Partnership

A business partnership is an agreement between two or more people, express or implied, to

conduct certain business activities. The parties to a partnership may be individuals, corporations,
and even other partnerships. Partnerships may be

 General partnerships, where all partners have equal rights and duties
 Limited partnerships, where general partners have broad rights and duties, a limited
partnership have restricted rights and duties
 Limited liability partnerships, where all parties have certain restrictions on liability

The principal characteristics of a general partnership include:

 Joint and several liabilities— This means that each partner may be responsible not only
for his or her share of partnership debt, but may be personally liable for all partnership
debt.
 Pass-through taxation— unlike a corporation, a partnership does not pay income tax at
the business entity level. Instead, the income earned by each partner “passes through” to
his or her personal tax return
 Equal sharing in profit and control

A Partnership
A partnership arises whenever two or more people co-own a business and share in the profits and
losses of the business. Other business legal structures include sole proprietorships, limited
liability companies (LLCs), corporations, and nonprofit corporations.
In a partnership, each person contributes something to the business -- such as ideas, money,
property, or some combination of these. Management rights, profit share, and personal liability
will vary depending on which of the three modern partnership forms the business takes: general
partnership, limited partnership, or limited liability partnership (LLP). Below are basic
summaries of the main types of business partnerships.

General Partnerships
A general partnership involves two or more owners carrying out a business purpose. General
partners share equal rights and responsibilities in connection with management of the business,
and any individual partner can bind the entire group to a legal obligation. Each individual partner
assumes full responsibility for all of the business's debts and obligations. Although such personal
liability is daunting, it comes with a tax advantage: partnership profits are not taxed to the
business, but pass through to the partners, who include the gains on their individual tax returns at
a lower rate.

Limited Partnerships
A limited partnership allows each partner to restrict his or her personal liability to the amount of
his or her business investment. Not every partner can benefit from this limitation -- at least one
participant must accept general partnership status, exposing himself or herself to full personal
liability for the business's debts and obligations. The general partner retains the right to control
the business, while the limited partner(s) do(es) not participate in management decisions. Both
general and limited partners benefit from business profits.

Limited Liability Partnerships (LLP)

Limited liability partnerships (LLP) retain the tax advantages of the general partnership form, but
offer some personal liability protection to the participants. Individual partners in a limited
liability partnership are not personally responsible for the wrongful acts of other partners, or for
the debts or obligations of the business. Because the LLP form changes some of the fundamental
aspects of the traditional partnership, some tax authorities may subject a limited liability
partnership to non-partnership tax rules.
Existing partnerships that wish to take advantage of LLP status do not need to modify their
existing partnership agreement, though they may choose to do so. In order to change status, a
partnership simply files an application for registration as a limited liability partnership with the
appropriate agency.
Partnership Firm
A Partnership Firm is an entity created by two or more persons as partners for Profit. It is very
easy to create a Partnership Firm. Partners have unlimited liability in a partnership firm. A
Partnership can be created by creating a Partnership Deed.

Core elements of a partnership agreement

These 5 essential elements of a partnership agreement are explained below in detail.
 Contract for Partnership. Partnership is the result of a contract. ...
 Maximum No. of Partners in a Partnership.
 Type of business between carrying on in a Partnership.
 Sharing of Profits. ...
 Type of partnership.

Alterations of a partnership agreement

If you are in a partnership, you may want to make some changes in your partnership agreement
at this time. Similarly, if you’re a limited liability company (LLC) that files a partnership return,
you, too, may want to make some changes in your operating agreement.

1. Changing partners
When a new partner comes into the partnership or when an existing partner leaves, you may
want to amend the partnership agreement. This may be desirable to reflect new roles in the
business, as well as new allocations of partnership items for tax purposes.

2. Changing entity status

Partnerships may want to change their form of entity for various reasons (e.g., to become an LLC
so that owners gain personal liability protection). Of course tax issues for the changeover must
be taken into account.
From the perspective of the partnership agreement, depending on the type of change, a new
agreement may be required or amendments to an existing agreement may suffice. Examples:

When a partnership converts to an LLC, a new operating agreement is required.

3. Mergers or divisions
One partnership may decide to combine with another, or a partnership may split into two or more
parts. There may be valid business reasons for making these moves, and usually they require a
new partnership agreement.

4. Operational changes
If the partnership makes some changes in business operations, they may need to be reflected in
the partnership agreement and require an amendment. Examples:
Adopting new accounting policies
Changing the banking institution

Source
https://bigideasforsmallbusiness.com/5-reasons-amend-partnership-agreement/
https://www.getlegal.com/legal-info-center/business-law/partnerships-limited-partnerships-and-
joint-ventures/
https://smallbusiness.findlaw.com/incorporation-and-legal-structures/types-of-partnerships.html
 Types of Authority in Partnership

There are three types of authority: express, implied, and apparent. Only express and implied are
actual authority, because the agent is truly authorized. In apparent authority, the agent seems to
be authorized, but is actually not. The principal is still bound by the agent’s actions.

Actual AuthorityExpress Authority granted by words or conduct that, reasonably interpreted,

cause the agent to believe the principal desires her to act. In other words, both the principal and
the agent agreed to the agency relationship through written or oral agreement. Any partner can be
the principal or agent depending on the circumstances. Implied Authority - Unless otherwise
agreed, authority to conduct a transaction includes authority to do acts that are reasonably
necessary to accomplish it. This suggest that the conduct of both parties expresses intent to create
agency relationship. Therefore one partner works on the next partner’s behalf through implied
authority.
If a server at a restaurant tells you they can give you a free beverage with the purchase of an
entree, they have made a contract with you on behalf of the restaurant business they are
representing.
Implied authority is one type of authority under the principle of agency. Another example of
implied authority is the wearing of a name tag by an employee. This gives the employee
implied authority to act as an agent of the employer.
Apparent AuthorityA principal can be liable for the acts of an agent who is not, in fact, acting
with authority if the principal’s conduct causes a third party reasonably to believe that the agent
is authorized.An agent with actual authority may perform an act beyond the scope of that
authority. If the action appears to the third party to be within the scope of the authority, the
principal will be bound.
Apparent authority may be given by a company by providing an individual, who has no authority
to make decisions or to contract, such items as business cards or stationery, business forms
with the company's logo, or a company truck with a logo.

Estoppel and RatificationEstoppel - No one may claim that a person was not his agent, if he
knew that others thought the person was acting on his behalf, and he failed to correct their belief.
Ratification - If a person accepts the benefit of an unauthorized transaction or fails to repudiate
it, then he is as bound by the act as if he had originally authorized it.

Estoppel and Ratification Distinguished Estoppel and ratification are easy to confuse.
Ratification applies when the principal accepts the benefits of the contract. Estoppel applies when
the principal does not want the benefit of the contract, but delays in telling the innocent third
party of the mistake.
 Liability of Partners and General Information on Partners

Management

Each partner has the right to take an equal part in transacting the business of the partnership.  It is
irrelevant that one partner contributed more than another financially or that one contributed only
services when the partnership was formed.

Inspection of Books

All partners are equally entitled to inspect the books of the partnership.

Share of Profits

Each partner is entitled to a share of the profits.  The partners may provide that profits shall be
shared in unequal proportions.  However, in the absence of such an agreement, each partner is
entitled to an equal share of the profits without regard to the amount of capital or services
contributed to the partnership by each partner.

Compensation

In the absence of an agreement to the contrary, a partner is not entitled to compensation for
services performed for the partnership.  Partners may agree that one of the partners shall devote
full time as manager of the business and may agree that a salary shall be paid to the partner in
addition to the managing partner’s share of the profits.  This sometimes occurs in legal
partnerships or accounting partnerships when one of the partners is appointed managing partner. 
In most cases, the managing partner practices his profession, but also handles the business affairs
of the partnership and is paid or compensated in some way for this extra duty.

Repayment of Loans

A partner is entitled to reimbursement of money advanced to the partnership, such as travel

expenses incurred on partnership business.

Contribution and Indemnity

If a partner pays more than his proportionate share of the debts of the partnership, he has a right
to reimbursement from the other partners.  If an employee of a partnership negligently injures a
third person while acting within the scope of employment, and if the injured party collects
damages from one partner, this partner is entitled to reimbursement from the other partners in
order to divide the loss equally.

Distribution of Capital

If a partnership is dissolved, every partner is entitled to receive a share of the partnership

property after due payment of all creditors and the repayment of loans made to the partnership by
the partners.  Unless otherwise stated in the partnership agreement, all partners are entitled to the
return of their capital contributions to the partnership.

Nature and Extent of Partner’s Liability

Partners are jointly and severally liable for all torts committed by one of the partners in the scope
of the partnership business.  When partners are held to be liable for an injury caused to a third
person, the third person may sue all or any of the members of the partnership. Partners are also
jointly and severally liable on all partnership contracts.

Each member of a partnership has individual and unlimited liability for the debts of the
partnership regardless of the member’s investment or interest in the partnership.  Even if a
partner only owns 5% interest in the partnership, a judgment against the partnership in the
amount of $100,000.00 can be collected from the 5% owner’s personal assets, particularly if the
partnership or the other partners did not have the money to pay this debt.

Liability for Breach of Duty

If a partner breaches a duty to the partnership, an injured partner may recover damages from the
partner who breached the duty.

Liability of New Partners                                                                                                    

A person admitted as a partner into an existing partnership has limited liability for all obligations
of the partnership that arose before he was admitted as a partner.  This type of claim could only
be satisfied out of partnership property and would not extend to the individual property of a
newly admitted partner.
Effect of Dissolution on Partners’ Liability

A partner will remain liable after dissolution of the partnership unless all claims against the
partnership have been paid or the creditors of the partnership have released their claims.  The
dissolution of the partnership does not in and of itself discharge the existing liability of any
partner.

Partnership Property

The property of a firm is also known as partnership property, partnership assets, joint stock,

common stock, or joint estate. A partnership property includes all property and rights, and interest in
property that the partnership firm purchases.
These purchases can also be made for the purpose and in course of the business of the firm,
including the goodwill of the firm. All partners collectively own such properties.

Hence, a partnership property comprises of the following items if there is no agreement between the
partners showing any contrary intention:

 All property and rights and interest in property that the partners purchase in the common
stock as their contribution to the common business.

 All property and rights and interest in property that the firm purchases either for the firm or
for the purpose and in course of the business of the firm.

 Goodwill of the business.

Determining whether a particular property is partnership property depends on the true intention or
agreement between the partners.

Hence, if a firm uses the property of a partner for its purposes, it does not make it a partnership
property unless that was the real intention. At any time, the partners may agree to convert the
property of a partner or partners into partnership property.

If such a conversion is made in good faith, then it would be effectual between the partners and
against the creditors of the firm. The partners may also agree to convert the separate property of any
partners into the property of the firm.

Goodwill
The goodwill of a business is the property of the firm and is subject to a contract between the
partners. However, it does not define the term goodwill.

Goodwill is the value of the reputation of a business in respect of the expected future profits OVER
AND ABOVE the profits that a firm earns in the same class of business. It is a part of partnership
property. The firm can sell the goodwill separately or along with other properties.

When a partnership firm dissolves, all partners have a right to have the goodwill sold for the benefit
of all the partners unless there is an agreement contrary to the same. After the firm sells the
goodwill, any partner may make an agreement with the buyer to not carry on any business similar to
that of the firm within a certain time-period or local limits.

Application of Partnership Property

The partnership property should be held and used exclusively for the purpose of the firm. While all
partners have a community of interest in the property, during the subsistence of the partnership no
partner has a proprietary interest in the assets of the firm.

Each partner has a right to his share in the profits of the firm until the firm subsists. He also has a
right to see that the application and use of the assets of the firm are for the purpose of the business
of the partnership.
 Rights and Duties of Partners
Relation of Partners with One Another/Outsiders

All partners are free to form their own terms and conditions with respect to functioning in their
partnership deed. Let us take a look at the duties and the rights of partners.

Right to Determine Relationship

Partners can determine their mutual rights and duties by a contract called partnership deed, which
determines aspects of general administration, such as which partner will do what work, what will be
their share in profits, etc. It may be varied by express or implied consent of all the partners.

Such deed can be expressly made or implied by a course of dealing. For example, if one partner
checks accounts of the firm daily and others do not object, his conduct will be presumed to be a
right of all partners in the absence of a written partnership deed between them. So they can
themselves determine the rights of partners.

Rights of Partners Inter Se

Partners can exercise the following rights under the Act unless the partnership deed states
otherwise:

1. Right to participate in business: Each partner has an equal right to take part in the conduct
of the partnership business. Partners can curtail this right to allow only some of them to
contribute to the functioning of the business if the partnership deed states so.

2. Right to express opinions: Another one of the rights of partners is their right to freely
express their opinion. Partners, by a majority, can determine differences with respect to
ordinary matters connected with the business. Each partner can express his opinion to decide
such matters.

3. Right to access books and accounts: Each partner can inspect and copy books of accounts
of the business. This right is applicable equally to active and dormant partners.

4. Right to share profits: Partners generally describe in their deed the proportion in which they
will share profits of the firm. However, they have to share all the profits of the firm equally if
they have not agreed on a fixed profit sharing ratio.

5. Right to be indemnified: Partners can make some payments and incur liabilities through
their decisions in the course of their business. They can claim indemnity from each other for
these decisions. Such decisions must be taken in situations of emergency and should be of
such nature that an ordinarily prudent person would resort to under similar conditions.
 6. Right to interest on capital and advances: Partners generally do not get an interest on the
capital they contribute. In case they decide to take an interest, such payment must be made
only out of profits. They can, however, receive interest for other advances made subsequently
towards the business.

Duties of Partners inter se

Now that we have seen the rights of partners let us see the duties the Act has prescribed,

1. General duties: Every partner has the following general duties like carrying on the business
to the greatest common good, duty to be just and faithful towards each other, rendering
true accounts, and providing full information of all things affecting the firm. Etc

General duties:

Loyalty and Good Faith

Each partner must act in good faith toward the other partners and must not take any advantage
over the other partners by misrepresentation or concealment.  Each partner owes a duty of loyalty
to the partnership, and this duty bars the making of any secret profit at the expense of the firm
and bars the use of the firm’s property for personal benefit.  A partner cannot promote a
competing business, and if he does so, he can be liable for any damages sustained by the
partnership. 

Obedience

Partners must observe any limitations adopted by a majority of the partners with regard to the
ordinary details of the partnership business.  For example, if a majority of the partners operate a
retail store and decide that no sales can be made on credit, a partner placed in charge of the store
must obey this limitation.  If a third person does not know of the limitation, the managing partner
will have the power to make a binding sale on credit to such a person, but if the third person does
not pay his bill, the partner who violated the limitation is liable for any loss caused by his
disobedience to the limitation.

Reasonable Care

A partner must use reasonable care in transacting the partnership’s business and is liable for any
loss resulting from a failure to act with reasonable care.
Information

A partner has the duty to inform the partnership of all matters relevant to the partnership.  For
example, if one partner is going to buy out the interest of another partner, this must be revealed
to the partnership.

Duties of Partners inter se

Now that we have seen the rights of partners let us see the duties the Act has prescribed,

2. Duty to indemnify for fraud: Every partner has to indemnify the firm for losses caused to it
by his fraud in the conduct of business. The Act has adopted this principle because the firm is
liable for wrongful acts of partners. Any partner who commits fraud must indemnify other
partners for his actions.

3. Duty to act diligently: Every partner must attend to his duties towards the firm as diligently
as possible because his not functioning diligently affects other partners as well. He is liable to
indemnify others if his willful neglect causes losses to the firm.

4. Duty to use the firm’s property properly: Partners can use the firm’s property exclusively
for its business, and not for any personal purpose, because they all own it collectively. Hence,
they must be careful while using these properties.

5. Duty to not earn personal profits or to compete: Each partner must function according to
commonly shared goals. They should not make any personal profit and must not engage in
any competing business venture. They should hand over personal profits made to their firm.

Fiduciary Duties in General Partnerships

In a partnership, each partner has a legal duty to act in the partnership's best interests, as well as
the best interest of the other partners. There's also the legal duty of individual personal liability
for partnership obligations. General partners are liable for all contracts entered into by other
partners. They may be found personally liable for breach of trust or fraud committed by other
partners as well.

Your fiduciary duties in a partnership depend on your role in the business, as well as the type of
partnership it is — limited or general. General partners in a partnership typically take part in
daily business operations.
Partnerships are formed by people who want to operate a common business for profit. The
partners are fiduciaries to each other, meaning they owe the business and each other certain basic
duties.

If a partner with fiduciary duties fails to live up to them, he or she may face substantial legal
liability.

Partners in a partnership must be able to trust and rely on their fellow partners for promoting the
success and best interests of the business. Their relationship is built on good faith, honesty,
loyalty, and fairness.

They're held to high standards of care, and their duties include acting for the common benefit of
all partners in business matters and refraining from taking advantage of other partners by using
any of the following:

 Concealment
 Misrepresentation
 Threat
 Adverse pressure
 Dissolution of a Partnership

Dissolution of partnership firm is a process in which relationship between partners of firm is

dissolved or terminated. If a relationship between all the partners of firm is dissolve then it is known
as dissolution of firm. In case of dissolution of partnership firm, the firm ceases to exist. This
process includes the discarding and disposing of all the assets of firm or and settlements of
accounts, assets, and liabilities. Learn more about Dissolution of partnership firm, legal provisions,
and settlement of accounts.

Dissolution of Partnership Firm

As we know that after the dissolution of partnership firm the existing relationship between the
partner’s changes. But, the firm continues its activities. The dissolution of partnership takes place in
any of the following ways:

1. Change in the existing profit sharing ratio.

2. Admission of a new partner

3. The retirement of an existing partner

4. Death of an existing partner

5. Insolvency of a partner as he becomes incompetent to contract. Thus, he can no longer be a

partner in the firm.

6. On completion of a specific venture in case the partnership was formed specifically for that
particular venture.

7. On expiry of the period for which the partnership was formed.

Dissolution of a Partnership Firm

 The dissolution of partnership firm ceases the existence of the organization. After this, the
partnership firm cannot enter into any transaction with anybody. It can only sell the assets to realize
the amount, pay the liabilities of the firm and discharge the claims of the partners.

However, the dissolution of a firm may be without or with the intervention of the court. It is
noteworthy here that the dissolution of partnership may not necessarily result in the dissolution of
the firm. But, dissolution of partnership firm always results in the dissolution of the partnership.

Following are the ways in which dissolution of a partnership firm takes place:

1. Dissolution by Agreement
A firm may be dissolved if all the partners agree to the dissolution. Also, if there exists
a contract between the partners regarding the dissolution, the dissolution may take place in
accordance with it.

2. Compulsory Dissolution
In the following cases the dissolution of a firm takes place compulsorily:

 Insolvency of all the partners or all but one partner as this makes them incompetent to enter
into a contract.

 When the business of the firm becomes illegal due to some reason.

 When due to some event it becomes unlawful for the partnership firm to carry its business.
For example, a partnership firm has a partner who is of another country and India declares
war against that country, then he becomes an enemy. Thus, the business becomes unlawful.
3. When certain contingencies happen
The dissolution of the firm takes place subject to a contract among the partners, if:

 The firm is formed for a fixed term, on the expiry of that term.

 The firm is formed to carry out specific venture, on the completion of that venture.

 A partner dies.

 A partner becomes insolvent.

4. Dissolution by Notice
When the partnership is at will, the dissolution of a firm may take place if any one of the partners
gives a notice in writing to the other partners stating his intention to dissolve the firm.
5. Dissolution by Court
When a partner files a suit in the court, the court may order the dissolution of the firm on the basis
of the following grounds:

 In the case where a partner becomes insane

 In the case where a partner becomes permanently incapable of performing his duties.

 When a partner becomes guilty of misconduct and it affects the firm’s business adversely.

 When a partner continuously commits a breach of the partnership agreement.

 In a case where a partner transfers the whole of his interest in the partnership firm to a third
party.

 In a case where the business cannot be carried on except at a loss

 When the court regards the dissolution of the firm to be just and equitable on any ground.

Expounding on the Dissolution of a Firm by the Court

The Court may dissolve a firm on the suit of a partner on any of the following grounds:

1] Insanity/Unsound mind

If an active partner becomes insane or of an unsound mind, and other partners or the next friend
files a suit in the court, then the court may dissolve the firm. Two things to remember here:

 The partner is not a sleeping partner

 The sickness is not temporary

2] Permanent Incapacity

If a partner becomes permanently incapable of performing his duties as a partner, and other partners
file a suit in the court, then the court may dissolve the firm. Also, the incapacity may arise from a
physical disability, illness, etc.

3] Misconduct

When a partner is guilty of conduct which is likely to affect prejudicially the carrying on of the
business, and the other partners file a suit in the court, then the court may dissolve the firm.
Further, it is not important that the misconduct is related to the conduct of the business. The court
looks at the effect of the misconduct on the business along with the nature of the business.

4] Persistent Breach of the Agreement

A partner may willfully or persistently commit a breach of the agreement relating to

 the management of the affairs of the firm, or

 a reasonable conduct of its business, or

 conduct himself in matters relating to business that is not reasonably practicable for other
partners to carry on the business in partnership with him.
In such cases, the other partners may file a suit against him in the court and the court may order to
dissolve the firm. The following acts fall in the category of breach of agreement:

1. Embezzlement

2. Keeping erroneous accounts

3. Holding more cash than allowed

4. Refusal to show accounts despite repeated requests, etc.

5] Transfer of Interest

A partner may transfer all his interest in the firm to a third party or allow the court to charge or sell
his share in the recovery of arrears of land revenue. Now, if the other partners file a suit against him
in the court, then the court may dissolve the firm.

6] Continuous/Perpetual losses

If a firm is running under losses and the court believes that the business of the firm cannot be
carried on without a loss in the future too, then it may dissolve the firm.

7] Just and equitable grounds

The court may find other just and equitable grounds for the dissolution of the firm. Some such
grounds are:

 Deadlock in management
  Partners not being in talking terms with each other

Consequences of Dissolution of a Firm

After the dissolution of firm, the partners have certain rights and liabilities. We will now look on the
consequences of the dissolution of a firm.

Liability for Acts done by Partners after the Dissolution of Firm

According to this section, the partners of a firm are liable to a third party for any act done by any of
them unless they give a public notice of the dissolution. Any partner can give this notice. It also
specifies that the estate of a partner who dies, retires from the firm, becomes insolvent, or that of a
person who the third party is not aware of being a partner of the firm, is not liable (from the date he
ceases to be a partner).

In simple words, the law endeavors to protect third parties who have no clue about the dissolution of
firm and also the partners of a dissolved firm from liabilities towards third parties post-dissolution.

Wind up the Business Post-Dissolution

Once a firm is dissolved, every partner or his representative has a right to apply the property of the
firm in payments of debts and liabilities of the firm. The surplus, if any, can be distributed among
the partners according to their rights.

Post-dissolution, the authority of each partner to bind the firm, along with other mutual rights and
obligations, continue till such time that they can wind up the affairs of the firm.

This gives them a chance to complete the unfinished transactions at the time of dissolution. This
does not include the acts of a partner who has been adjudicated insolvent.