Indian Partnership Act, 1932 and Limited Liability Partnership Act, 2008

Indian Partnership Act, 1932

1. Definition & Types of Partnerships

Partnership (Section 4 of Indian Partnership Act, 1932, herein after act of 1932)
  • ‘The relationship between two or more persons (known as partners), who have agreed (either written or oral – in form of partnership deed) to share the profits (losses also, if any) of a business carried (operations/commercial activities of firm) on by all or any of them acting for all (acting as agent to firm or rest of partner)’ 
  • So, partner is the person, who enters into partnership, and collectively these partners are known as ‘partnership firm’

Types of Partnerships

There are following types of partnership;
  1. General partnership – where liability of each partner is unlimited, which means partner are liable upto the any extent, even their personnel properties are attached to realize the creditors due. All the partners are taking active part (working partners) in the management of the firm. 
  2. Limited partnership – where liability of some partner is limited upto the extent of capital contributed by them. They are like sleeping partner, means not taking part in the management of the firm. Even his retirement, insolvency, lunacy or death has no dissolution effect.          Note – Such partnerships are now covered in scope of Limited Liability Partnership Act, 2008. 
  3. Partnership at will – Where partnership is formed for an indefinite period without specifying any specific objective. Dissolution can take place by serving a notice (specify will to dissolve) by any partner to the other partners. 
  4. Particular Partnership – Where partnership is formed for a definite period with specific objective. Partnership is automatically getting dissolved on the expiry of the specified period or on the completion of the specific purpose. 

2. Relation of partners to one another & to third Parties

  • The relation (duties and powers) among partners may be determined by contract between the partners. Partner is considered as agent of other partners on general. So, he may pledge or sell the partnership property; he may buy goods on account of the fi­rm; he may borrow money, contract debt and pay debts on account of the ­firm; he may draw, make, sign, endorse, accept, transfer, negotiate and get discounted promissory notes, bills of exchange, cheques and other negotiable papers in the name and account of the fi­rm. The implied authority of the partner to bind the fi­rm is restricted to acts usually done in the business of the kind carried on by the ­firm. The firm, however, is bound only by those acts of a partner which were done by him in his capacity as a partner 
  • As regards to third parties, a partner is considered as the agent of the firm and of fellow members; so firm and partners are individually and jointly liable for their acts (either by that partner, fellow partner or firm) 

3. Minor admitted to benefits of partnership (Section 30 of act of 1932)

  • Although, minor is not competent to contract, but minor can be admitted to the bene­fits of the partnership with prior consent of the existing partners. On attaining the age of majority, within six months such minor has option to become member of partnership. 
Note – In case of LLP, Minor cannot be admitted to the bene­fits of firm also

4. Registration (Section 58-59 of act of 1932)

  • On application in the prescribed form, containing the particulars of partnership and accompanied by the prescribed fee to registrar of the area in which any place of business of the ­firm is situated, Registrar of Firms by recording in the Register of Firms grant registration. 
Note - Registration of the ­firm is not compulsory

5. Effect of non registration (Section 69 of act of 1932)

  • A ­firm which is not registered is not able to enforce its claim against third parties in the Civil Courts. But note third party can sue. Partner is also not able to enforce his claim either against third parties or against fellow partners. 

6. Dissolution of a firm (Section 39-47 of act of 1932)

  • Dissolution of a fi­rm means the breaking up or extinction of the relationship which subsisted between all the partners of the ­firm. Firm can be dissolved by mutual decision, Compulsory by deed or event, by Order of court. 

7. Rights and Liabilities of Partners (Section 13 of act of 1932)

As earlier said, the rights and liabilities of partners can be settled mutually among themselves and laid down in partnership deed, but if deed is silent then followings are provision of section 13of act of 1932;
  1. No right of remuneration for taking part in the conduct of the business 
  2. Share the profit and loss equally 
  3. Interest on the capital is paid only out of profi­ts; 
  4. Interest on advance by partner to firm, beyond the amount of capital he has agreed to subscribe, is payable at the annual rate of six percent; 
  5. Fi­rm shall indemnify a partner for payments and liabilities incurred by him provided his act is in the ordinary conduct of the business, and such act is for protection of the firm from any loss 
  6. Partner shall also indemnify the ­firm for loss caused to firm by his wilful neglect in conduct of business of the ­firm. 

8. Limited Liability Partnerships & its Formation

  • The Limited Liability Partnership (LLP) is considered as an alternative corporate form of business. It provides the benefi­ts of limited liability and also allows its members to organize business structure as per mutually agreed agreement as like partnership. 
  • The Limited Liability Partnership Act, 2008 majorly got enforced from 31st March 2009. 

Process of formation of LLP

  1. Deciding Partners (Minimum of two partners, may be individual or body corporate) and Designated partners (Minimum of two and one should be resident in India) 
  2. Obtaining Designated Partner Identi­fication Number (DPIN) allotted by MCA and Digital Signature Certificates (DSC) 
  3. Checking the Availability of Name [upto 6 choices can be indicated] 
  4. Drafting of LLP Agreement (In the absence of any agreement the provisions as set out in First Schedule of LLP Act, 2008 will be applied). 
  5. Electronic Filing of Supporting Documents to Registrar of LLP 
  6. Issuing Certificate of Incorporation along-with LLPIN (Limited Liability Partnership Identification Number) by Registrar of LLP 

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