THE LAW OF PARTNERSHIP

The Indian Partnership Act of 1932 applies to partnerships created by agreement between parties.
The essential elements of a 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.
Persons who have entered into partnership with one another are called individually "partners" and
collectively "a firm", and the name under which their business is carried on is called the "firm
name".

Thus, as per the above definition, there are 5 elements which constitute of a partnership namely:

(1) There must be a contract;

(2) between two or more persons;
(3) who agree to carry on a business;
(4) with the object of sharing profits and
(5) the business must be carried on by all or any of them acting for all.

Characteristics of partnership:

1.Voluntary Agreement
2. Sharing of profits of a business
3. Mutual agency

How are partnerships different from other business entities?

A partnership, like a sole proprietorship, is legally and financially inseparable from its owners.
Profits and losses may be passed through to the owners' personal income for tax purposes. Debts
and liabilities pass through as well.
Partnerships are generally easier and less costly to create than corporations.
All partnerships provide the advantage of pass-through taxation, which generally results in lower
taxes than other business structures such as corporations.

Who can be a partner?

Generally speaking, any person can be a partner in a partnership. A partnership is formed

simply when two or more persons decide to get together and agree to do business together for
profit. People can become business partners either by: Formal written and
signed partnership agreements.

Parties who can be a partner of a partnership business are –

➢ Person
➢ Minor
 ➢ Person of unsound mind
➢ Women
➢ Company
➢ Alien enemy

Partnership forbidden by Law

Number of partners
Types of trade agreement

Classes of Partners

Partners are of different kinds in a business partnership. They are as working partner, sleeping
partner, nominal partner, partner by estoppel, limited partner, secret partner, partner by holding
out, sub-partner, partner in profit. They are briefly explained below:

1. Working Partner
A Working Partner is one who contributes capital to the business and takes active part in its
management. Hence, he is called active partner.

2. Sleeping Partner
A Sleeping Partner is one who contributes only capital to the business, but does not take part in its
management. He is also called dormant partner or financing partner.

3. Nominal Partner
A Nominal Partner does not contribute capital. Neither does he take active part in the management.
His contribution in a partnership is limited to allowing the other partners to make use of his name.

4. Partner by Estoppel
Partner by Estoppel is not a partner of the firm but by his words and conduct he leads the outsiders
to believe that he is also a partner of the firm. Usually this arises, when the outgoing partner fails
to give notice about his retirement.

5. Limited Partner
In foreign countries like U.K., the law of the land permits the admission of partners with limited
liability. But in Bangladesh, no one can be a limited partner. There is only one exception. The
liability of a minor admitted for the benefits of partnership is limited to the extent of his capital
contribution.

6. Secret Partner
A Secret Partner is actually a partner of the firm. But he does not hold out to the public as a partner
of the firm but keeps his existence as secret. His liability is also unlimited.
7. Partner by Holding Out
Though a Partner by Holding Out is not a partner, he knowingly permits himself to be a partner of
the firm by his activities.

8. Sub – Partner
A Sub-Partner has no direct contact with the firm. He is only next to a partner.

9. Partner in Profit
A Partner in Profit becomes a partner whenever the firm earns profit. His liability is also unlimited.

Classes of partnerships:

These are four types of partnerships.

1. General partnership

A general partnership is the most basic form of partnership. It does not require forming a business
entity with the state. In most cases, partners form their business by signing a partnership agreement.
Ownership and profits are usually split evenly among the partners, although they may establish
different terms in the partnership agreement.

In a general partnership, all partners have independent power to bind the business to contracts and
loans. Each partner also has total liability, meaning they are personally responsible for all of the
business's debts and legal obligations. That's a lot of power and a lot of mutual responsibility. For
example, say a general partnership has three partners. One of the partners takes out a loan that the
business cannot repay. All partners may now be personally liable for the debt. General partnerships
are easy to form and dissolve. In most cases, the partnership dissolves automatically if any partner
dies or goes bankrupt.

2. Limited partnership

Limited partnerships (LPs) are formal business entities authorized by the state. They have at least
one general partner who is fully responsible for the business and one or more limited partners who
provide money but do not actively manage the business.

Limited partners invest in the business for financial returns and are not responsible for its debts
and liabilities.

This silent partner limited liability means limited partners can share in the profits, but they cannot
lose more than they've invested. In some states, limited partners may not qualify for pass-through
taxation. If they begin actively managing the business, they may lose their status as a limited
partner, along with its protections.
3. Limited liability partnership

A limited liability partnership (LLP) operates like a general partnership, with all partners actively
managing the business, but it limits their liability for one another's actions.

The partners still bear full responsibility for the debts and legal liabilities of the business, but
they're not responsible for errors and omissions of their fellow partners.

LLPs are often limited to certain professions such as doctors, lawyers, and accountants.

4. Limited liability limited partnership

A limited liability limited partnership (LLLP) is a newer type of partnership available in some
states. It operates like an LP, with at least one general partner who manages the business, but the
LLLP limits the general partner's liability so all partners have liability protection.

LLLPs are currently authorized in Alabama, Arizona, Arkansas, Colorado, Delaware, Florida,
Georgia, Hawaii, Idaho, Illinois, Iowa, Kentucky, Maryland, Minnesota, Missouri, Montana,
Nevada, North Carolina, North Dakota, Oklahoma, Pennsylvania, South Dakota, Texas, Virginia,
Washington, and Wyoming.

California doesn't authorize LLLPs, but it will recognize LLLPs formed in other states.

Because they aren't recognized in all states, LLLPs are not a good choice if your business works
in multiple states. In addition, their liability protections haven't been tested thoroughly in the
courts.

Partnership property: The property of the firm includes all property and rights and interests in
property originally brought into the stock of the firm or acquired by purchase or otherwise, by or
for the firm, or for the purposes and in the course of the business of the firm and includes also the
goodwill of the business.

Thus, property of the firm means-

i) Property originally brought in by partners

ii) Property obtained while the firm was in business and
iii) The goodwill of the firm.

Goodwill: Goodwill may be defined as the advantage which is acquired by a firm from the
connections it has built up with its customers and the reputation it has gained. Goodwill is part of
the property of the firm.

Partnership Agreement: The agreement to carry on business in partnership may be oral or in

writing. If it is in writing, the document in which the terms are incorporated is called the Deed of
Partnership or the Articles of Partnership.
How to legally form a partnership

When forming a partnership, follow these steps.

Step 1: Choose a structure

The first step is to find the best partnership for your situation through these steps:

➢ Research permitted partnerships: Check your secretary of state’s website to determine

the types of partnerships available in your state and which ones are permitted for your
business type.
➢ Discuss your vision and goals: What do you expect to contribute to the business, and what
do you want to get out of it? Are you looking for steady income, a tax shelter, or the chance
to pursue a dream? Do you have spouses or family members who might play a role in the
business? How will you handle structuring money and partnership accounting?
➢ Choose a structure: Based on all of those factors, choose the structure that best fits your
business. This is a good time to consult your attorney and a tax advisor.

Step 2: Draft a partnership agreement

While partnerships have been founded on a handshake, most are created with a formal partnership
agreement.

A partnership agreement is like a corporation's articles of incorporation. It establishes how your

business will be run, how profits and losses will be shared, and how you'll manage changes such
as the departure or death of a partner.

Your partnership agreement should be signed by all parties and keep on file permanently.

Your agreement should cover the following items:

➢ Who are the partners and what is their contact information?

➢ How will ownership be divided among the partners?
➢ Who will manage the business? Will more than one partner share the responsibility?
➢ Do you have limited partners? If so, what will they contribute?
➢ How will disputes be resolved? Will one manager have a final say? What happens if you
have an irreconcilable difference?
➢ What process will you follow if a partner decides to leave? How will that person's financial
stake in the business be valued and resolved?
➢ How will profits and losses be distributed? On a set schedule? At the partners' discretion?
➢ Will family members participate in the partnership? Will they have any special powers,
privileges, or limitations?
Step 3: Name your business

Before filling out any state paperwork, you need to find an available, permissible name through
these steps:

• Consult partner name regulations: Each state has its own rules for including partner names in
your business name, and they can be very particular.

• Check corporate designator rules: States have unique requirements for including corporate
designators -- words or suffixes such as "LP" that reflect your business type -- in your business
name. This is to ensure that people dealing with you can readily understand the nature of your
business.

• Check availability: Once you have a street-legal name, you need to make sure it's not already
taken.

Step 4: Register your partnership

If you're forming an LP, LLP, or LLLP, you must register your business with the state through
these steps:

➢ First, you have to choose the place where you want to do your business.
➢ Then you have to determine what licenses you will need to conduct your business and apply
for them as required.
➢ Complete the relevant certificate of partnership for your chosen structure and submit it to
your secretary of state or corporation’s division or to respective authority. The application
generally includes the names and contact information for all partners, their roles, the
purpose of the business, and an expiration date for the partnership.
➢ Submit the prescribed number of copies (usually two) of your certificate with the required
fee to the secretary of state or corporation bureau. You can usually submit your application
online. Once your application is approved, store the documents in your permanent business
archives.

Rights of Partners

✓ Conduct of business
✓ Can express opinion
✓ Access, inspection, copy
✓ Equality of profits
✓ Interest on capital
✓ Interest on advance
✓ To get indemnity
✓ Application of property of firm
✓ Partner’s authority
✓ Reconstitution
✓ Dissolution
 ✓ Right to carrying on a competing business
✓ Right to share profits after retirement

Duties of partners

➢ Justice, faithfulness, true accounts, full information

➢ To pay indemnity
➢ To attend diligently
➢ No remuneration
➢ Equality of losses
➢ To pay indemnity for willful neglect
➢ No private benefit
➢ To account for secret profit
➢ No secret profits
➢ Unlimited liabilities