Law of Partnership

Presented by: Iqra Nagi Jahangir Tariq Shoaib Rizvi Jawad Ahmed

Introduction to Topic

One of the forms in which business can be carried on is partnership, where two or more persons join together to form the partnership and run the business. In order to govern and guide partnership, the Partnership Act, 1932 was enacted. Since public at large would be dealing with the partnership as customers, suppliers, creditors, lendors, employees or any other capacity, it is also very important for them to know the legal consequences of their transactions and other actions in relation with the partnership.

Meaning &Definition of Partnership

Section 4 of the Partnership Act, 1932 defines the term Partnership as under: PARTNERSHIP IS THE RELATION BETWEEN TWO OR MORE PERSONS WHO HAVE AGREED TO SHARE THE PROFITS OF A BUSINESS CARRIED ON BY ALL OR ANY OF THEM ACTING FOR ALL.

Thus, Partnership is the name of legal relationship between/among persons who have entered in to the contract.

Maximum Limit on Number of Partners

Section 11 Companies Act provides that the maximum no. of persons, a firm can have: 10

In case of partnership firm carrying on a banking business

In case of partnership firm carrying on any other business

20

If the number of partners exceeds the aforesaid limit, the partnership firm becomes an illegal association.
If an association of persons or firm having members or partners exceeding the Above limit will not be an illegal association if that firms objective is not to earn profit.

Legal Entity: Agreement:

CHACTERISTICS OF PARTNERSHIP

A partnership has no separate legal entity apart from its members. It means the firm and partners are not separate from one another.

A partnership is a result of agreement between persons. An agreement may be written or oral. Only the persons who are competent to contract can form a partnership.

Number of Partners:
There must be at least 2 persons to form a partnership. The partnership Act does not mention the maximum limit of persons who can be partners in a partnership firm. According to section 14 of Companies Ordinance 1984, a partnership consisting of more than 20 persons cannot be formed.

Existence of Business:
The partners must agree to carry on a business. If the purpose is something other than business, it is not partnership. Therefore when there is no business, there is no partnership.

Sharing of Profits:
The agreement between partners must be to share the profits of a business. The profit will be distributed amongst the partners according to their agreement. The partners will share the loss according to the agreed ratio.

Mutual Agency:
The business must be carried on by all the partners or any of them acting for all the partners. Each partner acts as an agent of other partners of the firm. Again, each partner acts as a principal also because he binds himself to the activities of other partners. It means that the contract of agency exists among partners.

Unlimited Liability:
The liability of partners is unlimited in case of debts. All the partners are individually and collectively responsible for the debts of the business. It means that if there is any loss and the business sources are insufficient to meet the claims of the creditors, the private properties of the partners can be sold to meet the claims of the creditors.

Capital:
Generally, the capital of the firm is provided by all the partners. It is not necessary to contribute equal capital. A person without contributing any capital may also become a partner.

Utmost faith:
A partnership business Is based on mutual confidence and trust of the partners. The partners must be just and honest with each other. They must disclose all facts and provide true accounts relating to the business to each other. They must not make any secret profit.

Management:
According to law, every partner can take part in the conduct and management of the business of the firm. Generally, the work is divided amongst partners according to their experience and knowledge.

Control:
Since partnership is formed by an agreement, its control depends on the terms of the agreement. Where all the partners can take active part in the conduct of the business, the control remains with all of them and all major decisions are taken with the consent of all the partners. Otherwise, control may be given to one or more partners under the agreement

Transfer of Interest:
A partner cannot transfer his share in the partners to an outsider without the consent of all other partners. Thus, share in partnership is not freely transferable.

Duration:
The partnership continues at the will of the partners. It comes to an end if anyone of the partners dies or become insolvent. However, if remaining partners agree to continue the business, the firm will not dissolve.

Types of Partnership
On the Basis of Duration

Partnership at Will (Sec.7)

Particular Partnership (Sec.8)

Partnership at Will [Sec.7 read with Sec.43)]

When there is no provision in partnership agreement (known as partnership Deed, if in writing) for: The duration of their partnership, or The determination of their partnership, then the partnership is called Partnership at Will. Special feature of Partnership at will is that such firm may be dissolved by any partner by giving a notice in writing to all other partners of his intention to dissolve the firm The firm will be dissolved from that date which is mentioned in the notice as the date of dissolution and if no date is mentioned then from the date of communication of notice.

Particular Partnership [sec. 8]

When a partnership is formed for a

Specific venture or undertaking, or Particular period (fixed term)

then such partnership is called a particular partnership. Such partnership comes to an end on the completion of the venture or the expiry of time period. A particular partnership may be dissolved before the expiry of the term or completion of the venture only by the mutual consent of all the partners.

Contd.

Sec. 17 (b) of the Act provides that if a firm ,constituted for a fixed term, continues to carry on business after the expiry of that term, then the partnership will become partnership at will AND mutual rights and duties of partners will remain same as they were before the expiry.

Advantages of Partnership Firm

Easy Formation:
The partnership can be formed easily because no legal formality is required for its formation. The registration of firm is not compulsory. The cost of formation is also small.

More Capital:
In partnership, there are more persons, so they can easily collect a huge amount of capital. If the present partners are not in a position to supply the needed capital, the amount can be borrowed. Moreover, the capital can also be increased by adding new partners.

Better Management:
In partnership, partners may perform those duties for which they are suitable. In case of important matters, all the partners can get together and decide. This ensures efficiency and increase profits.

High Credit Standing:

In case of partnership, the liability of all members is unlimited. It means that in case of loss the personal properties of all the partners are available to meet the claims of the creditors, so the financial institutions give loans without fear.

More Interest:
All the partners know that they will earn profit, so they work hard to make the firm successful. They know that in case of failure of business, they will have to bear the loss.

Skilled Employees
In partnership, resources of the Firm are more, so the services of skilled employees can be obtained.

Public Relations:
partners personally look after the business, so they can develop good relations with the employees and customers which are beneficial for the firm. The employees can also be managed efficiently.

Flexibility:
A partnership is free from legal restrictions. It is formed by an agreement so the business can be changed easily. Its objects, membership and capital may be adjusted according to change in business conditions

Quick Decision:
In partnership, quick decisions can be taken regarding business policies which enable a firm to take advantage of changing conditions.

Sharing of Risk:
A partnership firm enjoys the advantage of sharing risk as compared to sole trading.

Possibility of expansion:
A partnership business is flexible and expansion of business is easy. Firm can extend its business due to greater resources, favorable credit standing and managerial ability. It can be expanded by making more partners.

Disadvantage of Partnership Firm

Unlimited Liability:
The partners have unlimited liability with regards to the debts of the business. All the partners are individually and collectively responsible for the debts of the business. It means that if there is any loss and the business sources are insufficient to meet the claims of the creditors, the private properties of the partners can be sold to meet the claims of the creditors.

Risk of Dissolution:
In case of death, bankruptcy or insanity of partner, the partnership is terminated.

Possibility of Disagreement:
A partnership is started by a group of persons having good relations. But with the passage of time, differences may develop

among them resulting in dissolution of the firm.

Limited Resources:
In a joint stock company, there are thousands of shareholders and a large amount of capital can be gathered in order to expand the business. But in case of partnership, the maximum limit of members is 20 and huge amount of capital cannot be raised easily.

No Transfer of Shares:
The partner cannot transfer his share to an outsider without the consent of other members.

Lack of Public Confidence:

A partnership does not enjoy public confidence due to lack of publicity. The public have little knowledge about its activities because its accounts and reports are not published.

Lack of Authority:
All the partners have independent decision making authority in the management. As a result, many types of problems may arise when there is no mutual understanding and cooperation.

Authority of Partners:
A partner is the agent of firm and other partners. He can bind the firm and co-partners by his agreement with outsiders. Thus a dishonest and incompetent partner may create problems for his copartners.

Loss of Opportunities:
The partnership business may miss out on business opportunities due to delay in decision making and differences among partners.

Possibility of Fraud:
As the registration of firm is not compulsory, there are chances of fraud.