PartnershipsBusiness Law Report

12/16/2011Submitted to: Muhammad Zia Kyani Section: C

Submitted By:

Abdur Rafae Shahid (10081)

Muhammad Yahya (8958)

Definition of partnership"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. A partnership means a formal agreement between two or more parties that have agreed to work together in the pursuit of common goals.

Essential elements of Partnership

• Persons

There should be at least two persons to form a partnership or partnership firm.

» Restrictions on the number of persons

The maximum number of members that can exist in partnership is 10 in case of a firm carrying on banking business and 20 in case of any other business.

This restriction is placed by the companies act and not the partnership act.

Companies Act, 1956

• Who have agreed

There should be an agreement between those persons who are forming the partnership. The agreement is the foundation for the partnership. Partnerships can arise only from a contract and not status.

Indian (Adapted as Pakistani) Partnership Act, 1932

• The profits of a business

There should be a business carried on by the partnership and that too with an intention to make and share profits of that business.

Therefore we can say "No Business ⇒ No Partnership" as well as "No intention to share profits ⇒ No Partnership"Though, no specific mention of sharing of losses is made, we consider that Sharing profits implies Sharing Losses also.

Indian (Adapted as Pakistani) Partnership Act, 1932

• Carried on by all or any of them acting for all

The business may be carried on by any one or more of the partners.

Acting for all

This implies that a partner conducting the business should be understood as conducting the business on behalf of all the partners. Each partner would be responsible for the acts of the other partners in relation to the firm.

As far as the outsiders are concerned, the partners and the firm are one and the same.

Mutual Agency [Principal Agent Relationship]

In his/her role as a partner, a person acts both as a principal as well as an agent.

A partner is an agent for the acts that the he/she does on behalf of the firm, whereby he/she can bind the other partners for such acts. The other partners would be the principals for such acts.

With regard to the acts of the other partners, he/she will act as the principal (since he as a partner is bound by the acts of the other partners on behalf of the firm)

Where a partner cannot be made responsible for the acts of one or more other partners we cannot say they together form a partnership. This mutual agency is what really decides whether there is a partnership or not. Thus it is said the "Mutual Agency" is the real test of partnership.

Indian (Adapted as Pakistani) Partnership Act, 1932

• Partners

Persons who have entered into partnership with one another are called individually "partners".

• Partnership

The relationship between the persons is called "partnership".

• Firm

The partners are collectively called a "firm".

• Firm Name

The name under which the partnership business is carried on is called the "firm name"

CLASSIFICATIONS OF PARTNERSHIP

1. As to extent of its subject matter a. UNIVERSAL PARTNERSHIPi. UNIVERSAL PARTNERSHIP OF ALL PRESENT PROPERTY - comprises the following:a) Property which belonged to each of the partners at the time of the constitution of the partnershipb) Profits which they may acquire from all property contributedii. UNIVERSAL PARTNERSHIP OF PROFITS - comprises all that the partners may acquire by their industry or work during the existence of the partnership

Note: Persons who are prohibited from giving donations or advantage to each other cannot enter into a universal partnership

b. PARTICULAR PARTNERSHIP - has for its objects:i. Determinate thingsii. Their use or fruitsiii. Specific undertakingiv. Exercise of profession or vocation

2. As to liability of partnersa. GENERAL PARTNERSHIP - consists of general partners who are liable pro rata and subsidiarily and sometimes solitarily with their separate property for partnership debtsb. LIMITED PARTNERSHIP - one formed by 2 or more persons having as members one or more general partners and one or more limited partners, the latter not being personally liable for the obligations of the partnership

3. As to durationa. PARTNERSHIP AT WILL - one in which no time is specified and is not formed for a particular undertaking or venture which may be terminated anytime by mutual agreement

b. PARTNERSHIP WITH A FIXED TERM - the term for which the partnership is to exist is fixed or agreed upon or one formed for a particular undertaking

4. As to legality of existencea. DE JURE PARTNERSHIP - one which has complied with all the legal requirements for its establishmentb. DE FACTO - one which has failed to comply with all the legal requirements for its establishment

5. As to representation to othersa. ORDINARY OR REAL PARTNERSHIP - one which actually exists among the partners and also as to 3rd personsb. OSTENSIBLE OR PARTNERSHIP BY ESTOPPEL - one which in reality is not a partnership but is considered a partnership only in relation to those who, by their conduct or omission, are precluded to deny or disprove its existence

6. As to publicitya. SECRET PARTNERSHIP - one wherein the existence of certain persons as partners is not avowed or made known to the public by any of the partnersb. OPEN OF NOTORIOUS PARTNERSHIP - one whose existence is avowed or made known to the public by the members of the firm

7. As to purposea. COMMERCIAL OR TRADING PARTNERSHIP - one formed for the transaction of businessb. PROFESSIONAL OR NON TRADING PARTNERSHIP - one formed for the exercise of a profession

Different types of partners in a partnership firm

There are various types of partners in a partnership firm. They are as follows:

Active Partner:

Partner who takes an active part in the management of the business is called active partner. He may also be called 'actual' or 'ostensible' partner. He is an agent of the other partners in the ordinary course of business of the firm and considered a full fledged partner in the real sense of the term.

Sleeping or Dormant Partner:

A sleeping or dormant partner is one who does not take any active part in the management of the business. He contributes capital and shares the profits which are usually less than that of the active partners. He is liable for all the debts of the firm but his relationship with the firm is not disclosed to the general public.

Nominal Partner:

A partner who simply lends his name to the firm is called nominal partner. He neither contributes any capital nor shares in the profits or take part the management of the business. But he is liable to third parties like other partners. A nominal partner must be distinguished

from the sleeping partner. While the nominal partner is known to the outsiders and does not share in the profits, the sleeping partner shares in the profit a his relationship is kept secret.

Partner in Profits:

A partner who shares in the profits only without being liable of the losses is known as partner in profits. He does not take part in the management of the business but he is liable to third parties for all the debts of the firm.

Sub-partner:

When a stranger partakes in the profits derived from the firm by a partner he is regarded as a sub-partner. A sub-partner is in no way connected with the firm or he not a partner of the firm. He is simply a partners' partner. Therefore, he has no rights again the firm nor he is liable for the debts of the firm. He only shares profits from a partner.

Partner by Estoppels or Holding out:

When a partner is not a partner but represent to the outside world that he is a partner in a firm, he is stopped or prevented from denying the truth. He is considered as a partner in the eyes of law. Similarly, if a person is declared i be a partner by a partner of a firm and such person remained silent without denying it, he also considered a partner by holding out. Thus, such persons are liable to outsiders i partners on the principle of estoppel or holding out because on faith of their representation action outsiders have granted credit to the firm.

Minor Partner:

Partnership arises from contract and a minor is not competent to enter into contract. Therefore, strictly speaking, a minor cannot be a full-fledged partners. But with the consent of all the partners he can be admitted into partnership for benefits only. He is not personally liable to third parties for the debts of the firm, on attaining majority, if he continues as a partner, his liability will become unlimited with effect from the date of hi original admission into the firm.

Types of Partnerships

A partnership arises whenever two or more people co-own a business, and share in the profits and losses of the business. Each person contributes something to the business -- such as ideas, money, or property -- though management rights and personal liability will vary depending on which of three modern partnership forms the business takes: general partnership, limited partnership, or limited liability partnership (LLP).

General Partnerships

A general partnership involves two or more owners carrying out a business purpose. General partners share equal rights and responsibilities in connection with management of the

business, and any individual partner can bind the entire group to a legal obligation. Each individual partner assumes full responsibility for all of the business's debts and obligations. Although such personal liability is daunting, it comes with a tax advantage: partnership profits are not taxed to the business, but pass through to the partners, who include the gains on their individual tax returns at a lower rate.

Limited Partnerships

A limited partnership allows each partner to restrict his or her personal liability to the amount of his or her business investment. Not every partner can benefit from this limitation -- at least one participant must accept general partnership status, exposing him or herself to full personal liability for the business's debts and obligations. The general partner retains the right to control the business, while the limited partner(s) do not participate in management decisions. Both general and limited partners benefit from business profits.

Limited Liability Partnerships (LLP)

Limited liability partnerships (LLP) retain the tax advantages of the general partnership form, but offer some personal liability protection to the participants. Individual partners in a limited liability partnership are not personally responsible for the wrongful acts of other partners, or for the debts or obligations of the business. Because the LLP form changes some of the fundamental aspects of the traditional partnership, some state tax authorities may subject a limited liability partnership to non-partnership tax rules. The Internal Revenue Service views these businesses as partnerships, however, and allows partners to use the pass through technique.

Existing partnerships that wish to take advantage of LLP status do not need to modify their existing partnership agreement, though they may choose to do so. In order to change status, a partnership simply files an application for registration as a limited liability partnership with the appropriate state agency. All states require disclosure of the partnership's name and principle place of business. Some states also require, among other things, identification of the number of partners, a brief description of the business, a statement that the partnership will maintain insurance and written acknowledgment that the limited liability status may expire.

Advantages and Disadvantages of a General Partnership

Advantages of a General Partnership

Creating one is relatively easy and inexpensive compared to a corporation or Limited liability company.

The skills and abilities of more than one individual are available to the firm.

Having more than one owner may make it easier to raise funds.

Business losses can be deducted against the partners’ other sources of income.

It is not subject to double taxation (explained later).

Disadvantages of a Partnership

Liability on the part of each general partner is unlimited.

The business relies on the skills and abilities of a fixed number of partners. Of course, the owners can hire employees who have additional skills and abilities.

Raising capital can be difficult.

Because decision making among the partners is shared, disagreements can occur.

The business ends with the death or withdrawal of one partner unless otherwise stated in the partnership agreement.

The liquidity of each partner’s investment is low.

Modes of Dissolution

A firm may be dissolved in any of the following ways:-

1. By Consent: A partnership firm can be dissolved any time with the consent of all

the partners whether the partnership is at will or for a fixed duration.

2. By Agreement: A partnership can be dissolved in accordance with the terms of

the Partnership Deed or of the separate agreement.

3. Compulsory Dissolution: In case, any of the following events take place then it becomes

compulsory for the firm to dissolute.

(i) Insolvency of Partners: In case all the partners or all the partners except one become

insolvent.

(ii) Unlawful Business: In case the firm’s business become unlawful on the happening of a

subsequent event. E.g. trading with an alien country.

4. Dissolution on the happening of contingent event: A firm may be dissolved on the

happening of any of the following contingent event:-

(i) Expiry of Fixed Period: If the firm is constituted for fixed period, then the firm is dissolves

automatically.

(ii) On achievement of specific task: If the firm has been constituted for the achievement of

specific task, on achievement of that task, firm ceases to exist.

(iii) Death of Partner: Death of any of the partner dissolves the partnership.

(iv) Insolvency of Partner: The insolvency of any of the partner may dissolve the firm.

(v) Resignation of Partner: Resignation by any of the partners dissolves the partnership.

5. Dissolution by Notice: In case of partnership at will, a partner can dissolve it by giving written

notice of dissolution to other partners duly signed by him.

6. Dissolution by Court: The court may order for the dissolution of the firm on the following

grounds:-

(i) Insanity of Partner: On the application of any of the partner, court may order for

the dissolution of the firm if a partner has become of an unsound mind.

(ii) Incapacity of Partner: If a partner has become permanent in capable of discharging his

duties and obligations then court may order for the dissolution of firm on the application of any

of the partner.

(iii) Misconduct of Partner: If any partner other than partner suing is responsible for any loss

to the firm, then the court may order for the dissolution of the firm.

(iv) Constant breach of agreement by partner: The court may order for the dissolution of the

firm if the partner other than the suing partner is found guilty for constant breach

of agreement and it becomes impossible to continue the business with such partner.

(v) Transfer of Interest: When any of the partner other than the suing partner transfers whole

of its share to the third party for permanently.

(vi) Continuous Losses: The court may order for dissolution if the firm is continuously suffering

losses and there is no more capital available for the future growth of the firm.

(vii) Just and Equitable: The court may order for dissolution on any other ground which court

think is just, fair and equitable. e.g. loss of total confidence between the partners

The rights and the duties of partners in Business

The rights and obligations of the partners are described in the partnership deed. In the absence of a bonafide partnership deed, the provisions of the Partnership Act with regard to rights and obligations will apply.

The followings are some of the rights of a partner:

Every partner has a right to take active part in the management and administration of the firm.

The books of accounts of the firm must be kept at the principal lace of business and every partner has a right to have access to the accounts of the firm and he can have a copy of accounts.

Every partner has a right to continue in partnership.

Every partner has right to retire according to agreement or consent of all partners.

Every partner has a right to share profit and losses equally in the absence of partnership deed.

If a partner has given any loan or advance to the firm, he is entitled to interest on loan at 6 percent p.a.

Every partner has a right to prevent admission or retirement of a partner.

A partner is not liable for any activities in the firm before his admission.

Every partner has a right to sue for dissolution of the firm.

The partners have a right to do all such acts in the time of emergency which would protect the firm from losses.

Every partner has a right to be indemnified by the firm for the payment made or liabilities incurred by him in the ordinary course of conduct of the business.

The outgoing partner has a right to carry on similar business operations without the use of firm's name.

The following are the main duties of partners:

Every partner is bound to carry on the business of the firm to greater advantage.

Every partner has a duty to work hard and conduct the business in the best and common interest of the firm.

A partner shall not carry on any business competing with firm's business.

Every partner is bound to keep and render proper books of accounts.

Every partner has a duty to contribute equally for the losses incurred by the business.

Every partner has a duty to attend diligently to his duties and render true accounts and information.

Every partner is bound to use the property of the firm exclusively for the partnership business.

No partner can transfer his interest in the firm except with the consent of all partners.

Every partner is bound to act honestly, faithfully and diligently for the conduct of the business.

Conditions for success

Create a bond of trust and demonstrate openness

Work as a team, for consensus and consultation

Respect the organizational mission of each partner

Respect the expectations and limits of each partner

Share power, risks and responsibilities

Invest jointly in resources

Encourage commitment and permanency from the stakeholders