on Limited managerial ability Mr. Shi Shiv Sharma wa at mand agerial tasks such © prea wnable 0 assume the re ie organi gags sch a8 purchasin selling, fin ling ge nd wri ae i The owner his ro asume the responsibilty of tosh ented €m vi Financ q mpl ployees, “tiny eur Due to limited resources, he mY" : | u alm liability suposins of “pis personal properties | ‘Mr. Shiv Sharma had to the debs of he business os Af business Joss. the buna assets . los his personal propery | Soe proprietors have unlimited a sufficient to-meet all business liabilities the prope Pay | off the liabiliti «poor He ook 2 (eee of 8 20 ‘ a ee man fcr, fact P lakh 5. Rajeev Lochan Das is the only own of ie inning BIS besten cunning sem | tps nt rh ee tena | Raj company to settle the Pa hi later om he started incurring 10% jeev : ‘ ye finance companys Ral ,e finance i eae 15 lakh Ee rane es sie otal debt led a case une | on ear he had sold a his business assets, and the inte ye, oe fas ta pany enust sete te cou na wr Rae’ and Be ‘the decision in favour of the fi tate hie personal ase nan | an Dae . : be n) which is considered by the court | (3 marigy (©) Sat e's ‘Anse (a) Sole ropretorhiP (b) Unlimited Liability Sole proprietors have tunlimived Habiligg To the Siricjent eo meet all Business Tibiliies, che proprietor ™: liabilities 's argument door of business Josten If the busines ase Oy have to sell his personal property co FE no xy have (0 ‘personal property t0 pay off jp sole propsieror doesnot enj0y SPA legal entity. was not correct because @ Concept of Partn “As che business expands, larger number of people £0 share its risks. In such a situa manage the sion, people usual the partnership form of organisation ‘The name under which the business is cart Partnership- settins y two or ich the business i i fi 7 \g up of a business by : m ore the ‘firm's name’. persons and sharing its profits and lossesp OST PAP SEO MRO) MP 7 Vstue ee don + ‘Partnership is the relation which subsists between persons who have agreed to combine their property, abour or skill in some business and to share the profits therefrom between them” —The Indian Contract Act, 1872 + ‘Partnership isthe relation between persons competent to make contract, who agree to carry on a lawl bosiness in common with a view o private gain” LH. Haney Note ‘partnership firm has no separate legal entity, apart from the partners constituting it. Features of Partnership 1. Formation ‘The partnership form of business organisation is governed by the Indian Partnership Act, 1932. > Partnership is the result of an agreement between ewo or more persons to do business and share its profits and losses. The agreement becomes the basi of relationship between the partners. It is not necessary that such agreement is in written form. An oral agreement is equally valid. But in order to avoid disputes, it is preferred that the partners have a written agreement. > The agreement should be to carry on some business. Mere co-ownership of a property does not amount to partnership. For example, if Harshit and Chirag jointly purchase a plot of land, they become the joint owners of the property and not the partners. But if they are in the business of purchase and sale of land for the purpose of making profit, they will be called partners. > The agreement between partners must be to shate profits and losses of a business. If some persons join hands for the purpose of some charitable activity, it will not be termed as partnership. 2 The minimum number of partners needed to start a partnership firm According to section 464 of the Companies Act 2013, maximum number of partners in a partnership firm can be'100, subject to the number prescribed by the government. As per Rule 10 of The Companies (miscelleneous) Rules 2014, at present the maximum number of members can 6650. 3. Liability” The partners of a firm have oi ng Badia each partner can be held responsible to repay the debts of the business, However, such a Partner can later recover the balance amount from other partner(s). For example, A and B are partners of a firm sharing profits and losses equally. The assets of the firm amount ‘© 1,00,000 but the firm's debts are € 1,50,000. Here, A and B are liable to bring & 25,000 each from their Personal property to pay the firm's debts. But if suppose B is insolvent and cannot bring any amount, chen A alone will be liable to pay firm’s debt of & 50,000 because of his unlimited liability. 4.Risk bearing partners bear the risks involved in running a business as a team. The reward comes in the form of profits ich are shared by the partners in an agreed ratio. loweve, th5. Decision making and control ‘The partners share amongst themselves the responsibility of decision makin Decisions are generally taken with mutual consent. Thus, the activities of a partnership firm are managed throu ig and control of day to day actvite gh the joine efforts ofall the partners. 6. Continui insaniy of ess, 4 However, the remaining partners may, if they so desire, continue the busines on che basis of a new agreemeny, 7. Mutual agency The business of a partnership concern may be carried on by all che par statement has two important implications: First, every partner is entitled to particips > Second, that there exists a relationship of mutual a ‘on the business is the principal as well as the agent ners or any of them acting for all. This ate in the conduct of the affaits of its business. gency between all the partners. Each partner catrying forall the other partners. He can bind other partners by his acts and also is bound by the acts of other partners with regard to business ofthe firm Relationship of mutual agency is so important that one can say tha clemgnt of mutual agency is absent. 1. Ease of formation and closure: A parneship firm can be formed easly Re eden ro 6.08, eee some lawful business. Closure of the firm too is an easy task. its and Limitations of Partnership ¢ there would be no partnership, if the debts. The liability of partners is both joine and several which may prove to be a drawback for those partners who have greater personal wealth. They will have to repay the entire debt in case the other partners are unable ro do so. of functions can take the Asa result, decisions are t0 be more balanced. Limited resources: ° land hence contribution in terms of capital investment is usually| ‘not sufficient co suppoi Asa result partnership firms face problems i 3. More funds: In a partnership, the capital is contribured makes it pos of funds as compared (0 a sole proprietor and undertake additional operations when Parthes decisions of one partner are binding on other partners. Thus an] ‘unwise decision by some-one may result in financial ruin for 2) im are shared by s. This reduces the anxiety, burden and stress on individual pariners. niceded. others. In case a partner desires ro leave the firm, this can resi in termination of partnership as there is a restriction on transfer of ovnership. 4. Sharing of risks: TI in Secrecy: ited to is reports. Hence ic is able to maintain confidentiality of information relating to its operations. ‘Lack of public confidence: A i ia f ‘partnership firm is not legally requite to publish its financial reports or make other related information public. It is, therefore, difficult for any member of the public © pee the = fave ial status of a — e fen a ; |Cesc ees Pre Types of Partnership and Partners Classification on the basis of duration) Partnership formed atthe isealled‘pattneship at will ep cme ing | activity to be cartied on for a specified time peti is called 'p |Daration Kean por 5 Tedi @ for which | a i | it was formed is fulfilled or when the time duration a notice of withdrawal from partnership to | expires. the firm. ae 2 : Classification on the basis of liability Liability In general partnership, the liability of| In limited partnership, che — > partners is unlimited and joint. partner is unlimited whereas the rest may havellimited | Participation in | The partners enjoy the right co participate | The limi@dpaNOeNMOUROEER|Oy the Management — | in the management of the firm and cheir| management and their acts do not bind che fiem or acts are binding on each other as well as| the other partners. on the firm. Rejnton [Rejitaon sein WoNonl | REARALEMCPAMAANpNeompulSy. | Existence The existence of the firm is affected by Such a partnership does not get terminaved) with the the death, lunacy, insolvency or retirement | death) Iutaey OF insolvency of the limited. partners. of the partners Limited Parmership was not permitted in India earlier: The permission to form partnership firms with limited Habiliy bas been ranted alter introduction of New Smal Enterprise Polcyin 1991. The idea behind such a move bas been to enable the partnership finns to attract equity capital from friends and relatives of small scale entrepreneurs who were ealier reluctant to help, cue to the cxstence of unlimited Kabiiy clause in the partnership form of business. Popes of Partners ue een of| peeey er | Partner by Estoppel Aseeret partner | A nominal partner | A person is considered isone whose is one who a partner by estoppel . conductor boul hefshe gives 7 mntsbues to the impr capital ofthe frm. | chat ee | 2 carrying out | day activities of business ofthe | the business are firm on behalf of | called sleepingCapital ‘An active partner | A sleeping “Aeeciet partner [A nominal contribution contributes | partner contributes to | partner Capital to the | contributes _| the capital ofthe | contribute capi. | firm. capital to the | firm. firm. Doesnor Pawiepares in | Does not cake Panicipaion i | Management | the management | participate in the | the management | active part 1% ‘management of the the managemen PoP of [ofee sme, [management of | frm eben eae He/she d « lo the firm, Does not ake part in| Losses ‘Share in Profis/ | Shares profits and losses of the business Shares profs | Shares profs | Generally does [Boe share profs] profit or and losses of the | and losses of the sare business. business. losses of losses. Liability nln reales ES ale meus | Tiabilicy Tibiliy towards | liabilicy towards | to the third parties the creditors of || the creditors of | for the repayments the fim. the frm, of che firms debts. Wnlinited Habis the third parties for the repayments ofthe firm's debrs. Suppose Abhishekis a friend of Naveen accompanies him to a business meeting with Amit Softwares an ‘ealand gives the impression that hes also a partner in Simplex Solutions. If credits extended to Simpl bf these negotiations, Abhishek would also be liable for repayment of such debt, as fhe isa partner of the firm. ‘Such partners ore held lable for the debt ofthe frm because in the eyes ofthe third party they are considered partners, ‘even though they do nat contribute capital or take port in its management. ‘An example of a partner by estoppel whois a partner in a software firm — Simplex Solutions. On Naveen’s request, Abhishek 1d actively participates in the negotiation process for @ business —~ lex Solutions on the basis like to become a Registration of a partnership firm means the entering ofthe firm's name, along with the relevant presesib@ to do so, within the stipulated unlimited extent, in the same way as other ative partners ar. ‘As such a minor is incompetent to enter into a valid cont ‘minor can be admitted tothe benefits ofa partnership fi partner in th Minor as a Partner Partnership is based on legal contract beoween two persons who agree to share the profits or losses ofa business carried on bythe ‘with others, he cannot become a parmer in any firm, Howevet, ops Been tac cs ily the profi d ot be asked to bear the losses. However, he ‘The status of minor changes when he tains majority. fact on attaining majority, the minor has to decide whether he wot Le has to give public noice of his decision within six months of attaining major Ihe 6 1c wll he treated as a fullfledged partner and will become liable to the debts of the firm (0 Ate erte eee erect eatery particulars, in the Register of firms kept with the Registrar of Firms. deprived of many benefit. It provides conclusive proof of the existence ofa partnership firm, I is optional for a partnership firm co get registered, However, in case a firm does not get registered niteConsequences of non-registration of 1 parncy f an step fos OOO 2. The firr 3. The firm In view of these consequences, itis Gs Procedure for Registration of a Partne! coring to the Indian Parorhip Ae 193 the par h the pines may gst the im sited with the gira of rms of the fem betated. The regtaton can be a the time af oman ore ey ine rng hr execs the state in which ‘The procedure for getting a firm registered is as follows: 1. Submission of application: Submission of application in the prescribed form tothe Registrar of firms. The application should contain the following particul ‘© Name of the firm + Location of the firm «+ Names of other places where the firm carries on business + The date when each partner joined the firm ‘Names and addresses of the partners + Duration of partnership ‘This application should be signed by all the partners 12, Fees deposit: Deposit of required fees with the Registrar of Firms certineate of registration: The Registrar after approval will make an entry in the register of firms and will subsequently issue « cesificate of registration. fing common objectives. In order to enter into voluntary association of people who come together for achi il so that there is A partnership is Frnrsp, clear agreement wth respect othe terms, conditions and all aspects concerning the pares lerstanding later among the partne called the partnership deed. ‘The written agreement which specifies the Clauses/Contents of Partnership Deed “The partnership deed generally includes the following aspects: + Name of firm + Nature of business and location of business * Profits and losses sharing © Duties and obligations of the partners + Salaries and withdrawals ofthe partners admission, retirement and expulsion of rus governing, ‘a partner ston drawings * Tnterest on capita and i + Procedure for dissolution of the firm their auditing jon of accounts + Prepar + Method of solving disputes