The Founding Stone : Partnerships – I
A partnership Act 1932 defines partnership as the relation between two or more person who have agreed to share profit and losses of a business carried on by all of them or any of them. acting on behalf of all
Section 2 of the act defines,
(a) an “act of a firm” means any act or omission by all the partners, or by any partner or agent of the firm which gives rise to a right enforceable by or against the firm;
(b) “business” includes every trade, occupation and profession;
(c) “prescribed” means prescribed by rules made under this Act; (c-1) “Registrar” means the Registrar of Firms appointed under sub-section (1) of section 57 and includes the Deputy Registrar of Firms and Assistant Registrar of Firms appointed under sub-section (2) of that section;
(d) “third party” used in relation to a firm or to a partner therein means any person who is not a partner in the firm; and
(e) expressions used but not defined in this Act and defined in the Indian Contract Act, 1872, shall have the meanings assigned to them in that Act.
The persons who have entered such an agreement are called partners and give their collective business a name, which is necessarily their firm-name. This relation between partners arises out of a contract or an agreement, which means a husband and wife carrying on a business or members of a Hindu undivided family are not into partnership. The share of profits received by any individual from the firm, money received by a lender of money, salary received by a worker or a servant, annuity received by a widow or a child of a deceased partner, does not make them a partner of the firm.
To know more about Partnership Act of 1932 check at : Partnership Act 1932
For entrepreneurs it becomes really important, aiming for long run, to forward each step as per requirement because they work on dual investment of time and money and need not waste both on any craps created at later developing stage. A mutual understanding is always necessary but giving it a form of a legal document give it a better picture. This can be formalized through a written document depicting the rules, terms in details and other mutual decisions and is usually termed as Partnership Deed
Indeed this deed can be customized as per the business need for entrepreneur under the default rules if not specified along with some restrictions as well.
Drafting Your Partnership Deed
Default Rules of Partnership Act: A syntax to follow
These rules and some statutory provisions are more as a backup where the contract remains silent on a particular point, but most of the rights are “subject to contract between the partners”
Lets have a look some of them below:
- Through partnership deep the business partners can be restrained to engage in business activities other than those of partnership firm
- Each of partner has full right to take part in business of the firm and has its say
- Partner duties can be decided on the mutual understanding and he has to maintain his drafted position by diligently performing his duties sincerely
- The hier or legal representative has full right to inspect the accounts of the firm only in case of the death of that partner
- The small and ordinary business affairs can be tackled through majority, however if in case majority wants to change the business structure one has to veto to question and stop complete change in business structure it requires the consent of all.
- No remuneration apart form profit sharing just for being a part of business.
- If the partnership deed does not specify any ratio for the sharing of profits, they will be shared equally between all partners, even if the various partners have contributed capital in a different ratio.
- Any interest payable on capital deposited by a partner would be payable from the profits alone. Further, if a partner deposits capital beyond his/her agreed share, then the rate of interest payable would be 6% p.a.
- The capital of the firm comprises of those properties, rights and interests that are a part of the firm for the course of its business. As per Section 14 of the Partnership Act, it includes all property, rights and interest in property that is:
- originally brought into the stock of the firm, or
- subsequently acquired, by purchase or otherwise, by or for the firm for the purposes and in the course of the business of the firm, and includes also the goodwill of the business. Properties acquired with money of the firm are considered to be the firm’s property, unless a contrary intention appears in the contract.
Non Customizable Provisions of Partnership Act under Partnership Deed
- Carrying out the business of the firm for the best common interest.
- No competing business be started by any partner while the original partnership is still into existence as this will be the violation of the partnership deed
- To disclose and render the complete business information and accounts that affect or is part of the business
- Duty of one partner to indemnify the others for loss resulting from fraud caused by him or her. This is restricted to fraud in the course of the business of the firm, and not other actions of the partner.
- Partners must ensure that they accrue no personal profit (s.16). If any partner, in violation of this general duty, derives any profit from: a transaction of a firm, using firm property, business connections of firm, firm name and performing any competing business or the same business and using inside trading, is bound to share the profits made by such manner.
Partners Authority, Liability and Accountability towards firm
Each partner is jointly liable along with the other partners for the action of any partner, and each of partner into agreement are liable for any act or omission of the other partner (Section 25 of Indian Partnership Act 1932). along with the firm. Thus firms liability is more or less the individual partner liability.
Though partners have a great deed of power but with some authorization. Each partner acts as the agent of the firm and hence need to take any decision which should not affect the firms, as his action is regarded as the firms actions but on some account he is not at all bound to take individual action like
a. to submit a dispute of the firm for arbitration, relinquish a claim, admit any liability, withdraw a suit,
b. to open a bank account for the firm in her own name
c. acquire or transfer immovable property on behalf of the firm,
d. enter into a partnership on behalf of the firm