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BASICS OF PARTNERSHIP

Author – Purvi

Businesses have different forms such as sole proprietorship, corporation and partnership. A partnership is an association of two or more persons, known as general partners, who act as co-owners of a business and operate it for profit.

The word ‘person’ here can be a natural person (an individual) or a legal person (corporates). A minor is someone who is below the age of 18 and he is legally incompetent to enter into a valid contract. So, a minor cannot be a full pledged partner of a firm.

Partnership agreement can be written or in oral. According to the partnership Act, partnership doesn’t need to be written. If a partnership agreement is in writing it is called partnership deed which is to be signed by partners, stamped, and registered.

Partnership is easy to establish and the income is only taxed once as a partnership firm is not a separate legal entity from its partners. The profits are shared among the partners as per the partnership deed.

  • Number of partners:According to the New Companies Act, 2013 in a partnership firm, there should not be more than 100 members as a partner. (note: a maximum limit of 10 partners in banking business and 20 partners in other business was in accordance with Companies Act, 1956 which is replaced by New Companies Act, 2013)
  • Management of the firm: all the partners are entitled for the management of the business. The business may be carried by all the partners or any of them acting for all. This also implies that a relationship of mutual agency exists among the partners. Each partner carrying on the business is considered as principal and agent for all the other partners. All partners are bound by the act of other partners with regard to the business of the firm.
  • Liability: in partnership partners are jointly and severally liable for the debts of the business. In other words, each partner has an unlimited liability and is personally liable for all the debts. This is one of the chief disadvantages of partnership firms. However, to facilitate limited liability in partnership, a new form of partnership has been introduced under which the liability of a partner of a firm is limited and such form is called LLP (limited liability partnership).
  • If a partner wants to sever the business relationship, the whole partnership dissolves.
  • When a partner is declared insolvent, he no longer remains a partner of the firm. And the partnership also dissolves. Unless, it is expressly mentioned in the details of the deed that if such an accident takes place the remaining partners can continue the firm’s business. And the date the insolvent partner of the firm is declared as insolvent by the court, the reconstituted firm is not responsible for the matters of the former insolvent partner.
  • A partner can’t transfer his interest in a firm without the consent of other partners. He may assign his share in partnership to someone else but the assignee would only get financial benefits and doesn’t become a partner unless other partners agree to it.
  • With the consent of other partners in a partnership, a partner may retire. But before his retirement, he is responsible to the 3rd parties for all the dealings of the firm.
  • According to Income tax Act, 1961, in a partnership firm, audit of accounts is to be conducted only if the turnover exceeds Rs. 25 lakhs in case of profession or Rs. 1 crore in case of business.
  • After partnership is dissolved, the partners are no longer allowed to conduct business together. They must discharge all their responsibilities to all the creditors and divide all the assets, profits and loss among themselves, before formally ending a partnership.

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