PARTNERSHIP
FORM OF ORGANISATION
A Sole trader organisation have limited financial resources,
limit, managerial ability and skills, and unlimited liability. In case of
expansion more capital as more managerial skills are required. At the same
time, the risk will also increase. A sole proprietor may not be able to fulfil
all these requirements. A person who lacks managerial skills may be having
capital. Another person who is a good manager may not be having sufficient
capital. This calls for a situation where two or more persons come together,
you; their capital and skills, and organise the business. This type of business
organisation is called partnership organisation. It grew essentially because of
the limitations and failure of the sole proprietorships. As defined by J.L.
Hanson, "a partnership is a form of business organisation in which two
more persons upto a maximum of twenty join together to undertake some form of
business activity".
The Indian Partnership Act, 1932 defined partnership as "the
relation between persons whey have agreed to share the profits of business
carried on by all or any of them acting for all" The Uniform
Partnership Act of the USA defines a partnership "as an association of
two of more persons to carry on as co-owners a business for profit". Based
on the above definitions, we can state that partnership is an association of
two or more persons who have joined together to share the profits of business
carried on 1, all or any of them acting for all.
The persons who own the partnership business are
individually called 'partners' and collectively known as the 'firm' or
'partnership firm'. On an agreed basis, partners contribute to capital and
share the responsibility of running the business. However, in some cases one
partner may provide the whole or major portion of the capital and others
contribute technical and managerial skills with or without some capital. All
such terms conditions of partnership are usually mentioned in the partnership
agreement.
Main Features
From the above discussion, we can list the main features of
partnership form of organization as follows:
1-
Plurality of persons: To form a partnership firm, there should be at
least two persons. The maximum limit on the number of persons is ten for
banking business and twenty for other types of business.
2-
Contractual relationship: Partnership is created by an agreement
between persons called 'partners' In other words, a person can become a partner
only on the basis of a contract. This contract could be oral, written or
implied.
3- Profit
sharing: There must be an agreement among the partners to share the
profits and losses of the business of the partnership firm. This is one of the
basic elements of partnership. If two or more persons jointly own some property
and share its income, it is not regarded as partnership.
4-
Existence of business: The purpose of the agreement among the
partners is to do some lawful business and share profits. If the purpose is
something other than business, it should not be treated as partnership. For
example, if the purpose is to carry some charitable work, it will not be
treated as partnership.
5- Principal-agent
relationship: The business of the firm may be carried on by all or
one or more partners acting for all the partners. Every partner is entitled to
take part in the operations of the firm. In dealing with other parties, each
partner is entitled to represent the firm and other partners in respect of the
business of the firm. All partners are bound by his acts done in the ordinary
course of business and in firm's name. In this sense a partner is agent of the
firm and the other partners.
6-
Unlimited liability: In respect of business debts, each partner has
unlimited liability. This means that if the assets of the firms are not sufficient
to meet the obligations of the firm, the partners have to pay from their
private assets. The creditors can even realise the whole of their dues from one
of the partners. Thus, all the partners are jointly and severally liable for
all business debts and obligations.
7- Good
faith and honesty: A partnership agreement rests on good faith among
the partners. The partners must be honest to each other and trust each other.
They must disclose every information about the business and present true
accounts to one another.
8-
Restriction on transfer of share: A partner cannot transfer his
share to an outsider without the consent of all the other partners.
Classification of Partners
You have learnt that different partners play different roles
in the operations of the firm. One partner may contribute more capital while
another partner may spend more time in managing it, Depending on the role
played, we can classify the partners into various categories:
Based on the extent of participation in the functioning
of the business, we can classify partners into: (a) active partners, and (h)
sleeping partners.
a) Active partner: If a partner
takes an active part in the management of the business. we call hint as active
partner. He is also known as a 'working partner'.
b)
Sleeping partner: If the partner is not actively associated with the
working of the partnership firm, we call him a sleeping partner. A sleeping
business partner simply invests his capital. He does not participate in the
functioning of the firm. Such a partner is also known as a 'dormant partner'.
Based on the sharing of profits, partners may be
classified into: (a) nominal partners, and (h) partner in profits.
a)
Nominal partner: A partner who just lends his name to the
partnership is known as a nominal partner. He neither invests his capital nor
participates in the day-to-day working and management of the firm. Such partners
are not entitled to a share of profits, but they are liable to other parties
for all the acts of the firm.
b)
Partner in profits: A partner who shares the profits of the business
without being liable for losses is called a partner in profits. As a rule, he
will not take any part in the management of the business. This is applicable to
a minor who is admitted to the benefits of the firm.
Based on the behaviour and conduct exhibited, the
partners may be divided into: (a) partner by estoppel, and (b) partner by
holding out.
a)
Partner by estoppel: A person who behaves in the public in such a
fashion as to give impression that he is one of the partners in a partnership
firm is called a partner by estoppel. Such partners are not entitled to profits
but are fully liable as regards the firm, obligations.
b)
Partners by holding out: If a particular partner of a firm
represents that another person is also a partner of the firm, and if such a
person does not disclaim the partnership relationship even after coming to know
about it, such person is called a 'partner by holding out'. Such partners are
not entitled to profits but are liable as regards the obligations of the firm.
You should note the difference between these two types
clearly. In the case of a partner by estoppel. the person's own behaviour and
conduct have created a mistaken impression in the third parties mind that he is
a partner of the firm. Whereas in the case of a partner by holding out, the
other partners have represented the person as a partner, though he is not one,
and he does not contradict it. You will learn more about such partners in a
separate course.
Based on liabilities also, partners may be classified
into two categories: (a) limited partners, and (b) general partners.
a)
Limited partner: The liability of such a partner is limited to the
extent of the capital contributed by him. He is not entitled to take part in
the management of the business, but he can advise the other general members.
His acts do not bind the firm. He has right to inspect the books of the firm
for his information. Such partner are also called 'special partners'.
b) General
Partners: He is also called ‘unlimited partner’. His liability is
unlimited and he is entitled to participate in the management of business.
Every partner who is not a limited partner is treated as a general partner.
As you know in partnership the liability of the partners is
unlimited. The limited partner, found only in limited partnership form of
organisation which is found only in some European countries and the USA. This
is not allowed in India.
Partnership Deed
You know that a
partnership is formed by an agreement. Such agreement may be either written or
oral. To avoid misunderstanding and unnecessary litigations, it is always desirable
to have a written agreement. When the written agreement is duly stamped and
registered, it is known as 'Partnership Deed'. After registration, each partner
is given a copy of the partnership deed. A partnership deed, generally contains
the following particulars.
1.
Name of the firm.
2.
Nature of the business to be carried out.
3.
Names of the partners.
4.
The town and the place where business will be
carried on.
5.
The amount of capital to be contributed by each
partner.
6.
The profit and loss sharing ratio of each
partner.
7.
Loans and advances by partners and the interest
payable on them.
8.
The amount of drawings by each partner and the
rate of interest allowed thereon.
9.
The rate of interest on capital.
10.
Duties, powers, and obligations of partners.
11.
Remuneration, if any, payable to the active
partner.
12.
Maintenance of accounts and arrangements for
audit.
13.
Settlement in the case of dissolution of
partnership.
14.
The methods of evaluation of goodwill on
admission or death or retirement of a partner.
15.
The method of revaluation of assets and
liabilities on admission or death or retirement of a partner.
16.
The method of retirement of a partner, and the
arrangement for the payment of the dues of a retired or deceased partner.
17.
Arbitration in case of disputes among partners.
18.
Arrangements in case a partner becomes
insolvent.
This is not an
exhaustive list. Any other clauses, as desired by the partners, could be
included in the partnership deed. In fact, the Partnership At defines certain
rights and duties of a partner. But the provisions of the Act conic into
operation only when there is no agreement amongst the partners. Registration of
the firm: Under the Indian Partnership Act it is not compulsory to register the
firm. But there are certain limitations for an unregistered firm. So, it is
better to register it. Registration can be done at any time. To register the
firm. an application with all particulars about the firm and registration fee
have to be sent to the Registrar of Firms.
Joint
Hindu Family Firm
Joint Hindu Family
firm is a unique form of business organisation prevailing only in India This is
the firm belonging to joint hindu family and governed by the provisions of the
Hindu Law.
In Hindu Law there are two schools:
a)
Mitakshara: It is applicable to the whole of India except
Bengal and Assam. According to this school. a Hindu inherits property from his
father, grandfather, and great grandfather. Thus, three successive generations
in the male line (son, grandson. and great grandson) inherit the ancestral
property. They are called coparceners and the senior most member of the family
is called ‘Karta'. The Hindu Succession Act. 1956 has extended the line of
coparcenary interest to female relatives of the deceased coparcener or male
relatives claiming through such female relatives.
b)
Daya bhaga: It is applicable in Bengal and Assam. According to
this, the male heirs become members only on the death of the father.
According to Hindu Law, a business
is an inheritable asset. After the death of Hindu, the business will be jointly
owned by all the coparceners. The elder person among the coparceners becomes
the new Kara and manages the business. If any property is inherited from any
other relative, or acquired from personal resources, such property is regarded
as personal property and treated as distinct from ancestral property.
Important features of the Joint Hindu Family Firm are :
1) Business is managed by the senior member of the family
called Karta. Other member do not have the right to participate in the management
of the firm.
2) Other members cannot question the authority of the Karta.
Their only remedy is to get the family dissolved by mutual agreement.
3) Karta has the power to borrow funds for the business. The
liability of the Karta is unlimited whereas the other coparceners are liable
only to the extent of their share in the business.
4) If the Karta has misappropriated the funds of the
business, he has to compensate the other coparceners to the extent of their
shares in the joint property.
5) The death of any member of the family does not dissolve
the business or the family.
6) Through mutual agreement the joint hindu family firm can
be dissolved.
You should note the difference between the joint Hindu
family firm and the partnership firm. A joint Hindu family firm is the result
of the operation of the Hindu Law. No formal agreement is required to convert a
business into a joint Hindu family business. The members of the family
automatically become coparceners. Only the Karta can participate in the management.
The liability of the Karta is unlimited but the liability of the other
coparceners is limited to their shares in the business. The rights, duties and
liabilities of coparceners are governed by the provisions of the Hindu Law.
Partnership is the result of an agreement between the persons who need not be
blood relatives. Each partner has the right to participate in the management of
the business. The liability of each partner is unlimited. The duties, rights
and liabilities of the partners are governed by the Indian Partnership Act,
1932.
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