Partnership

Meaning and Definition

Partnership Act 1932,Section 4: Partnership is the relation between persons who have agreed to share
the profits of a business carried by all or any one of them acting for all.

A partnership is a voluntary association of two or more persons who contribute money,property,time

and skill to carry on business for profit and share losses. The persons who have entered into a
partnership are individually called partners and collectively called a firm.

Characteristics
Legal Entity: A partnership has no separate legal entity apart from its members. It means that the
partnership and partners are not separate from each other. The rights and liabilities of the partnership
firm are considered the rights and liabilities of the partners. If any partner dies, retires or becomes
insane, the partnership comes to an end.

Agreement: A partnership is formed as a result of an agreement between two or more persons. An

agreement may be written or oral. Only the persons who are competent to contract can form a
partnership. Upon death of a father who was a partner in the firm, the son can claim share in the
partnership assets but cannot become a partner unless he enters into an agreement with the other
partners.

Number of partners: At least 2 persons are required to form a partnership. The partnership act does not
mention any maximum limit of partners in a partnership. According to companies Act 2017, a
partnership consisting of more than 20 persons cannot be formed. However a partnership of more than
20 persons can be formed to carry on practice as lawyers, accountants and other professionals.

Purpose of partnership: In order to form a partnership, the partners must agree to run a certain
business. If the purpose of partnership to carry on something other than business, it cannot be called a
partnership.

Share Profits: The agreement between partners must be to share the profits of a business. The profit is
distributed among partners according to the agreement. If there is no agreement regarding the
distribution of profits, it is equally distributed among the partners. The partners share the loss
according to the agreed ratio. Some partners may agree to bear all the losses of the business.

Mutual Agency: The business may be carried out by all the partners or any of them acting for all. Each
partner acts as an agent of the other partners of the firm. Each partner acts as a principal because he
binds himself to the activities of other partners. It means that the contract of agency exists among
partners. This is the truest test of a partnership, it I the cardinal principle of a partnership. So if a partner is
both the principle as well as an agent of the firm we can say that mutual agency exists. This means that the
actions of any partner/s will bind all the other partners as well.

Unlimited Liability: The liability of all the partners is unlimited. All the partners are individually and
collectively responsible for the debts of the business. If there is any loss and firm’s assets are insufficient
to pay the claims of the creditors the private assets of the partners can be sold to pay the claims.

Transfer of Ownership: Usually the partnership deed includes provisions regarding transfer of
ownership of partners. If there are no such provisions in the partnership deed, a partner cannot transfer
his ownership to an outsider without consent of all other partners. Thus the share in a partnership is
not freely transferable.

Duration: A partnership continues as long as the partners are willing to run the business. It comes to an
end on death, insanity or insolvency of any of any of the partners. However, if remaining partners agree
to continue the business and make a new agreement, the firm will not dissolve.

Existence of Partnership:

The following must be proved to determine the existence of partnership:

1. There must be an agreement among the persons.

2. The agreement must be to do some lawful business.
3. The agreement must be to share profits of the business.
4. There must be a relationship of principal and agent among the partners.
5. There must be an agreement to carry on the business by all or any of them acting for all

Types of Partnership:
The following are two types of partnership:
1. Partnership at-Will.
Where no provision is made in the agreement regarding the duration of the partnership, it is called
partnership at will, Any partner can terminate it any time, by giving a notice of termination When such a
notice is given, the partnership is dissolved from the date mentioned in the notice. If no date is mentioned
in the notice, the partnership terminates from the date when the notice is communicated. [Sec. 7]
2. Particular Partnership.
When partnership is formed to do a particular business or undertaking, it is called particular partnership.
Such partnership is dissolved immediately on the completion of the particular business, e.g. running
coalmine or producing film. If it is continued after completion of that business for which it was formed, it
becomes partnership-at-will. [Sec. 8]
Minor Partner:
Minor is a person who has not completed 18 years of age. The person who wants to enter into partnership
must be competent to contract. As minor is not competent to contract, so he cannot become a partner. But
with consent of all partners, he may be admitted to the benefits of partnership by an agreement with his
guardian. The following points are important in this regard: (Sec. 30]
1. Position during Minority.
The rights and liabilities of a minor during minority are as follows:
a). He has right to receive his agreed share of property and profits of the firm.
b). He can inspect and take copies of accounts but not the books of the firm as they may contain business
secrets.
c). He is not personally liable for the debts. His liability is limited to the agreed share in profit and property
of the firm.
 d). He cannot take part in management of the business.
e). He has right to sue other partners for his share in profit or property of the firm when he breaks his
relation from the firm.
f). He cannot be declared insolvent.

2. Position after Majority:

The minor must decide within 6 months whether he will continue or leave the firm. These 6 months
start on attaining majority or on knowing that he was admitted to the benefits of partnership, whichever
date is later. He must give public notice about his decision. If he fails to do so, he shall be considered a
major partner.
3. Decision to Become Partner:
If he decides to become a partner, his position will be as follows:
a). His rights and liabilities will be similar to those of a major partner.
b). He becomes personally liable to third parties for debts and obligations of the firm from the date of
his admission to the benefits of partnership.
c). His share of profits and property in the firm remains the same unless changed by agreement.
4. Decision not to become Partner:
If he decides not to become a partner, his position will be as follows:
a. His rights and liabilities continue to be those of a minor up to the date of giving public notice.
b. He is not liable for the acts of the firm done after the date of his public notice.
c. He has right to sue the partners for his share of property and profits in the firm.

DIFFERENCE BETWEEN PARTNERSHIP AND CO-OWNERSHIP

Co-ownership means joint ownership of some property. Two or more persons who own some property
jointly are called co-owners. If co-owners of some property share profits arising from the property, they do
not become partners. The differences between the two are as follows:

PARTNERSHIP CO-OWNERSHIP
1. Agreement.
It is a result of an agreement. It is not necessarily the result of an agreement. It may
arise by operation of law.
2. Agency.
A partner is an agent of the firm. He A Co-owner is not an agent of the can bind other
partners for his acts. Business. He cannot bind co owners for his acts.

3. Lien.
A partner has lien on the property of A Co-owner has no lien on the property partnership for
expenses incurred by of Co-ownership for expenses spent by him.
him.
4. Transfer of Share.
A partner cannot transfer his share A co-owner can transfer his interest without the
without the consent of all the partners. Consent of co-owners.
5. Common Interest.
There is a common interest. There is no common interest.
6. Number of Members.
The maximum limit of partners is 20. In There is no maximum limit of co-owners.
some cases, the number of partners
may be more than 20.
7. Status of Member.
Persons who form partnership are Persons who co-own joint property are
called partners. called co-owners.
8. Business.
It is always formed to carry on a It may or may not be formed to carry
Business. on a business.
 9. Division of Property.
A partner cannot sue for division of the A co-owner can sue for division of property.
Property.
10. Refund.
If partner spends personal money for If co-owner spends personal money for the firm, he
can recover. Co-Ownership, he cannot recover.
11. Sharing of Profits.
Sharing of profits and losses is Sharing of profits and losses may or
necessary. may not be necessary.
12. Regulation.
It is regulated by the Partnership Act, It is not regulated by any separate Act. 1932.

Formation of Partnership.

There must be an agreement among the partners to form a partnership. The agreement may be oral or written. The
following must be considered before entering into an agreement of partnership.
1. The partners of a firm must be selected with care.
2. The object of the firm must be lawful.
3. The rights and duties of partners must be explained in detail.
4. The registration of partnership is not compulsory. But it is better to have it registered.

Partnership Deed.
The partnership agreement in writing is called partnership deed. It generally contains the following provisions:
1. The name of the firm.
2. The names and addresses of all partners.
3. The nature of business of the firm.
4. The town and place where the business will be carried on.
5. The amount of capital invested by each partner.
6. The duration of the partnership.
7. The ratio of sharing profits and losses.
8. The rate of interest, if any allowed on capital.
9. The rate of interest on loans given by partners to firm.
10. The rate of interest to be charged on drawings.
11. The amount a partner can withdraw from the firm.
12. The amount of salary or commission payable to any partner for his services.
13. The circumstances under which a firm shall dissolve.
14. The rights, duties and liabilities of partners.
15. The method of valuation of goodwill.
16. The period of accounting year.
17. The rules regarding retirement, death and admission of a partner.
18. The methods of solving disputes among the partners and appointment of arbitrator.
19. Power of a partner to retire after giving notice.
20. The rules to determine amount to be paid to the deceased partner and manner of payment.
21. The rules of expulsion of partner from firm.
22. The keeping of proper books of accounts and preparation of accounts.

Firm's Name.
The name under which partners carry out their business is called the firm's name. The partners can choose any
name for the firm according to the following rules: [Sec. 58]
1. Name must not be identical or similar to the name of an existing firm.
2. Name must not contain the words Government, Jinnah Quaid-e-Azam or words showing the approval or
patronage of the Federal Government or any Provincial Government, without consent of the provincial
government.
3. Name must not contain the name of United Nations (UN) or abbreviations of its subsidiary body without sanction
of the Secretary General of UN.
4. Name must not contain the name of the World Health Organization (WHO) or its abbreviations without sanction
of the Director General of WHO.
5. Name must not contain any word which may be declared by the Provincial Government as undesirable.

Topic 2.

REGISTRATION OF FIRM.
Registration of partnership is not compulsory although it is optional but The Partnership Act 1932 impose some
disabilities on an unregistered firm As a result, it is advisable for the partners to get their firm registered.
Procedure of Registration;
Procedure of registration of firm is as follow:
1. Submission of Application.
For registration of a firm an application on prescribed form along prescribed fee is submitted to Registrar of
Firms. The application must be signed by all partners of the firm or by their agents specially authorized in this
behalf.
The application contains following particulars:
(i) Name of the firm.
(ii) Place or principal place of business of the firm
(iii) Names of any other places where the firm carries on business
(vi) Date when each partner joined the firm.
(V) Names and permanent addresses of the partners.
(vi) Duration of the firm. (Section 58).

2. Certification.
If the registrar is satisfied with the application, he registers the firm and enters its name in a register called
Register of Firms He then issues a certificate of registration. (Section 59).
Change of particulars.
If after the registration any change takes place in any of the particulars furnished to the registrar in the
application form, the registrar must be informed accordingly. The registrar shall include the necessary change
in the Register of Firms. (Sections 60 to 65).
Penalty for False Particulars.
Any person, who knowingly provides false information to the registrar, shall be punishable with imprisonment
that may extend to three months, or with fine or with both. (Section 70).
Effect of Non-Registration.
The Partnership Act 1932 imposes following disabilities on an unregistered firm
1. No Suit Between Partners and Firm.
Partner of an unregistered firm cannot sue the firm or any of his partners for enforcement of any right
arising from contract of partnership or conferred by the Partnership Act.
2. No Suit between Firm and Third Parties.
An unregistered firm cannot file a suit against a third party for the enforcement of any right arising from a
contract.
3. No Claim of Set off.
An unregistered firm can not claim a right of set off exceeding Rs 100 in proceedings instituted against the
firm by a third party.
(A set-off is the right of a debtor to balance mutual debts with a creditor. In
bookkeeping terms, set-offs are also known as reconciliations. To determine a set-off,
simply subtract the smaller debt from the larger.)
Exceptions:
Non registration of a firm does not affect the following:
1). Third parties can sue the firm whether the firm is registered or not.
2).The partners can sue for dissolution of the firm.
3).The partners in sue for accounts of a dissolved firm.
4).The partners can sue for realization of property of a dissolved firm.
5).The partners can claim set off not exceeding Rs.100.
6). Official receiver of an insolvent partner can sue the firm for recovery of his share.
7).The partners can refer a dispute to arbitration.

Advantages of Registration.
Registration of firm removes the disabilities imposed on an unregistered firm. After the registration the partners can
sue their co-partners and the third parties for enforcement of contractual rights. They also become entitle to claim of
set off. Advantages of registration are discussed below in detail.
1. Suit Against Co-partners.
A partner of a registered firm can sue the firm or any of the partners for enforcement of a right arising from
contract or conferred by The Partnership Act 1932.
2. Suit Against Third Parties.
A registered firm can file a suit against a third party for enforcement of a right arising from contract.
3. Claim of Set Off.
A registered firm can claim set off in proceedings instituted against the firm by a third party.

Topic # 3.
DISSOLUTION OF PARTNERSHIP AND FIRM.

The terms "dissolution of partnership" and "dissolution of firm mean the following:
Dissolution of Partnership.
When there is a change in the partners of a firm, there takes place refers to cancellation of partnership deed for
dissolution of partnership. In this case, the existing contract of reconstitution of a firm If partnership is cancelled and
a new contract of partnership is made between the partners of reconstituted firm. Dissolution of partnership does not
affect continuity of business of the firm.
Dissolution of firm:
As the partnership act 1932 describes it: Dissolution of partnership between all the partners of a firm is called
dissolution of the firm. It means end of business of the firm. Here all partners agree that they are no more partners in
the firm. Consequently, assets of the firm are sold, its liabilities are paid off and the business is closed.
Modes of Dissolution of Firm.
Following are different modes of dissolution of a firm:
1. Dissolution by Agreement. A firm is a creation of an agreement between partners. Similarly, the partners may
agree to terminate the firm and the firm shall be dissolved. (Section 40)
2. Compulsory Dissolution. The Partnership Act 1932 provides that under following circumstances a firm shall be
compulsorily dissolved:
(a) All of the partners are declared as insolvent.
(b) All of the partners except one are declared as insolvent.
(c) The business carried on by the firm becomes unlawful.
3. Contingent Dissolution.
On happening of anyone of the following contingencies, partners of a firm may decide to close business of the firm.
(a) If the firm is constituted for a fixed term, on expiry of that term.
(b) If the firm is constituted to carry out one or more projects, on completion thereof.
(c If a partner of the firm dies.
(d) If a partner of the firm is declared as insolvent.
4. Dissolution by Notice.
Where a partnership is at will, the firm may be dissolved by any partner by giving a notice in writing to all the other
partners of his intention to dissolve the firm. The firm is dissolved as from the date mentioned in the notice as date
of dissolution or if no date is mentioned, as from the date of communication of the notice. (Section 43)
5. Dissolution by Court.
The court on a suit by a partner may dissolve the firm on any of the following grounds:
(a) Insanity. That a partner has become of unsound mind.
(b) Permanent Incapacity. That a partner. other than the partner suing, has become in any way permanently
incapable of performing his duties as partner.
(c) Misconduct.

That a partner, other than partner suing, is guilty of conduct which is likely to affect prejudicially carrying on of the
business.
(d) Breach of Agreement.

That a partner, other than partner suing willfully or persistently commits breach of agreement relating to
management of affairs of the firm.

(e) Transfer of Interest.

That a partner, other than partner suing has transferred whole of his interest in the firm to a third party or has
allowed his share to be sold in execution of a decree.

(f). Losses. The business of the file cannot be carried on except at loss

(g) Just and Equitable Cause.

On any other ground which renders it just and equitable that the firm should be dissolved (Section 44).