An Introduction
When two or more people come together as partners, they can form a partnership firm. This partnership firm is governed by the rules and regulations of the Indian Partnership Act, 1932. The partnership is also governed by the Indian Contract Act in areas where the Partnership Act, 1932 is silent. Let us have an overview of this act by understanding its meaning, scope, and different kinds of partnerships.
Definition of Partnership
Section 4 of the Indian Partnership Act defines a partnership as “Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all”.
Meaning of Partnership
In a partnership firm, two or more people come together to carry out a business for the purpose of earning profits and sharing those profits. The partners combine their capital resources and work jointly to carry on the business. According to Section 12 of the Indian Partnership Act, a partnership must be formed for the purpose of carrying a business that is legal in nature. Co-ownership of a property is not considered as a partnership.
Essentials of a Partnership
There must be an agreement between the partners to carry on the business of the partnership firm.
The aim of the formation of the partnership should be to earn profits and share them among partners. The sharing of profit and losses can either be according to the ratio of the capital contributed by each partner or be equally among all the partners unless otherwise specified.
The partnership agreement must state that the business will be jointly carried on by all of them or some of them acting on the behalf of all. According to Section 13 of the Partnership Act, 1932, the mutual agency exists between the partners. Every partner in a partnership acts as a principal as well as an agent for other partners. The actions of a partner are binding on the actions of all the other partners.
Unlimited Liability- The partners can be held liable jointly for any debts of the firm. They have an unlimited liability that extends to their private assets for the disposal of the firm’s debts.
Number of Partners in a Partnership
According to the Indian Partnership Act, there is no limit on the maximum number of partners that can be there in partnership but there must be a minimum of two partners. However, according to Companies Act 2013, the maximum number of partners must not exceed 100 in case of a partnership. If the number of members in a partnership exceeds 100 then it is termed as an illegal association as per Section 464 of the Companies Act, 2013. As per Section 11 of the Companies Act, the maximum number of partners for banking purposes is 10 and for other purposes is 10.
Partnership Deed
The partnership agreement forms the basis of a partnership. It is the foundation that creates a legal relationship between the partners to carry out the business of the partnership firm. A partnership agreement can either be written or oral but in the written format it is known as the partnership deed. Some of the details mentioned in a partnership deed are as follows.
Name and address of the partnership firm as well as that of the business
Name and address of all the partners
Rights, duties, and obligation of partners
Profit and loss sharing ratio
Capital contribution by each partner
Rate of interest on capital, loan, drawings
Settlement of accounts in the event of the dissolution of the firm
Mode of settlement in the event of disputes among partners
Salaries and commission payable to partners
Rules to be followed in the event of the admission of a new partner, retirement and death of an existing partner
Any other provisions affecting the rights of the partners
The Indian partnership act of 1932 is an extremely important act that is studied by students in the commerce stream. The Indian partnership act of 1932 is started as a part of the accountancy class 12 NCERT book of accounts This act contains 3 to 4 chapters that are based on the concept of partnership in the firms. These chapters are extremely important as they not only hold significant weightage in the class 12 board examination of accounts but also, the knowledge and the impact are extremely important to have in mind as it will help people who are interested in building a firm to stay vigilant as they will know about all the legal features that are associated with it.
The Indian partnership act of 1932 can be read from the chapter called accounting for partnership – basic concepts 2. After reading the study notes provided by Vedantu on the topic of the Indian partnership act of 1932, students will be able to define partnership and will also be able to list the essential features They will be able to identify the provisions of the Indian partnership act of 1932 that are related to accounting, they will know how to prepare partners capital accounts under fixed and fluctuating capital methods, repairing the profit and loss appropriation account and partners, calculate interest on capital, they will have knowledge on how guarantee for a minimum account of profit affect the distribution of profit among the partners, they will be able to make adjustments to rectify the past errors, they will also learn how to prepare final accounts of a partnership firm.
According to the Indian partnership act of 1932, a partnership can be defined as a “relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all’.
People who have entered into a partnership willingly with the knowledge of every other detail relating to the firm are called partners and they collectively form a firm. They agree on a particular name under which the business will be carried on which is called the firm’s name. A partnership firm does not have a separate legal entity other than the partners constituting it.
Essential Features of a Partnership
Two or More than Two Persons – in order for a firm to come into existence, it should involve two or more than two partners, who have a vested interest in a common goal. However, according to section 464 of the companies act of 2013, the central government has prescribed a limit on the maximum number of partners a firm can hold. Therefore, According to the central government, the maximum number of partners a firm can hold is 50.
Legal Agreement- Partners who come together to form a firm, already have a mindset that they will be sharing both profits and losses of the firm equally. These agreements, if made orally are valid however it is advised to get these agreements written in a legal form to avoid disputes in the future.
Partners in Business- In order to be partners in business, there should be some business going on in the firm that only then can they be called Business partners and only then can the Indian partnership act of 1932 be applicable to them.
Mutual Agreements - In order for a partnership to take place, a Mutual agreement on the mutual agency is extremely important. Partners of a firm can make rules and bind other partners to it and also bound to the rules that are made by other partners of the firm. Every partner is allowed to make decisions and conduct the affairs of the business according to him/her.
FAQs on The Indian Partnership Act, 1932: An Overview
1. What is a 'partnership' as defined by the Indian Partnership Act, 1932?
According to Section 4 of the Indian Partnership Act, 1932, a partnership is defined as the “relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all.” This means it is a legal relationship formed to conduct business and distribute the resulting profits.
2. What are the essential features of a partnership firm under this Act?
A partnership firm has several key characteristics based on the Indian Partnership Act, 1932:
- Two or More Persons: A minimum of two people are required. The Companies Act, 2013, further specifies the maximum number of partners, which is currently prescribed as 50.
- Agreement: A partnership is formed through an agreement, which can be oral or written (known as a Partnership Deed).
- Business Purpose: The agreement must be to carry on a legal business. Co-ownership of property alone does not constitute a partnership.
- Profit Sharing: The primary motive must be to earn and share profits among the partners.
- Mutual Agency: Each partner acts as both a principal and an agent for the other partners, meaning an act by one partner can bind the entire firm.
3. What is a Partnership Deed and why is a written one important?
A Partnership Deed is the written agreement among partners that outlines the terms and conditions of the partnership, such as profit/loss sharing ratios, capital contributions, and partner duties. While an oral agreement is legally valid, a written deed is highly recommended because it serves as concrete proof of the terms, helping to prevent future disputes and providing legal clarity on the rights and obligations of each partner.
4. How does the principle of 'mutual agency' affect the partners' responsibilities?
The principle of 'mutual agency' is a core feature of partnership. It means that every partner is an agent for the firm and for all other partners. Therefore, any act or decision made by one partner in the ordinary course of business is binding on all other partners and the firm as a whole. This creates a relationship of trust and shared responsibility, where each partner can represent the firm but is also liable for the actions of others.
5. What are the main types of partnerships based on duration?
Based on their duration, partnerships can be classified as:
- Partnership at Will: This type has no fixed duration. It continues as long as the partners wish and can be dissolved by any partner by giving notice to the others.
- Partnership for a Fixed Time: This partnership is formed for a predetermined period. It automatically dissolves upon the expiry of that time.
6. What are the different kinds of partners that can exist in a firm?
A partnership firm can have various types of partners, each with a different role and liability:
- Active/Managing Partner: Actively participates in the firm's daily operations.
- Sleeping/Dormant Partner: Contributes capital and shares profits/losses but does not take part in management.
- Nominal Partner: Lends their name to the firm but has no real interest or investment. They are still liable to third parties.
- Partner by Estoppel: A person who, by their words or conduct, represents themselves as a partner, making them liable to anyone who gave credit to the firm on that belief.
7. If the Partnership Act, 1932 doesn't specify a maximum number of partners, what law does?
While the Indian Partnership Act, 1932, only specifies a minimum of two partners, the Companies Act, 2013 sets the upper limit. Section 464 of the Companies Act, 2013, empowers the government to prescribe the maximum number of partners, which cannot exceed 100. Currently, the prescribed maximum limit is 50 partners. An association with more than 50 partners would be considered an illegal association.
8. What does 'unlimited liability' practically mean for a partner's personal assets?
Unlimited liability means that partners are not only liable to the extent of their investment in the firm but are also personally responsible for all of its debts. If the firm's assets are insufficient to pay off its liabilities, creditors can claim the partners' personal assets (like their house, car, or bank savings) to settle the outstanding debts. This liability is joint and several, meaning a creditor can sue the firm or any individual partner for the full amount.
