1. Legal Aspects of Business
• Module V: Indian Partnership Act, 1932:
• Meaning and Definitions, Registration of
partnerships, Types of partners, Dissolution,
Limited Liability Partnership Act, 1932—
Meaning and Definitions, Meaning of
Designated partner, Registration of LLP, Types
of Partners Dissolution.
1
2. Partnership Fundamentals
Meaning and Definition of Partnership:
• Section 4 of the Indian Partnership Act 1932 defines Pp as “
the relation between persons who have agreed to share the
profits of a business carried by all or any of them acting for
all. ( The word profits imply LOSSES also)
•
• The minimum number is 2 and the maximum number is ---10
in case of banking business and 20 in case of other
businesses. The persons are called “partners individually and
a “firm” collectively. The business name is called firm name.
2
3. Essential Features of Partnership
Essential Features of Partnership
• --Number: Minimum 2; Maximum 10 for banking 20 for others
• --Agreement—Deed oral or written—usually written;
• --Business conducted jointly; business includes lawful trade,
occupation or profession.
• --Profit Motive;
• --Profit/loss must be shared in the agreed proportion. In the
absence of any agreement, then equally irrespective of capital
contributions.
• --Carried by all or any of them (one or more of them) acting for all.
• --The Partnership Act does not recognise separate entity. That
means Partnership firm has no separate entity(existence apart
from the partners composing it.
• --Partners’ liability is unlimited, joint and several (individually) for
all the debts of the firm
3
4. Registration of Partnership firms
• Registration of Partnership is not COMPULSORY though an unregistered
firm suffers from certain disabilities
• Registration by itself does not create a partnership, it is only a reliable
evidence and affords protection to outsiders.
• Partners come together by way of a Partnership Deed
• Registration can be done at any time by filing an application in the form of
a statement giving necessary information to the Registrar of Firms.
Necessary fees have to be paid.
• Such an application or Statement shall contain: a) Name of the firm; b) the
place or the principal place of business; c) the names of other places
where the firm carries on business; d) the date on which each partner
joined the firm and e) names in full and permanent addresses of all the
partners and the duration of the firm
• All the partners have to sign the application. A partner may authorise an
agent to sign on his behalf.
4
5. Registration of Partnership firms
Effects of Non-registration:
• A partner cannot sue the firm or any partners to enforce a right arising from a
contract or a right arising from the Partnership Act
• An unregistered firm cannot sue a third party to enforce a right arising from a
contract
• Unregistered firm or any of its Partners cannot have a right of set-off in a
proceeding initiated by a third party to enforce a right arising from a contract.
• Third parties can file a suit against the firm or any of its partners
However, Non registration does not affect:
• The rights of a firm or a partner who have no place of business in India
• The right of a partner to sue for the dissolution of the firm or for accounts of
the dissolved firm or for the share of the dissolved firm
• The powers of the official receiver or assignee to realise the properties of an
insolvent partners
• If in the original suit if the non-registration is not contested, it cannot be
contested by another suit.
5
6. Registration of Partnership firms
Alterations:
In case of a registered firm, any alteration in any of the following shall be
informed to the Registrar of Firms through proper application for effecting
those changes:
• Change in the name of the firm or the location of the principal place of
business
• Opening and Closing of branches
• Changes in names and addresses of partners
• Change in the constitution of the firm and its dissolution or election of a
minor partner on attaining majority as partner or sever his connection.
6
7. Partnership Deed
Partnership Deed and its contents:
• A Partnership Deed is a written agreement among the partners
providing for rules and regulations. It is signed by all the partners. It is
stamped as per the Stamp Act. It is documented to prevent possible
disputes & disagreements among the partners at a future date.
Contents of a Pp deed:
• --The name of the firm;
• --Names and addresses of the partners;
• --Nature of business;
• --Date of commencement;
• --Duration/Period;
• --The amount of capital to be brought in by each partner;
• --The amount of drawings that may be permitted in anticipation of
profits and the manner of withdrawal;
7
8. Partnership Deed
Contents of a Pp deed (contd..)
• --Interest on partner’s capital and the Rate of interest;
• --Interest on partner’s drawings and the rate of interest;
• --The amount of salary, commission or any other remuneration payable to any
partner;
• --The ratio of sharing profits or losses;
• --The treatment of losses arising on account of insolvency of a partner;
• --The manner of calculation of goodwill at the time of admission, retirement or
death of a partner;
• --The method of settlement of account in case of retirement of a partner;
• --Details re: operation of the bank account;
• --The manner of keeping books of account and audit;
• --Sharing of managerial work/responsibilities;
• --Dissolution and settling of accounts thereupon;
• --Disputes and the manner of settlement.
• If, in a partnership deed, certain items are absent or not agreed upon, then the
provisions of the Partnership Act 1932 apply.
8
9. Rules in absence of a Pp Deed
• --Profits/losses are to be shared equally;
• --Interest on partner’s capital is not allowed;
• --Interest on partner’s drawings is not to be charged;
• --Partner is not eligible for salary, commission, or any other
remuneration for any extra work done;
• --Interest on loans lent by partners @ 6% p.a. only;
• --A change in the constitution of the firm does not alter the
rights and duties of the partners;
• --Partners have a right to participate in the management;
• --Partner has a right to inspect the books of account;
• --Partner is to be indemnified in respect of all acts done in
the ordinary course of business;
9
10. Rules in absence of a Pp Deed
• Majority of partners has to decide all matters relating to day
to day conduct of the business. Change in the nature of the
business is to be decided with the consent of all the
partners;
• --Every partner has a right to protect the firm in case of an
emergency;
• --Admission of new partner only with the consent of all the
existing partners;
• --Every person must compensate the firm for any loss
caused to it by fraud or wilful negligence in the management
of business;
• --Personal profits derived by diverting the benefits of the
firm should be restored to the firm
• --A partner should not carry on other business which is
competing with the business of the firm.
10
11. Types of Partners
• Actual or Ostensible Partners or Active:
• Sleeping or Dormant partners:
• Nominal Partners:
• Partner in profits only:.
• Sub-partner:
• Partner by Estoppel or holding out
• Minor as a partner for benefits
11
12. Types of Partners
• Actual or Ostensible Partners or Active: a partner who is by agreement
actively involved in the management of the business is known as Actual or
Active or Ostensible partner. He is the agent of the firm and his actions
bind the firm and other partners.
• Sleeping or Dormant partners: A partner who does not take any active
part in the business of the firm. He merely invests capital and claims a
share of the profit as per agreement. However, he is equally liable for the
acts of other partners and of the firm.
• Nominal Partners: A partner who merely lends his name to be a partner
without having any real interest in the business. He does not invest any
capital and he does not share any profits of the firm. May be the
reputation of such individuals may enhance the business of the
partnership firm
• Partner in profits only: By agreement he shares only profits and absolves
himself from the losses.
12
13. Types of Partners
• Sub-partner: When a partner shares profits with a third person, such third
person may be called a sub-partner. A sub-partner is no way connected with
the business and he/she cannot bind the firm or any of the other partners.
He/she has no rights as well.
• Partner by Estoppel or holding out: A person who is not a partner may be
liable for the debts of the firm as if he were a partner. Such persons are
known as PARTNER BY ESTOPPEL OR HOLDING OUT. He must have lent his
name or by express words or by conduct must have represented himself to be
a partner to outsiders. The other person acts on this representation. A retired
partner who allows his name on the letterheads and other important
documents is a partner by estoppel.
• Minor as a partner for benefits: a Minor can be admitted ONLY FOR THE
BENEFITS ( i.e, for profits only and not for losses). Minors have no contractual
capacity. He cannot bind other partners or the firm but they can be partners
for sharing profits only. Consent of all the existing partners necessary to
admit minor as such a partner. However, on attaining majority, he may choose
to continue his partnership or quit by giving a proper public notice.
13
14. Dissolution of Partnership firm
• All the partners of a firm sever (cut off) their connections with the firm and the
business of the firm is brought to a close. Such a complete closure of the firm’s
business is called DISSOLUTION of a partnership firm.
•
• If one or more partners bring the dissolution but the business is not brought to a
close, then it is called dissolution of partnership. The remaining partners
continue the firm’s business.
•
The circumstances under which a partnership firm is dissolved are:
•
• If there is no agreement to continue the business of the firm: a) on the expiry of
a fixed period if the firm was for a fixed period; b) on the completion of a
particular venture/s if the firm was for a particular venture/s; c) on the
retirement, death or insolvency of a partner.
• On the death, retirement or insolvency of all partners except one.
• On the happening of an event which makes the business of the firm illegal.
• If the partnership is AT WILL by giving 14 days’ notice.
• By court orders.
14
15. Dissolution of Partnership firm
REALISATION ACCOUNT:
• On dissolution of a partnership firm, all the assets and liabilities
are realised. First the assets (except cash on hand and bank & P &
L balances) and all external liabilities(i.e, excluding partners’ loan
account, capital account, Reserve Fund and P & L Account) are
transferred to an account styled REALISATION ACCOUNT at book
values and thereafter actual realisations are recorded. The
external liabilities are cleared first and then the partners can take
their dues. The partners can also take over assets and liabilities at
agreed values. The actual realisation/payment of liabilities may
relate to an unrecorded asset/liability ( incl goodwill) and even
such realisation/payment should be brought to realisation
account. The expenses relating to realisation can also be debited
to the realisation account. The profit or loss on realisation will
then be transferred to the capital accounts in the profit sharing
ratio.
15
16. Dissolution of Partnership firm
Current accounts of partners on dissolution of a partnership
firm:
• The current accounts are maintained under Fixed Capital
system. The fixed capital system is relevant as long as the
firm is continuing the business. On dissolution of a firm, the
balances of current accounts can be transferred to capital
accounts of the partners and all adjustments on realisation
can be through the capital accounts.
16
18. Limited Liability Partnership Act, 2008
• A limited liability partnership (LLP) is a partnership in which some or all
partners (depending on the jurisdiction) have limited liability. It therefore
exhibits elements of partnerships and corporations. In an LLP, one
partner is not responsible or liable for another partner's misconduct or
negligence. This is an important difference from that of an unlimited
partnership. In an LLP, some partners have a form of limited liability
similar to that of the shareholders of a corporation
• The law defines LLP as: “ a corporate business vehicle that enables
professional expertise and entrepreneurial initiative to combine and
operate in flexible, innovative and efficient manner, providing benefits of
limited liability while allowing its members the flexibility of organising
their internal structure as a partnership.
• Minimum 2 partners required. No maximum limit
• LLP is applicable to all types of enterprises.
18
19. Limited Liability Partnership Act, 2008
Benefits of LLP:
• Partners’ liability is limited as written in the agreement files at the time of registration
• Low cost formation and easy to form. No requirement of any minimum capital.
• No restrictions on the number of partners
• No exposure to the individual assets of partners except in case of frauds
• Partners are not liable for the acts of other partners. Partners are liable for their own
actions
• Less restrictions on LLPs re: compliance as compared to Companies
• Less requirement as to maintenance of statutory records
• LLP can sue and be sued in its own name. Individual partners cannot be sued for the
acts of the LLP
• Less Government intervention
• Easy to dissolve or wind up
• Professionals can form multi-professional LLPs
• Audit requirement only if the contributions exceed Rs25 lakhs or turnover exceeding
Rs40 lakhs
Disadvantages of LLP :
• They cannot issue IPOs and cannot raise capital from the public
• Any act of any partner can bind the LLP
19
20. Limited Liability Partnership Act, 2008
• In India, Limited Liability Partnership Act 2008, came into effect from 31st
March 2009 and extends to the whole of India.
• LLP is a hybrid form of organisation combining the features of Sole
Proprietor, Partnerships and Companies. (Unlimited + Limited Liabilities in
different proportions)
• In India, for all purposes of taxation, an LLP is treated like any other
partnership firm.
• Liabilities limited to their agreed contribution in the LLP.
• Further, no partner would be liable on account of the independent or
unauthorized actions of other partners, thus allowing individual partners
to be shielded from joint liability created by another partner's wrongful
business decisions or misconduct.
• LLP shall be a body corporate and a legal entity separate from its partners.
It will have perpetual succession. Indian Partnership Act, 1932 shall not be
applicable to LLPs and there shall not be any upper limit on number of
partners in an LLP unlike an ordinary partnership firm where the
maximum number of partners can not exceed 20, LLP Act makes a
mandatory statement where one of the partner to the LLP should be an
Indian.
20
21. Limited Liability Partnership Act, 2008
• Provisions have been made for corporate actions like mergers,
amalgamations etc.
• While enabling provisions in respect of winding up and dissolutions
of LLPs have been made, detailed provisions in this regard would be
provided by way of rules under the Act.
• The Act also provides for conversion of existing partnership firm,
private limited company and unlisted public company into a LLP by
registering the same with the Registrar of Companies (ROC)
• Nothing Contained in the Partnership Act 1932 shall effect an LLP.
• The Registrar of Companies (Roc) shall register and control LLPs
also.
• The governance of LLPs shall be in electronic mode based on the
successful model of the present Ministry of Corporate Affairs
Portal.
• Distinction between LLP and a company is that LLP has less number
of compliances as compared to companies.
21
22. Distinction between LLP and ordinary partnership
Ordinary Partnership
• Number of partners is restricted
to 10 in case of banking business
and 20 in case of others
• Unlimited liability
• Individual partners can sue and
be sued
• Each partner is Jointly and
severally liable.
LLP
Though the minimum number is two,
there is no restrictions on the
maximum number of partners
Limited Liability
It is the LLP that can sue and be
sued. Individual partners cannot
be sued for the debts of LLP
Each partner is liable for his own
actions and not liable for the
actions of other partners
22
23. Limited Liability Partnership Act, 2008
Other points:
• LLPs would be taxed as Partnerships. Individual partners are not taxed on
the LLP income. They are responsible as individuals. They have to pay
taxes on their individual incomes.
• Existing partnerships can be converted into LLPs.
23
