BASIC CONCEPTS OF PARTNERSHIP :
Partnership: Partnership is defined in Section 4 of the Indian Partnership Act, 1932 as “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”.
Partners and Firm: Persons who have entered into partnership with one another are individually known as ‘partners’ and collectively a ‘firm’. The name under which the business is carried on is called ‘firm’s name’. In other words, a firm is a collection of the partners. The assets of the firm are joint property of the partners and the partners are personally liable for all liabilities of the firm.
Essential features of Partnership: The following features must exist in order to constitute a partnership –
(i) There must be an agreement and for an agreement, at least two persons are required. The agreement must be entered into by all the persons concerned. The persons must be competent to contract.
(ii) The Partnership Act does not lay down any maximum number of partners. But according to Section 464, Rule 10 of Companies Miscellaneous Rules, 2014, maximum number of partners is 100. But according to section 11 of the Companies Act, a partnership for a banking business must not have more than ten partners and that for any other business it must not have more than twenty partners.
(iii) There must be a ‘business’ and for this purpose business would include any trade, profession or occupation; For example, the jobs of medical practitioners or lawyers are not called business but there can be a partnership between doctors or lawyers.
(iv) The business must be carried on for the purpose of earning profits which would be divided among the partners i.e. there must be an agreement among the partners to share the profits (including negative profits, i.e., losses) of a business.
(v) The business must be carried on by some or all of the partners for the benefit of all of them. Consequently in partnership, there is a mutual agency among the partners and in the ordinary course of business acts of one partner are considered to be the acts of the firm.
Partnership Deed: A contract for partnership need not necessarily be in writing although it is advisable to reduce it in writing to minimize the disputes among the partners. But when the contract is put in black and white, the written contract is called a partnership deed. It is a legal document signed by all the partners and mostly contains the following:
The name of the partners; name of the firm; nature of the business to be carried on by the firm; the powers of the partners; when termination is certain, the term of duration of partnership; the amount of capital to be contributed by each partner, the restrictions on working of each partner; methods of division of profits or losses; salary; commission, interest on capital etc. payable to the partners; interest on drawings to be charged on withdrawals; interest on loan payable to a partner; valuation of goodwill when there is a change in the constitution of the firm; methods of accounting and the arbitration clause, etc.
If there is no partnership deed or if there is no provision in it indicating a contrary intention, the following provisions of the Partnership Act, apply.
(i) Every partner has a right to take part in the conduct of the business of the firm and also the right of free access to all records, books and accounts of the firm.
(ii) Partners share profits and losses equally. It is so, even when partners contribute capital unequally.
(iii) Partners are not entitled to any interest on capital contributed by them nor can they claim any salary for the work done by them for the firm. In case a partnership deed provides for payment of interest on capital or salary, it is payable only if there is a profit.
(iv) On amounts advanced by a partner to the firm in excess of his agreed share of capital, the partner is entitled to receive interest on such excess at the rate of 6% per annum. Such interest is payable even if there is a loss.
(v) No interest is to be charged on drawings.