Partnership Act 1932: A partnership firm is formed when two or more people join forces as partners. The Indian Partnership Act, 1932 governs this partnership firm’s laws and regulations Also, the Indian Contract Act governs the partnership in locations where the Partnership Act, 1932 is absent. In this article, let’s understand the Partnership Act 1932, its definition, scope, and different types of partnerships.
- Definition of Partnership Act
- What is Partnership Act, 1962?
- Partnership Act Important Points
- Types of Partnerships
- Number of Partners in a Partnership
- Types of Partners in Partnership Firm
- Partnership Deeds
- FAQ’s on Partnership Act
The Indian Partnership Act, Section 4, defines a partnership as:
Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all
A partnership firm is formed when two or more persons join forces to run a business with the goal of making money and sharing it. The partners pool their financial resources and work together to run the company. A partnership must be created for the purpose of carrying on a lawful business, according to Section 12 of the Indian Partnership Act. Property co-ownership is not considered a partnership.
The important points of the Partnership Act are explained below:
- To carry on the partnership firm’s business, the partners must come to an agreement.
- The goal of forming a partnership should be to make money and share it with the other partners. Unless otherwise indicated, profit and loss distribution might be based on the capital contribution percentage of each partner or distributed equally among all partners.
- The partnership agreement must specify that the business will be run jointly by all of them or by some of them acting on behalf of all of them. The mutual agency exists between the partners, according to Section 13 of the Partnership Act of 1932.
- In a partnership, each partner serves as both a principal and an agent for the other partners. A partner’s activities have a binding effect on the actions of all other partners.
- Unlimited Liability- The partners might be held jointly accountable for the firm’s debts. They have unlimited accountability for the firm’s obligations, which extends to their personal assets.
On the basis of partnership terms and business scope, there are two types of partnerships.
- Partnership on the Basis of Duration
- Partnership at Will: A partnership at will has no set time limit for its expiration.
- Partnership for a Fixed Period: The partners agree on a period of time for the partnership to last, after which it will end.
- Partnership Based on the Size of the Company
- Particular Partnership: When a partnership is formed for the purpose of completing a specific project, it expires after the project is completed.
- General Partnership: When a partnership is created for the firm’s regular operations rather than for a specific project, it is referred to as a general partnership.
- According to the Indian Partnership Act, the maximum number of participants in a partnership is unlimited, although a minimum of two partners is required.
- According to the Companies Act of 2013, the maximum number of participants in a partnership cannot exceed 100.
- According to Section 464 of the Companies Act, 2013, a partnership with more than 100 members is considered an illegal association.
However, the maximum number of partners for banking purposes is ten, while the maximum number of partners for other reasons is ten, according to Section 11 of the Companies Act.
In a partnership firm, there are essentially six types of partners.
- Active/Managing Partner: Takes an active role in the firm’s day-to-day activities.
- Sleeping/Dormant Partner: Does not participate in the day-to-day activities of the firm but is bound by the other partners’ actions.
- Nominal Partner: Has no financial interest in the firm and is merely a partner in the name.
- Partner in profit only: He/She shares only the firm’s gains and not the losses. Any third-party liabilities are not the responsibility of such a partner.
- Minor Partner: According to the Indian Contract Act, a minor cannot be a partner in a partnership firm, but he can be entitled to the firm’s benefits with the approval of the other partners. The minor partner shares in the firm’s profits equally, but has limited accountability for the firm’s losses.
- Partner by Estoppel: A person who is not a partner of the firm but represents himself to be one to another person through his words or conduct is referred to as a partner by estoppel. Even if he is not a partner, such a person cannot deny being one afterwards.
A partnership’s foundation is the partnership agreement. It is the basis that establishes a legal relationship between the partners in order to carry out the partnership firm’s operations. A partnership agreement can be written or oral, but it is referred to as a partnership deed when it is written. The following are some of the details contained in a partnership deed.
- The partnership firm’s name and address, as well as the business’s
- All partners’ names and addresses
- Partners’ rights, responsibilities, and obligations
- Ratio of profit and loss sharing
- Each partner makes a financial contribution.
- Interest rates on capital, loans, and drawings
- Accounts are settled in the event of the firm’s dissolution.
- In the event of a disagreement between partners, how do you resolve it?
- Partners’ salaries and commissions are due.
- Rules to follow in the event of a new partner’s admission, retirement, or death of an existing partner
- Any other provisions impacting the partners’ rights
What are the rights of partnership?
For the business, partners share planning, decision-making, operation, and management rights and duties. This right can also be waived by partners. During the decision-making process, partners have the right to provide input and propose ideas, and these ideas can be considered by the group.
Why is a HUF not considered as a partnership?
A contract/agreement for a partnership is one of the most crucial aspects of a partnership. A voluntary and contractual agreement between partners is required. A HUF is formed from statues, and all of its members are born into the organisation. As a result, these individuals cannot be considered partners under the law, therefore the HUF is not a partnership.
Sharing of Profit is the truest test of a partnership. True or False?
This is a false statement. The existence of a Mutual Agency is the truest test of a partnership. There are additional situations in which profit is shared but there is no partnership. However, if there is an agency between the persons that manage a business jointly and split earnings, it will be considered a partnership.