What a Partnership Is
Chapter Nine
Syllabus topic 3, "Registration procedure of Partnership firms under The Partnership Act, 1932."
Pages 18 to 19 of 62
The definition
Section 4 of the Indian Partnership Act, 1932:
"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.
Persons who have entered into partnership with one another are called individually "partners" and collectively "a firm", and the name under which their business is carried on is called the "firm name".
Three elements, and all three must be present.
1. An agreement. Section 5 puts it beyond doubt: The relation of partnership arises from contract and not from status. A Hindu undivided family carrying on a business is not a partnership, however many members work in it, because its relation arises from status.
2. Sharing of the profits of a business. Not of gross returns, and not of an asset. Two people who own a building together and divide the rent are co-owners, not partners.
3. Mutual agency, which is the phrase "carried on by all or any of them acting for all". Every partner is both a principal and an agent of every other. This is the true test, and it is what makes each partner liable for what the others do in the firm's business.
The firm is not a person
Section 4's second paragraph says the partners collectively are called "a firm". A firm has no legal personality separate from its partners.
Three consequences follow and they matter to an accountant.
The partners own the property, though it is held for the firm's purposes.
The partners are personally liable, jointly and severally, for everything the firm owes, and the liability is unlimited.
The firm cannot contract in its own right. It contracts through its partners.
Contrast this with an LLP and a company, which are bodies corporate with a legal personality of their own. That contrast is the whole of the chapter that compares the three forms.
Registration is NOT compulsory
This is the first thing an answer on MU's topic must say.
The Indian Partnership Act 1932 contains no provision requiring a firm to be registered. Section 58 says the registration of a firm "may be effected at any time". A firm that never registers is still a firm, its partnership is valid, and its contracts are good.
What the Act does instead is impose a disability on an unregistered firm, in section 69, and the disability is severe enough that registration is compulsory in practice. The chapter on the effect of not registering is where that is worked out.
So the correct answer to "is registration of a partnership firm compulsory?" is: it is not compulsory under the Act, but section 69 disables an unregistered firm from suing, so it is compulsory in effect.
What a Partnership Is
Some States have made it compulsory by their own amendment, Maharashtra among them, and a candidate who says so has said something extra and correct.
What a partnership deed contains
The Act does not require a written deed. Section 4 needs only an agreement, and an oral agreement makes a partnership.
But section 58 requires the statement of particulars to be signed by all the partners, and the Registrar in practice asks for the deed. More to the point, a firm with no deed has no answer to the questions that arise later.
A deed normally states:
- the firm name and the place of business;
- the names and addresses of the partners;
- the date of commencement and the duration, or that it is at will;
- the capital each partner brings, and whether interest is allowed on it;
- the profit sharing ratio, and the ratio for losses if different;
- the salary or commission payable to a working partner;
- the drawings allowed, and interest on them;
- the duties, powers and restrictions of each partner;
- how accounts are kept and audited;
- the procedure on admission, retirement, death and expulsion;
- dissolution, and how the accounts are settled;
- arbitration of disputes.
Where the deed is silent, the Act supplies the terms. Section 13 gives equal profit sharing, no interest on capital, no salary to a partner, and interest at six per cent on advances. A firm whose deed says nothing about the profit ratio shares equally, however unequal the capital.
Stamp duty and the deed
A partnership deed is an instrument chargeable with stamp duty under the State's own Stamp Act, and in Maharashtra under the Maharashtra Stamp Act. An unstamped or insufficiently stamped deed is not admissible in evidence, which defeats the whole purpose of writing it.
Who may be a partner
A person competent to contract. So:
- A minor cannot be a partner, but section 30 allows a minor to be admitted to the benefits of a partnership with the consent of all the partners.
- A company may be a partner, through its authorised representative, if its objects permit.
- A firm cannot be a partner in another firm as a firm, because it has no legal personality; its partners may be.
The four things to say in one line each
A partnership is a contract, not a status. Section 5.
Every partner is an agent of the others. The mutual agency test in section 4.
The firm has no separate legal personality, so liability is unlimited and personal.
Registration is optional under the Act and unavoidable in practice, because of section 69.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.