Understanding the Nature of Partnership Firms under the Indian Partnership Act, 1932

Theoretical overview

Partnership: When two or more people join hands to set up a 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 partnership act 1932 explain partnership.

For example: –

1. ‘X’ and ‘Y’ buy 100 pieces of cloth which they agree to sell on their shared account. ‘X’ and ‘Y’ will become partners, for the sale of cloth.
2. There are two partner and they entered into an agreement to start a 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.

Essentials of partnership firm

1. Two or more persons: – 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.

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.

2. Agreement: agreement can be based on written or oral agreement. To avoid disputes parties must have a copy of written agreement.
3. Sharing of profit and losses:-Another important component of a partnership is the sharing of profit and loss of business concerns by agreement between partners.
4. Mutual Agency:-The business of a partnership firm can be carried out by all partners or any of them
5. Liability of Partnership:-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.

Types of partnership firm

1. Partnership at will:  according to section 7 when no provision is made by contract b/w the partners for duration of their partnership or for the determination of their partnership , the partnership is ‘partnership at will.’
2. Particular partnership: section 8 defines particular partnership. If the partnership is made for any particular purpose and that purpose is complete then partnership came to an end.
3. Partnership for fixed term: during the establishment of partnership the parties agrees on the duration of agreement this means partnership was established for fixed period. The partnership will terminates after the expire of such period.
4. General partnership: when the purpose of forming a partnership is to carry out the busine ss in general it is called general partnership . 

Relevant sections

• Section 4 of partnership act 1932 explain partnership.
• Section 7 of partnership act 1932 defines partnership at will: when no provision is made by contract b/w the partners for duration of their partnership or for the determination of their partnership , the partnership is ‘partnership at will.’
• Section 8 of partnership act 1932 defines particular partnership
• Section 10 duty to compensate for loss
• Section 11 of act contain the general rule that the mutual rights n duties of the partners are to be determined by their mutual agreement.
• Section 12(a) right to participate in business
• Section 12(c) right to express opinion
• Section 12(d) right to access books of accounts 
• Section 13(b) right to profit sharing
• Section 13(c) right to interest on capital
• Section 13(e) right to indemnify
• Section 15 duty to use firm assets properly
• Section 16 duty not to earn personal profit

Important case laws

In k. Jaggaiah v. Kokumanu, the plaintiff and the two defendant joined together and obtained a contract for the maintenance of a road there was held to be partnership in the road building activity. Such activity though arising out a single contract  was spread over a particular period & the firm had to employee certain workers supervise the work prepare bills and finalise the work & get the approval from the gov. n finally receive the bills n all that meant carrying on of business.

In M.O.H Uduman v. M.O.H Aslum, the partnership deed contained the clause to the effect that the [partnership shall continue b/w the remaining partner unless all the partners mutually agree to determine the relationship considering this clause the apex court held the partnership was not at will and that it could not be dissolved by the partner by giving notice to the remaining partners.

It is thus stated that full effect has to be given to the intention of the party to be gather from the conjoint reading all the parts in partnership deed.

Points to remember

1. When two or more people join hands to set up a 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”.
2. There should be two or more member for partnership.
3. Partner should share profit & loss according to the agreement.
4. There are 4 types of partnership firm: partnership at will,  particular partnership, general partnership, partnership for fixed term.
5. Partner have to certain rights and duties which he/she have to follow