Success Roar Classes

Meaning and Nature of Partnership

Meaning and Nature of Partnership - Success Roar Classes

What is the nature of Partnership?

  1. Legal Point of view
    1. No separate existence means firm and partners are considered as one person.
    1. Partners have unlimited Liability in the firm.
  2. Accounting Point of view
    1. Separate Existence of firm and partners (Meaning and Nature of Partnership)

What is the meaning of Partnership?

Section 4 of the Indian Partnership Act, 1932

“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.

What is the meaning of partner and firm?

  1. Partner – The individual member of the partnership is called a partner.
  2. Firm – All partners of the firm collectively known as the firm.

What are the characteristics of partnership?

  1. Partner

As per the Indian Contract Act,1872, every person except following are competent to contract,

  1. Minor
  2. Person of unsound mind
  3. Person disqualified by any law

*Note: As per section 30 of the Indian Partnership Act 1932, a minor may be added as a partner but he will only be admitted to the benefits of partnership.

2. Agreement

  • The partnership is the result of an agreement between partners not by an operation of law.
  • This agreement can be in Oral or written form.
  • The registration of a partnership is not mandatory.
  • This document defines the rights and responsibilities of partners, other terms of the partnership.

3. Existence of Business

  • The partnership business should be for a profit motive, not for charitable purposes.
  • Joint ownership of some property by itself cannot be called a partnership.

4. Sharing of Profit/losses

  • In agreed ratio as among partners. In absence of a partnership agreement, partners will share profits equally.
  • It may be mutually decided by all partners that any one or more partner will not be liable for the losses.

5. Relationship of Principal and Agent

  • All partners act as both principal and agent in partnership.
    • As Agent- A partner can bind other partners by his acts.
    • Principal- Other partners can also bind him by their acts.

6. Carrying on Business

  • The business of partnership may be carried by all partners or any of them acting for all.
  • Active partner – The partners actively taking part in day to day conduct of the business.
  • Sleeping partner – When a partner provided the capital to the firm but does not take part in the day-to-day workings of the firm.

7. Unlimited Liability of partners 

  • As per the legal point of view, partners and firms are considered as the same person. This makes the partner’s liability unlimited.
  • Unlimited liability means when the personal assets of partners can be used to pay off the debts of the firm if required.

Meaning and Nature of Partnership

What are the rights of a partner in the firm?

  1. Share profits or losses
  2. Rights to take part in the conduct of the business. 
  3. Right to be consulted in matters related to the business.
  4. Right to inspect and have a copy of books of accounts.
  5. Right to disallow the admission of a new partner
  6. Joint owner of the partnership property
  7. Right to get interest on the loan provided to the firm. Rate will be as decided mutually or in absence of any agreement 6% p.a. (provided in the Indian partnership Act 1932).
  8. Recover the expenses paid on behalf of the firm.
  9. Get Retire after giving proper notice.

What are the Duties of a partner in the firm?

  1. Profit from Competitive BusinessWhen a partner carries on any business which is competitive to the firm’s business then the partner needs to give all profits to the firm earned from such business.
  2. Profit from firm’s transactions
    • When a partner earns any profit for himself from  
      1. any transaction of the firm or
      2. the use of firm’s property or
      3. using the business connection, such profit so earned shall be paid to the firm.

                Note: The above points are subject to the partnership deed.

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