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PARTNERSHIP
Contents
Introduction of Partnership ............................................................................................................................ 2 Important elements necessary to constitute partnership ......................................................................... 2 Types of Partnership ....................................................................................................................................... 2 Ordinary Partnership .................................................................................................................................. 2 Limited Partnership .................................................................................................................................... 3 Partnership at-will ...................................................................................................................................... 3 Difference between Company and Partnership ............................................................................................. 4 Difference between Joint Venture and Partnership....................................................................................... 5 Rights Duties and Liabilities of Partners ......................................................................................................... 6 Rights of Partners ....................................................................................................................................... 6 Duties of Partners (General/ Fundamental /Absolute) .............................................................................. 6 Liabilities of Partners .................................................................................................................................. 6 Registration of Partnership............................................................................................................................. 7 Procedure and Requirements..................................................................................................................... 7 Partnership Deed ........................................................................................................................................ 7 Application.................................................................................................................................................. 8 Advantages of Registration .......................................................................................................................... 10 Advantages of Registration to the firm .................................................................................................... 10 Advantages of Registration to the Partners ............................................................................................. 10 Advantages of Registration to the Creditors ............................................................................................ 10 1|Page
Costs for Non-Registered Firm ................................................................................................................. 10 Reconstitution of a Partnership Firm ........................................................................................................... 11 Dissolution of Firm/ Partnership .................................................................................................................. 12 Process for the dissolution of a Partnership firm ......................................................................................... 15 References .................................................................................................................................................... 16
Introduction of 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. The term is defined as a voluntary contract between two or more competent person to place their money, effects, labor and skill, or some or all of them, in lawful commerce or business, with the understanding that there shall be a communion of the profits thereof between them. Halsbury defines a partnership as "the relation which subsists between persons carrying on a business in common with a view of profit".
Types of Partnership
Thus, when all these conditions are fulfilled, a group can be registered as partners. Now there are various types of partnerships. 1. Ordinary Partnerships 2. Limited Partnerships 3. Partnership at-will
Ordinary Partnership
All of the partners share equal rights and responsibilities in the management of the business. Likewise, each partner in an ordinary partnership assumes full personal liability for the debts and obligations of the business. And one partner can enter into a contract on behalf of the partnership, making the other partner(s) legally bound to the terms of the contract. The profit of a general partnership passes through to its owners, making it taxable at each partner's individual
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income tax rate. (Partnership losses are also "pass-through", giving each partner the ability to offset taxable income from other sources.)
Limited Partnership
In this kind of partnership one or more partners have limited liability and at least one of the partners has unlimited liability. The liability of the limited partner is limited to the extent of his investment in the business. a) It is formed under Limited Partnership Act 1907 (of England) b) One or more partners have limited liability c) There is at least one partner with unlimited liability d) The firm must be registered. Once this is done the rights and duties of the partners are also recognized. e) A limited partner has no right to take an active role in the management of partnership. f) The capital invested by the limited partner will not be returned to him as long as he remains a limited partner on the firm. g) The limited partner can inspect the accounts of the firm at any time. h) A new partner can be introduced into the firm at any time without the consent of the limited partners. i) The partnership should not consist of more than 20 partners (whether limited or not) except in the case of banking where they should not exceed 10. j) The registrar of Joint Stock Companies shall be the registrar of Limited Partnerships.
Partnership at-will
The essence of a partnership at-will is that the partners do not limit the duration of their partnership, and are free to break their relationship at any time they see fit. It is a partnership for indefinite period. The partnership may be dissolved at any point as long as the partner gives notice to all the other partners. An ordinary partnership becomes a partnership at-will under the following circumstances:
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a) If the partnership is of a indefinite period b) If a partnership is formed for a limited period of time, and the firm continues to function after the expiry of this period. c) If a partnership is formed to conduct a particular venture, and then continues to function after the venture is complete.Difference between Company and Partnership The above mentioned partnership types can be differentiated from a company in many ways. These include: PARTNERSHIP
1. A partnership is not a distinct legal person, but is made of the persons composing it. 2. Creation of Partnership is purely a matter of agreement between the parties such an agreement need not even be in writing. 3. In a firm partner cannot transfer his interest with the consent of the other partners. 4. Each partner is prima facie the agent of others, and can bind them by his contract made in the course of business of the partnership. 5. Each partner is liable in full for the debts of the firm. 6. A partner cannot contract with his firm. 7. Partners may make any private arrangements among themselves. For instance a partner may buy his partners share. 8. The Maximum number of partners can be twenty. But in banking business it is ten.
COMPANY
1. A company is a distinct legal person. 2. Creation of Company involves elaborate legal formalities. 3. Shares in a Company (especially, in a public Company) are generally freely transferable. 4. Shareholders in a Company are not the agents of one another. 5. The liability of Companys shareholders is limited by shams or by guarantee. 6. A share holder in a company can contract with the company. 7. Arrangements in regard to Companies are regulated by law and statute for instance a company cannot buy its member's shares, but a partner can. 8. There is no maximum number of share holders laid down by the law in a public company though the minimum is seven. In a private Company, the minimum is two, and the maximum is fifty. 9. Death or retirement of a share holder does not dissolve the company. 10. Property belongs to the company and not to its members. 11. On the other hand restrictions in the Articles of a Company affect third parties also. 12. A company can sue and be sued in its own name. 13. A Decree against a company cannot be executed against its shareholders.
9. The death or retirement of a partner dissolves a firm. 10. Property may be the common property of partners. 11. Restrictions contained in a partnership deed will not affect third parties, who are not aware of such restrictions. 12. A firm cannot sue and be sued in its own name. 13. Decree against a firm can be executed against the partners.
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14. Registration is optional. 15. A firm having no separate legal existence cannot be shareholder of company.
14. Registration is compulsory. 15. A company on the other hand can be a shareholder of another company.
Partnership can also be differentiated from a joint venture according to the following differences: PARTNERSHIP 1. A partnership firm arises as a result of an agreement or a contract. 2. In partnership, the individuals involved become partners in an organization for the sake of profit. 3. The members in a partnership can claim Capital Cost Allowance as per the partnership rules. 4. However, a member of the joint venture can retain the identity of his firm or property JOINT VENTURE 1. Joint venture involves two or more companies joining together in business. 2. Two or more companies, which are listed in the stock market often, engage in a joint venture to overcome business competition. 3. Joint ventures on the other hand can use as much or as little of the CCA as they wish. There is no need to file returns in a joint venture but it has to be filed in partnership. 4. In Partnership, the members cannot act as per their wishes and they do not have any individual identity
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Liabilities of Partners
The liabilities of the partners are given below. 1. Liability of partner for acts of the firms. 2. Liability of the firm for the wrongful acts. 6|Page
3. Liability of firm for misapplication. 4. Liability of retiring partner for all the liabilities of the firm prior to his retirement.
Registration of Partnership
Partnership Deed
Partnership Deed is a document that tells about the mutual rights and obligations of all partners. This needs to be signed by all the partners and subsequent copies held by each partner. At the time of registration, a copy of the deed has to be submitted with an application to the Registrar of Firms in the concerned area. This document may also be referred to as an Article of partnership. A partnership deed usually contains the following format: 1. 2. 3. 4. The name of the firm The nature of business that is to be carried out by the firm The address at which the firm intends to conduct its business The amount of capital that each partner contributes. The form of capital whether that be cash or property needs to be documented. If the capital is property, a full description of the property and the valued amount should be given also.
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5. The names and addresses of each partner should be given 6. The duration of the partnership if any 7. The ratio of sharing profits and losses 8. The amount or percentage of interest, if any, which is to be allowed on capital 9. The amount of salary each partner is to receive 10. The manner in which a partnership is to be dissolved and the subsequent distribution of property among the partners. 11. In the case of insolvency the valuation and treatment of goodwill 12. Provisions regarding the accounting system and the fiscal year to be used 13. Rules to be followed in the case of retirement, death and admission of a partner 14. The method of settling disputes if any among partners. I.e. whether or not an arbitrator is to be appointed 15. Method of calculating amount issued to a deceased partner, and whether this is to be paid in full or in installments to his legal representative. 16. In the case of breach of duty by one partner, powers of other partners to expel him from the firm 17. The keeping of proper books of accounts and periodical preparation of accounts. 18. Any provisions to prevent any future misunderstanding and ill will.
Application
The procedure of registration is comparatively simple. An application in the Form No. 1 Partnership Act 1932) along with the fee has to be submitted to the Registrar of Firms. All the partners must sign the application. The application or statement must contain the following particulars: 1. 2. 3. 4. 5. 6. The name of the firm The place or principal place of business of the firm The names and addresses of other places where the firm may conduct business The partners date of joining the firm The duration of the firm The name and address of the partners.
Once the registrar is satisfied with the application, a certificate of registration is issued to the partners. As mentioned previously this is not required to commence business. If at any time there are changes to the firm in relations to the partners, place of business, insolvency etc. the registrar must be notified.
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The whole registration procedure is summarized in the form of a flow chart and is attached in appendix A.
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Advantages of Registration
Advantages of Registration to the firm
1. The registered firm can sue the third party if it violates the term on contract and can claim adjustments from third party in court of law. 2. The registered firm attracts large capital resources from the public and it increases the goodwill of the firm, as in case the details of the firm are needed, they can be acquired from the third party. 3. The registered firm also obtains the benefit of income tax concession.
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Breach of Agreement: a partner, other than partner suing, willfully or persistently commits breach of agreement relating to the management of the affairs of the firm. Transfer of Interest. That a partner, other than partner suing, has transferred whole of his interest in the firm to a third party or has allowed his share to be sold in execution of a decree. Losses. The business of the firm cannot be continued further on except at a loss. Just and Equitable Cause. On any other ground which renders it just and equitable that the firm should be dissolved.
1. Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and, lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits. 2. The assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order:a. In paying the debts of the firm to third parties; b. n paying to each partner ratably what is due to him from the firm for advances as distinguished from capital; c. in paying to each partner ratably what is due to him on account of capital; and d. The residue, if any, shall be divided among the partners in the proportions in which they were entitled to share profits.
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all the attested documents. Later, when all the documents are submitted, the partners are required to report to the office with their original N.I.C. from 9 am to 11 am.
References
Registration procedure for partnership prepared by: Policy Planning and Strategy, SMEDA Pakistan, Dated June 1, 2008 Business Law By Kalid Mehmood Cheema, Revised Edition 2009. Partnership Act of 1932 available from World Wide Web by links o [http://www.jamilandjamil.com/publications/pub_commercial_laws/act1932.htm] o http://www.scribd.com/doc/2441358/Partnership-Act
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