A partnership firm in India is a popular business model in India. In this model, two or more partners join together to run a business, share its profits and losses and management responsibilities.
The Indian Partnership Act, 1932 is the primary act that governs the partnership firms in the country. In this Q&A page, we shall answer the most commonly asked questions about the partnership firms.
The rights of partners under the Indian Partnership Act, 1932 include, but are not limited to, the right to take part in business u/s 12(a), right to be consulted u/s 12(c), right of access to books u/s 12(d), right to share profits u/s 13(b) and right to indemnity u/s 13(e).
The duties of the partners under the Act include greatest common advantage, utmost good faith and true accounts u/s 9, indemnify for fraud u/s 10, proper use of property u/s 15 and share losses u/s 13b among others.
Under Section 42(c), a partnership firm is automatically dissolved on death of a partner, unless there is a contract between partners that states the contrary. However, the estate of deceased partner is not liable for any act or debt of firm after their death, as provided u/s 28(2) of Act.
If the surviving partners continue the business without settling deceased partner’s share, Section 37 gives deceased partner’s estate the right to receive either 6% annual interest on their share of firm’s assets or a share of the profits earned from using that share, as applicable. If the partnership deed allows it, the surviving partners may also have the right to induct a new partner according to its terms.
In case of insolvency, Section 34 provides that a partner ceases to be a partner from the date they are adjudicated insolvent, whether or not the firm is dissolved. If the partnership agreement provides that firm will continue despite insolvency, the insolvent partner’s estate is not liable for any act of firm after the date of insolvency. Similarly, the firm is not liable for any acts of insolvent partner after that date.
A partnership agreement can be oral or written and both of them can be legally valid. However, a written agreement is much better than an oral one as it clearly records terms agreed between partners. As a result, it is easier to rely on if a dispute ever arises. Oral agreement, which is a verbal agreement between partners, can be valid too. However, it can be a tad bit difficult to prove what was actually agreed upon, especially when there is a dispute about profit sharing, capital contribution, duties or other terms. When the agreement is a written agreement, i.e., the terms are put in writing and signed by the partners, it is generally called a partnership deed.
It clearly sets out important terms such as profit-sharing ratio, capital contribution, duties and rights of the partners. If there is no agreement on a particular matter or the agreement does not cover it, the default provisions of the Indian Partnership Act, 1932 may apply. Therefore, having a clear written partnership deed is generally viewed as a much safer option as it greatly helps avoid disputes between all the firm’s partners.
Registration of a partnership firm isn’t mandatory under the Partnership Act of 1932. However, there are certain legal disadvantages that an unregistered firm tends to face. Section 69 of the Act places restrictions on an unregistered firm and its partners from filing a suit to enforce certain rights arising from a contract. A registered firm, on the other hand, does not face such restrictions and can enforce its contractual rights through courts.
To file an ITR for a partnership firm, you need to use a specific form known as Form ITR-5. You have to fill out all the necessary details in this form and then submit it electronically via the official Income Tax e-Filing Portal of the Income Tax Department.
No. In such a scenario, the firm shall be dissolved and cease to exist as only one partner remains. In other words, a partnership firm cannot continue with only one partner as a partnership requires at least two partners.
A partnership deed tends to cover most of the important matters. However, it’s not always the case that every matter is specifically mentioned in the deed. In such a situation, the default provisions of the Indian Partnership Act, 1932 prevail.
For example, if the deed does not specify the interest payable on a partner’s loan to the firm, the partner is entitled to interest at 6% per year on the loan amount under the Act.
No. Under Section 15, subject to the contract between partners, the property of firm must be held and used by partners only for the purposes of firm’s business rather than for any partner’s personal purposes.
According to Section 4 of the Act, a "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.
No. A written partnership deed is not actually compulsory under the Indian Partnership Act of 1932. A partnership can also be formed through an oral agreement between partners as well. However, having a written Partnership Deed is generally recommended by most business registration experts and legal consultants because it clearly records the partners’ rights, duties, profit-sharing ratio and other agreed-upon terms. As a result, a written deed helps avoid disputes later.
Section 4 of the Partnership Act of 1932 defines a partnership as a 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 a partnership with one another are collectively known as a firm.
Section 28 of the 1932 Act discusses holding out. It means when a person represents themselves, through words/writing/conduct, as a partner of a firm, or knowingly allows others to represent them as a partner. If a third party gives credit to the firm based on this representation, then such a person can be held liable as a partner, even if they were not actually a partner of the firm.
However, if a partner passes away and the business continues to run in the old firm name, merely continuing to use the firm name or deceased partner’s name does not make the deceased partner’s legal representative/estate liable for acts of firm done after the partner’s demise.
No. U/s 25 of the Indian Partnership Act, a partner is liable for acts of the firm done ‘while’ he is a partner.
A partnership firm can get dissolved automatically in certain situations. This may happen when the business becomes unlawful or impossible to continue due to a change in law, all partners or all except one partner are declared insolvent, when the fixed period of the partnership comes to an end or the specific project for which the firm was formed gets completed.
The death or insolvency of a partner can also lead to dissolution of partnership firm unless the partnership agreement provides otherwise and allows the remaining partners to continue the business.
No. The Indian Partnership Act, 1932 only applies to the partnership firms in India, not other business structures. The limited liability partnerships (LLPs), which are different from traditional partnership firms, are actually governed by a separate Act known as Limited Liability Partnership Act, 2008.
For assistance in setting up a partnership firm, you can get in touch with our business registration consultants at Registrationwala.
Get Free ConsultationWant to know More ?
Transform your Business.
