, then it is known as a Particular Partnership.
   2. The partnership will be dissolved after the completion of the said undertaking or activity. However, the completion of the task the partnership firm will end.
3. Partnership for a Fixed Term
   1. Now, during the establishment of a partnership, the partners can agree on the duration of this arrangement. This would mean that the partnership was established for a fixed period.
   2. Therefore, such a partnership would not be called a partnership at will, it would be a partnership for a fixed period of time. The partnership terminates after the expiration of such period.
   3. However, there may be cases where partners continue their business even after the expiry of the period. They continue to share profits and are a component of a mutual agency. Then in such a case, it will become partnership at will.
4. General Partnership
   1. When the purpose of forming a partnership is to carry out the business in general, it is called a general partnership.
   2. Unlike a particular partnership, in a general partnership, the scope of the business to be carried out is not defined, so all partners are accountable for all the actions of the partnership.