The Partnership Act, 1932, details the laws and regulations pertaining to a partnership firm in India. It outlines the powers of the partners, their responsibilities and duties, and how they can deal with third parties. If you are planning to start a business and considering registering a partnership firm, then this you are in the right place. In this article, we will talk about everything that you need to know regarding a partnership firm in India.
Definition of a Partnership Firm in India
According to the Partnership Act, 1932, the definition of a partnership firm in India is as follows:
“Partnership” is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.
Therefore, there are three essential aspects of a partnership firm:
- It is an agreement between two or more people
- The agreement is based on the concept of sharing profits of a business
- The business is run by all the people in the partnership or by a few on behalf of everyone.
The Three Essentials of a Partnership Firm in India
Here are some salient features of a partnership firm:
I. The partnership agreement
For any partnership to exist, there needs to be an agreement between two or more people. Hence, you must remember that, unlike a Hindu Undivided Family, a partnership can arise only from an agreement and not status. Further, since the partnership is based on a contract, the nature of the partnership becomes important. A partnership agreement can have several variants. It can also be in written or verbal.
II. The concept of sharing profits in a partnership
There are two primary things to consider here:
- A partnership is for profits obtained from a business – Hence, the partnership needs to have a business. It can be any profession or trade where earning profits is the core objective. So, a partnership is not every association where two or more people come together for financial gains. There needs to be an intention of doing business and sharing the profits. Therefore, charitable institutions and non-profit NGOs are not eligible for registration as a partnership firm in India.
- Agreement for sharing profits – In a partnership, it is important to have a written agreement regarding profit-sharing. It can be equal, based on the capital infusion or any other factor. You can also include the loss-sharing component or bear the losses in the same ratio as the profits.
III. Managing the business
One of the most important elements of a partnership is regarding how the business is carried out. Either all the partners can play an equal role in the running of the business or one or more partners can act in the benefit of all. Even if all the partners don’t run the business, the acts of those who do in the course of carrying out the business of the firm, are the acts of all the partners. Hence, in a partnership, the ability to work in cohesion is crucial to its success.
Remember, a partnership is a bond that holds the partners together and helps the firm earn profits. Hence, ensure that these elements are in place to be a part of a successful partnership firm.
Types of Partnerships
Please note that we are talking about partnerships here and NOT partnership firms. Broadly, there are four types of partnerships:
Partnership at will
As the name suggests, a partnership at will means no specific mention of the duration of the partnership or expiry of a project. Any partner, at any time, can dissolve the partnership without liability.
Fixed Term Partnership
You can create a partnership for a fixed duration. Let’s say that you want to try your hands at a couple of business ventures in partnership with three friends. However, you don’t want to continue it if you can’t establish yourself in two years. So, you talk to your friends and create a partnership for a fixed duration of two years. After two years, the partnership can end without any liability. However, you can also choose to continue the partnership after the expiry of the term with the consent of all the partners. In such cases, it becomes a partnership at will.
You can also create a partnership for a specific venture. Let’s say that you receive a project for constructing a bridge. You can create a particular partnership that will end once the construction is done.
Lastly, you can create a partnership to run a business without any specific conditions. This is a general partnership.
Types of Partners in a Partnership Firm in India
A partnership firm in India can have various types of partners. The Partnership Act, 1932, has no restrictions on any unique type of partnership. Here are some common types of partners:
As the name suggests, an active partner actively participates in the running of the business of the firm. Therefore, he acts as an agent of the other partners for the acts carried out in the usual course of business of the firm. When an active partner retires, he must give a public notice about his retirement. This absolves him of any acts done by his other partners after his retirement.
Unlike an active partner, a dormant partner does not participate in the running of the business of the firm. However, he is bound by the actions of all the other partners of the firm. He also shares in profits and losses. On retirement, he is not required to give any public notice.
A nominal partner lends his name to the partnership without having any interest in it. He does not make capital contributions or share in the profits of the firm. However, he is liable to any third party for acts of the other partners in the firm.
Partner in Profits only
A self-explanatory name, a partner in profits shares in the profits of the firm without being liable for any losses.
Partner by Estoppel
According to Section 28 of the Partnership Act, 1932, if a person knowingly or unknowingly represents himself to be a partner in a firm either by spoken/written words or conduct, then he is considered to be a partner in the firm for the said transaction or interaction.
Before you register a partnership firm in India, it is essential to understand the points mentioned above. We hope that the article offered you enough information to make an informed decision. If you need assistance to register a partnership firm in India, drop us a line. Our team of experts will contact you soon with all the details.