The law relating to partnership firm in India is prescribed in the Indian Partnership Act of 1932. This Act lays down the rights and duties of the partners between themselves and other legal relations between partners and third persons, which are incidental to the formation of a partnership. Thus, the Act establishes the position of a partner as well as a partnership firm vis-à-vis third parties, in legal and contractual relations arising out of and in the course of the business of a partnership firm. In this article, we look at the various aspects of running a partnership firm in India in detail.
A partnership is a relationship between individuals who have agreed to share the profits of a business carried on by all or any one of them acting for all as stated in Section 4 of the Indian Partnership Act. Therefore, a partnership consists of three essential elements.
- A partnership must be a result of an agreement between two or more individuals.
- The agreement must be built to share the profits obtained from the business.
- The business must be run by all or any of them representing the rest.
All these conditions must coexist before a partnership can come into existence.
Essential Elements of a Partnership
Some key elements are required for the formation of a Partnership. They are listed below with a brief explanation.
Dstinction between Partnership and Firm
Individuals who have entered into a partnership with one another are called Partners individually. The partners may be called collectively as the name under which the business is carried on is called the name of the Firm. A partnership is merely an abstract legal relationship between the partners. A firm is a concrete object signifying the collective entity for all the partners. Thus, a partnership is an invisible bind that holds the partner together, and a firm is the visible form of this partnership which is, therefore, bound together.
A partnership by will is a partnership where there is no provision made by contract between the partners for the duration of their partnership, or the determination of their partnership.
A particular partnership is when a person becomes a partner with another individual in a particular business enterprise or for a particular business venture or undertaking, such as the construction of a road, laying a railway line, etc. This sort of a partnership shall come to an end on the completion of the task for which it was initially formed.
Types of Partners
The different classes of partners can be derived based on the extent of liability in a partnership firm.
Active/ Actual/ Ostensible Partner
When a partner of a partnership firm,
- has become a partner by an agreement;
- actively participates in the conduct of the partnership.
The partner of the firm acts as a representative of other partners for all the acts carried out in the usual business lifecycle of the business. In the event of a retirement of a partner, the person must give a public notice to absolve himself of their liabilities for acts carried out by the other partners after his retirement.
Sleeping or Dormant Partner
A Sleeping or a Dormant Partner is a partner,
- who is a partner by agreement;
- who does not actively take part in the conduct of the business.
These partners share their profits and losses and are liable to third parties for the business carried out by the partnership firm. However, they are not required to give public notice of their retirement from the partnership firm.
A nominal partner is an individual who lends his name to the partnership form. When this is done without having any real interest in the business, the person is a nominal partner. This kind of a partner is not entitled to share the profits of the firm. This partner has neither invested in the firm nor takes part in how the business is run at the firm. Although, such a partner is liable to third parties for all the actions taken by the firm.