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The Indian Partnership Act, 1932

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Last updated date: 29th Mar 2024
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An Introduction

When two or more people come together as partners, they can form a partnership firm. This partnership firm is governed by the rules and regulations of the Indian Partnership Act, 1932. The partnership is also governed by the Indian Contract Act in areas where the Partnership Act, 1932 is silent. Let us have an overview of this act by understanding its meaning, scope, and different kinds of partnerships. 

 

Definition of Partnership

Section 4 of the Indian Partnership Act defines a partnership as “Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all”.

 

Meaning of Partnership

In a partnership firm, two or more people come together to carry out a business for the purpose of earning profits and sharing those profits. The partners combine their capital resources and work jointly to carry on the business. According to Section 12 of the Indian Partnership Act, a partnership must be formed for the purpose of carrying a business that is legal in nature. Co-ownership of a property is not considered as a partnership.

 

Essentials of a Partnership

  • There must be an agreement between the partners to carry on the business of the partnership firm.

  • The aim of the formation of the partnership should be to earn profits and share them among partners. The sharing of profit and losses can either be according to the ratio of the capital contributed by each partner or be equally among all the partners unless otherwise specified.

  • The partnership agreement must state that the business will be jointly carried on by all of them or some of them acting on the behalf of all. According to Section 13 of the Partnership Act, 1932, the mutual agency exists between the partners. Every partner in a partnership acts as a principal as well as an agent for other partners. The actions of a partner are binding on the actions of all the other partners.

  • Unlimited Liability- The partners can be held liable jointly for any debts of the firm. They have an unlimited liability that extends to their private assets for the disposal of the firm’s debts.

 

Number of Partners in a Partnership

According to the Indian Partnership Act, there is no limit on the maximum number of partners that can be there in partnership but there must be a minimum of two partners. However, according to Companies Act 2013, the maximum number of partners must not exceed 100 in case of a partnership. If the number of members in a partnership exceeds 100 then it is termed as an illegal association as per Section 464 of the Companies Act, 2013. As per Section 11 of the Companies Act, the maximum number of partners for banking purposes is 10 and for other purposes is 10. 

 

Partnership Deed

The partnership agreement forms the basis of a partnership. It is the foundation that creates a legal relationship between the partners to carry out the business of the partnership firm. A partnership agreement can either be written or oral but in the written format it is known as the partnership deed. Some of the details mentioned in a partnership deed are as follows.

  • Name and address of the partnership firm as well as that of the business

  • Name and address of all the partners

  • Rights, duties, and obligation of partners

  • Profit and loss sharing ratio

  • Capital contribution by each partner

  • Rate of interest on capital, loan, drawings 

  • Settlement of accounts in the event of the dissolution of the firm

  • Mode of settlement in the event of disputes among partners

  • Salaries and commission payable to partners

  • Rules to be followed in the event of the admission of a new partner, retirement and death of an existing partner

  • Any other provisions affecting the rights of the partners

The Indian partnership act of 1932 is an extremely important act that is studied by students in the commerce stream. The Indian partnership act of 1932 is started as a part of the accountancy class 12 NCERT book of accounts This act contains 3 to 4 chapters that are based on the concept of partnership in the firms. These chapters are extremely important as they not only hold significant weightage in the class 12 board examination of accounts but also, the knowledge and the impact are extremely important to have in mind as it will help people who are interested in building a firm to stay vigilant as they will know about all the legal features that are associated with it.

The Indian partnership act of 1932 can be read from the chapter called accounting for partnership – basic concepts 2. After reading the study notes provided by Vedantu on the topic of the Indian partnership act of 1932, students will be able to define partnership and will also be able to list the essential features They will be able to identify the provisions of the Indian partnership act of 1932 that are related to accounting, they will know how to prepare partners capital accounts under fixed and fluctuating capital methods, repairing the profit and loss appropriation account and partners, calculate interest on capital, they will have knowledge on how guarantee for a minimum account of profit affect the distribution of profit among the partners, they will be able to make adjustments to rectify the past errors, they will also learn how to prepare final accounts of a partnership firm.

According to the Indian partnership act of 1932, a partnership can be defined 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’.

People who have entered into a partnership willingly with the knowledge of every other detail relating to the firm are called partners and they collectively form a firm. They agree on a particular name under which the business will be carried on which is called the firm’s name. A partnership firm does not have a separate legal entity other than the partners constituting it. 


Essential Features of a Partnership

Two or More than Two Persons – in order for a firm to come into existence, it should involve two or more than two partners, who have a vested interest in a  common goal. However, according to section 464 of the companies act of 2013, the central government has prescribed a limit on the maximum number of partners a firm can hold. Therefore, According to the central government, the maximum number of partners a firm can hold is 50.

Legal Agreement- Partners who come together to form a firm, already have a mindset that they will be sharing both profits and losses of the firm equally. These agreements, if made orally are valid however it is advised to get these agreements written in a legal form to avoid disputes in the future.

Partners in Business- In order to be partners in business, there should be some business going on in the firm that only then can they be called Business partners and only then can the Indian partnership act of 1932 be applicable to them.

Mutual Agreements - In order for a partnership to take place, a Mutual agreement on the mutual agency is extremely important. Partners of a firm can make rules and bind other partners to it and also bound to the rules that are made by other partners of the firm. Every partner is allowed to make decisions and conduct the affairs of the business according to him/her.

FAQs on The Indian Partnership Act, 1932

1. What are the different kinds of Partnerships?

There are two kinds of partnerships on the basis of partnership terms and extent of the business.  

Partnership on the Basis of Duration

  • Partnership at Will- No fixed period is specified for the expiration of a partnership by will. 

  • Partnership for a Fixed Time- The partners fix the duration of the partnership, after the expiration of which the partnership comes to an end.

Partnership on the Basis of the Extent of Business

  • Particular Partnership- When a partnership is formed for the completion of a particular project and it expires after the project is completed.

  • General Partnership- When the partnership is formed for the general business of the firm and not for a specific project.

2. What are the different kinds of Partners in a Partnership Firm?

There are primarily six different kinds of partners in a partnership firm.

  • Active/Managing Partner- Plays an active role in the day to day business operations of the firm.

  • Sleeping/Dormant Partner- Does not participate in the operations of the business but is bound by the conduct of the other partners.

  • Nominal Partner- Does not have any significant interest in the firm and is a partner in name only. 

  • Partner in profit only- Shares only the profits of the firm but does not share the losses. Such a partner is not liable for any third-party liabilities.

  • Minor Partner- A minor cannot be a partner in a partnership firm as per the Indian Contract Act, but he can be entitled to the benefits of the firm with the consent of the other partners. The minor partner shares the profits of the firm equally but has limited liability for any losses of the firm.

  • Partner by Estoppel- A person who is not a partner of the firm but represents himself to be one through his words or conduct, to another person is a partner by estoppel. Such a person cannot deny being a partner afterward even though he is not a partner.  

3. Where can I find the notes on the Indian partnership act of 1932?

The study notes on the Indian partnership act 1932 and is easily available on the website of Vedantu. The study notes are curated according to the students’ needs as they are based on the curricula set by the Central Board of secondary education. The Indian partnership act 1932 is an extremely important concept as about 3 to 4 chapters in accounts revolve around the concept of partnership and it explains in-depth the features of the Indian partnership act of 1932.

4. What does the Indian partnership act of 1932 state?

According to the Indian partnership act of 1932, the partnership can be defined 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’.

5. What is the meaning of partnership?

In order for a partnership firm to come into existence, it needs two or more partners Both of whom have a vested interest in the common goal that benefits the firm. About two or more people come forward to carry out a business, the main objective being to earn profits and to share equal profits. The partners of the firm combine and share their capital resources and work together to build a successful firm. According to section 12 of the Indian Partnership Act, to carry a partnership business partnership must be formed in a legal nature. In other words business should take place as only just a piece of property is not considered a partnership.

6.  What are the different kinds of partnerships?

There are various types of partnership such as active/managing partner, sleeping/dormant partner, nominal partner, partner in profit only, minor partner, partner by estoppel. These concepts can be studied in depth in the study notes provided by Vedantu.

7.  What is a partnership deed?

A partnership deed is an agreement that forms the basis of a partnership. A partnership deed is important to carry out illegal business, as when everything is written in a legal form, disputes in the future can be avoided. A partnership deed can be oral or written but a written format is preferable and it is known as the partnership deed.