Types of Organization

Types of Organizations/Ownership Structure

Proprietorship/Sole Proprietorship

Partnership firm

Company

Co-operative
 PROPRIETORSHIP/SOLE PROPRIETORSHIP

Proprietary establishments are the most common form of

privately owned and managed business ventures. The sole
proprietor invests own and borrowed funds and uses own skills
and abilities in the management of affairs of his/her firm. In case
a proprietor decides to withdraw from all business activities and
in the event of there being none to succeed him/her, more often
the business is sold to someone or closed.

* One man Ownership

* No separate Business entity
* No separation between ownership and management
* Unlimited liability
* All profit and losses to the proprietor
* Less formalities
INDIAN PARTNERSHIP ACT,
1932
 INDIAN PARTNERSHIP ACT, 1932
The law of partnership is one of the specific contracts
contained in the Indian partnership act which was come
into existence on 1st Oct, 1932.

According to sec (4) of Indian partnership act,

“partnership is the relation between the persons who
have agreed to share the profits of the business
carried on by all or any of them acting for all”.

The person who has entered into the partnership

agreement with one another is individually called
partners and collectivity of a firm.
 ESSENTIAL ELEMENTS OF PARTNERSHIP

 Association of two or more persons: There should be at

least two competent parties to form a partnership.
Hence any person who is not a minor, of sound mind and
is not disqualified by law can be a partner.

Partnership act does not say anything about

the maximum no of partners but sec11 of the companies act
fixes the maximum no. at 10 or according on banking
business and 20 for carrying on any other business. If the
no. of partners exceeds this limit the partnership becomes
an illegal association.
CONT…
 Agreement: There must be an agreement to form a
partnership. This agreement may be express or implied.
Partnership is created by contract and not arises by operation
of law. If one of the partners is expired, his son or
daughter will not automatically become partners unless
there is an agreement between them to carry on the business
as a partner.

 Business: A partnership can be formed only for the

purpose of carrying on some business. Where there is no
business to be done there can be no question of partnership.
The business to be carried on by the firm must be legal.
CONT…
 Sharing of profits: The sharing of profits is an
essential feature of partnership. Profits must be distributed
among the partners in an agreed ratio. The partners may
agree to share profits in any manner they like. They may
share it equally or in any other proportion.

 Mutual agency: The business of partnership may be

carried on by all the partners or any of them acting for
all. In a firm each partner is a representative of the other
partners. Each of the partners is an agent as he can bind
the other partners by his act and he is a principal in the
sense that he is bound by the act of the other partners.
CONT…
 Restriction on the transfer of shares: No
partners can sell or transfer his share to the third party
without the consent of all the partners.

 Extent of liability: Liability of each partner for the

firm is unlimited. The creditors have the right to recover
the firm debt from the private property of any or all the
partners.

 No separate entity: Partnership is an association of person

who are individually called as partners and collectively
called firm. Legally a partnership firm is not a separate
entity from the partners.
DURATION OF PARTNERSHIP
At the time of partnership agreement partners may fix the
duration of the partnership or may not. The duration may be
decided as:
 Partnership for a fixed term: It is a partnership created
for a fixed period of time. When the fixed period is over,
partnership comes to an end.

 Partnership at will: According to sec 7 of the act where

no provision has been agreed for the duration of the partnership,
it is called partnership at will. A partnership at will may be
dissolved by any partner by giving notice in writing to all the
partners of his intention to dissolve the firm.

 Particular partnership: When a partnership is formed for

a specific venture, the partnership is called particular
partnership. It comes to an end on the completion of the venture.
TYPES OF PARTNERS
 Active partner: A partner who is actively engaged in
the conduct of business is known as an active partner. He
is also called a working partner and his liabilities are
unlimited.

 Sleeping partner: Sleeping partner is one who

contributes share, profits and losses of the firm but does
not participate in the working of the business. He is also
liable for the liabilities of the firm.

 Nominal partner: A nominal partner is one who does not

contribute any capital or share in profit but lends his
name to the business is called nominal partner. He is also
liable to the third parties.
CONT…
 Partner in profit only: A partner sharing a profit of business
without bearing the losses is called partners in profits only. He
contributes capital and is also liable to the third party but is
not allowed to take part in the management of the firm.

 Minor as a partner: A minor cannot become the partner in the

partnership firm because he cannot enter into the contract but he
may be admitted to the benefits of partnership as per the consent
of all the partners.

 Incoming partner: A person who is admitted as a partner in an

existing partnership is called as incoming partner. He is not
liable to the creditors for anything that has happened before he
joined the business.
CONT…
 Outgoing partner: Partner leaving the existing firm is
called an outgoing partner or retiring partner. An
outgoing partner is liable for the debts incurred before
retirement.

 Partner by estoppel or holding out: When a person is

not a partner but he pretend to be partner by words
spoken or written or by his conduct is called partner by
estoppel or holding out.

He shall be liable for the third party who deals with the
firm on the supposition that he is a partner even though
he is not a partner.
MINOR AS A PARTNER
A minor cannot become a partner in the partnership
because according to Indian contract act he is incapable of
entering into the contract of partnership but he may be
admitted to the benefits of partnership with the consent of
all the partners.

The position of minor partner is studied under two heads:

 Position before majority:

a) Every minor has a right of share in the profits and
property of the business as agreed by the members.
b) He has the right to inspect the books of accounts.
c) If he is not given his due share, he has the right to file a
suit against the firm.
CONT…
 Position after majority:
On attaining majority the minor has to declare within six
months whether he shall continue in the firm or leave it. If he
fails to declare, he becomes partner in the firm at the end of six
months.
1) When he elects to be a partner:
 He becomes personally liable to all the third parties for all the
act of the firm since he has admitted to the benefits of
partnership.
 His share in the profits of the firm is the share to which he has
entitled as a minor.
2) When he elects not to become a partner:
 His right and duties continue to be as a minor up to the date of
notice.
 He is not liable for any act of the firm done after the date of
public notice.
 He has a right to sue the partners if his share of profits is
denied.
ADVANTAGES OF PARTNERSHIP
 Easy formation: Like sole proprietorship partnership
form of organization can be formed without legal
formalities because registration is not compulsory and the
agreement may be written or oral.

 Sharing of risk: In partnership the losses are shared by all

the partners, whereas in case of sole traders, he bears it
alone.

 Large resources: Partnership firm enjoys large

resources as compared to sole proprietorship.

 Flexibility: The partnership business is considered

flexible because it is free from legal formalities and the
partners can introduce any change whenever required.
CONT…
 Maintenance of secrecy: The partnership business is less
secretive but it doesn’t have to get it accounts audited and
published as is necessary for joint stock companies.

 Direct relationship between reward and work:

 In partnership there is direct relation between reward and
work and this enables the partners to put more labor and
earn more profit.

 Easy dissolution: The partnership business can be

easily dissolved on the death, insolvency of partners.
There are no legal formalities involved in the dissolution.
DISADVANTAGE OF PARTNERSHIP

 Lack of harmony: In partnership firm there is mostly

disharmony among partners which results in lack of
management.

 Limited resources: Maximum no of partners is 20 in a

partnership firm so it limits the amounts of capital raised.

 Instability: One major disadvantage is that the firm can

come to abrupt and on death, lunacy and insolvency of
partners. It can also be closed by the order of law or if a
partner expresses his desire to dissolve the partnership.
CONT…
 Lack of public faith: There is lack of public faith in this
form of organization as it has no legal formalities and
people do not get exact position of business because
accounts in this form of organization is not published.

 Restriction of transfer of interest: In partnership,

if a partner wants to transfer his interest to the third party,
he will have to seek the consent of all the partners.

 Liability after retirement: A partner is liable after his

retirement also. He is liable to all the acts done by him
when he was a partner.
PARTNERSHIP DEED
Partnership is the result of an agreement which may be in
writing or formed verbally. But it is desirable to have the
partnership agreement in writing to avoid future
disputes.

The deed is required to be duly stamped as per the

Indian Stamp Act, 1889 and duly signed by all the
partners.

The agreement between the partners is written in a

partnership deed. The agreement should be signed by all
the partners. Partnership deed is not a public document
like M.O.A (Memorandum of association).
CONTENTS OF PARTNERSHIP DEED
 Name of the firm.
 Name and addresses of all the partners.
 Nature and place of the business.
 Term or duration of partnership.
 Amount of capital to be contributed by each partner.
 The drawings that can be made by each partner.
 The interest to be allowed on capital, and charges on drawings.
 Rights of partners.
 Duties of partners.
 Remuneration of partners.
 Ratio in which the profits and losses are to be shared.
 The procedure of admission and retirement of a partner.
 Settlement of amount in case of retirement, death of partners or
dissolution of the firm.
 The procedure to be adapted in case of disputes.
REGISTRATION OF PARTNERSHIP

Sec 57 deals with appointment of registrar of firms. The

state govt. is empowered to appoint registrar of firms
for carrying out the purposes of act and lays down the
areas within which they shall exercise their powers
and perform their duties.
PROCEDURE FOR REGISTRATION
Sec 58&59 deal with the procedure for the registration of the
firm. An application in the prescribed fees is to be filled with
the registrar of the area in which any where place of the
business of the firm is situated or proposed to be situated. The
application shall state the following:

 The name of the firm.

 The place of the business of the firm.
 The name of any other place where the firm carries on
business.
 The date when each partner join the firm.
 The name in full and the permanent addresses of all the
partners.
 The duration of the firm.
CONT…

The application shall be signed and verified by

each partner or his agent specifically authorized
for this purpose in the manner prescribed by law.

When the registrar is satisfied that the provision of

sec58 have been compiled with, he shall make an
entry of the application in the register of firms and
shall file the same.
DISSOLUTION OF PARTNERSHIP FIRM

Dissolution of the firm means dissolution of partnership

between all the partners of the firm. It means the business
of the firm is discontinued.

Dissolution of partnership involves only change in the

relation of the partners. The firm still continues even
after the dissolution of partnership because this may
happen on admission, retirement or death of the
partner.
MODES OF DISSOLUTION OF FIRM
1) Dissolution without the order of the court (sec 43):
Dissolution of the firm without the order of court may take place
in the following ways:

a) Dissolution by agreement (sec40): A firm may be dissolved

with the consent of all the partners with the contract between
the partners. The contract for the dissolution of firm may be
express or implied.

b) Compulsory dissolution (sec 41): A firm is

compulsory dissolved in the following circumstances:
 If all the partners or one partner of the firm are declared

insolvent.
 If some events takes place which makes it unlawful for the

business of the firm to be carried on.

 CONT…
c) Dissolution on the happening of certain contingencies
(sec 42): A firm is dissolved on the following four
contingencies:

 On the expiry of the fixed term.

 On completion of the venture or undertaking.

 On the death of a partner.

 On the insolvency of the partner.

d) Dissolution by notice (sec 43): Where the partnership is

at will, the firm may be dissolved by any partner giving
notice in writing to all the other partners of his intention to
dissolve the firm.
CONT…
2) Dissolution by court (sec. 44): According to sec 44 of the
Indian partnership act, dissolution by court may take place
on the following grounds:

a)Insanity: The court may dissolve the firm where a partner

has become of unsound mind. The firm may dissolve on the
petition of any of the partner or by the next friend of insane
partner.

b) Permanent incapacity: When a partner has become

permanently incapable of performing duties, any other
partner may apply for dissolution in the court. The
incapacity must be of a permanent nature such as physical
disablement, illness etc.
CONT…
c) Misconduct: The court may order the dissolution of firm
on account of misconduct of any partner other than the
one filling a suit for dissolution.

d) Persistent breach of agreement: When a partner willfully

or persistently commits breach of the partnership agreement
relating to the affairs of the firm or conduct of the business,
the court may at instance of any of the other partner
dissolve the firm.

e) Business working at loss: Where the business of the firm

cannot be carried on except at a loss, the court may order
dissolution of the firm.