STD 11 COMMERCE

CHP 6 – PARTNERSHIP
STD. XI (ISC)
2024-25

Partnership
A partnership is a voluntary association of two or more persons who agree to carry on some
business jointly and share profits and losses. They combine their funds and skills to carry on
lawful business.
Features of Partnership
1. Two or more persons – There must be atleast two or more persons. The number of
persons in a partnership must not exceed 50 otherwise it will become an illegal association of
persons. The members of the firm may become partners in another firm but a firm cannot
become a partner of another firm.
2. Agreement – The relation of partnership arises from the formation of a contract or
agreement and not by virtue of birth or status. The agreement may be oral or written but it
must satisfy all the essentials of a valid contract.
3. Lawful Business – A partnership must be carried on only with the purpose of carrying on
some lawful business. Illegal acts such as theft, dacoity, smuggling, etc cannot be termed as
partnership.
4. Sharing of Profits – There is no partnership without the intention of mutual gain. The
partners should share profits and losses in an agreed ratio.

5. Mutual Agreement – A partnership is an implied agency. Every partner is acting on

behalf of the other. They are implied agents of each other and the firm. Each partner is liable
for the acts performed by the other partners on behalf of the firm.
6. Utmost Good Faith – There must be mutual trust and confidence amongst all the partners.
Each one must work in the best interest of the firm and the co-partners. They must show true
accounts and must not make secret profits out of the business.
7. Unlimited Liabilities – The liability of the partners is joint and several. In case the assets
of the firm aren’t sufficient to pay the debts of the firm, the personal property of each partner
can be attached to pay the creditors.
8. Restriction on transfer of interest – A partner cannot transfer his share in the business
without prior consent of all the partners.
9. Joint ownership and control – A partnership is owned and controlled by all the partners
together.

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10. Separate Entity - A partnership firm has no legal entity separate from the partners.

Formation of Partnership Firm – Partnership Deed

A Partnership can be formed only through an agreement between two or more persons. This
agreement may be oral or in writing. The Law does not prescribe a mode of formation. It is
not even compulsory to register a partnership firm. To avoid disputes it is advisable to have a
written agreement. However, in the absence of such an agreement the rights and duties of
partners are determined by the Partnership Act, 1932.

Meaning of a Partnership Deed:

• A partnership deed is a document containing the terms and conditions of a
partnership.
• It is an agreement in writing, signed by all partners duly stamped and registered.
• It defines the rights, duties and obligations of partners and governs relations among
them in the conduct of the business affairs of the firm.
• It is not a public document.
• The partnership deed must not contain any terms which is contrary to the provisions
of the Partnership Act.
• The terms and conditions stated in the partnership deed can be changed with the
consent of all the partners.
• A written agreement is helpful in preventing and resolving disputes among the
partners.

A Partnership deed may usually contain the following details:

1. Name of the firm

2. Nature of the firm’s business
3. The principal place of business
4. Duration of Partnership, if any
5. Name and addresses of partners
6. Amount of capital to be contributed by each partner
7. Amount that can be withdrawn by the partner
8. The profit- sharing ratio
9. Rate of interest (if any) on capital and drawings
10. Amount of salary or commission payable to partners
11. Allocation of work among partners
12. Mode of valuation of goodwill
13. Procedure of admission, retirement, etc. of a partner
14. Procedure for maintain accounts and getting them audited
15. Procedure to be followed in event of dissolution of the firm and settlement of the
accounts
16. Loans and advances by partners and rate of interest payable to them
17. Arbitration clause in case of disputes among partners.

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 Procedure for the Registration
The Registration of a Partnership firm is not compulsory under the law. A firm may be
registered at the time of the formation or at any other time thereafter.
A prescribed registration form must be filed with the Registrar of Firms. The application
should contain the following information:
i. The name of the firm
ii. The principal place of business
iii. Names of other places where the firms business is carried on.
iv. Names in full and permanent address of the partners.
v. The date on which the partners joined the firm.
vi. The duration of partnership if any.

• The application must be duly signed and verified by all the partners.
• It is then submitted to the Registrar of Firms of the area in which the principal place
of the firm’s business is situated or proposed to be situated.
• A registration fee is to be deposited.
• The application is then examined by the Registrar.
• If found satisfactory, the registrar makes an entry in the register of firms and issues a
certificate of registration.
• Registration doesn’t make the firm a legal entity.

Types of Partnership

1. General Partnership – In general partnership each partner has unlimited liability. It

means creditors can recover their payments from the personal property of any of the partners
if the assets of firms are not sufficient.
An exception is made in case of a minor partner whose liability is limited to the extent
of his share in capital and profits of the firm.
Each partner in general partnership is entitled to take active participation in the
management of the firm unless otherwise decided by other partners.

2. Limited Liability Partnership (LLP) – Limited Liability Partnership is now allowed

in India Under Limited Partnership Act, 2008.

Its main features are:-

i. A Limited liability partnership must be registered under the Act.
ii. Minimum number required to form such a partnership is two and there is no maximum limit.
iii. An LLP is a corporate body having separate legal status and perpetual succession.
iv. The liabilities of the partners is limited to their share capital in the firm. No partner is liable
for any unauthorised or independent action of the other.
v. True and fair picture of the state of affairs must be maintained annually.
vi. If the firm or its partners carry out business with the intention of fraud, then the limited
liability of the partners would become unlimited.
vii. LLP is a hybrid form of business combining the features of both a partnership firm and a
joint stock company.

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 Advantages of an LLP:
i. Since an LLP has a separate legal status, it is capable of owning and holding property in its
own name.
ii. It does not dissolve by retirement, insolvency or death of a partner and therefore enjoys
perpetual succession.
iii. As the liability of the partners is limited, they do not have to bear unlimited risk.
iv. There is no maximum limit on the number of partners in an LLP and therefore they can raise
huge funds for the growth and expansion of the business.
v. A body corporate can be a partner in an LLP.

Disadvantages of an LLP:
i. As an LLP has to be registered, it has to spend a lot of time and money on the documentation
and formalities of registration.
ii. Secrecy of affairs cannot be maintained as it has to fulfil legal requirements.
iii. Limited liability of the partners reduced the credit standing on the business.
iv. Due to legal formalities, flexibility is reduced.
v. If the business is carried out with the intention of fraud then the limited liability is converted
into unlimited liability.

3. Partnership at will – The duration and purpose of the firm is not mentioned. It is formed
for an indefinite time depending upon the will of the partners. It dissolves when any partner
gives a notice to the other partners expressing the desire to quit the firm.

4. Particular Partnership – It formed for a particular period of time and for a specific
purpose. Once the time period and the objective for which the firm was formed is achieved,
the partnership dissolves automatically.

Types of Partners

Type of 1. Active/ 2. Sleeping/ 3. Secret 4. Limited 5. Partners

Partners Working Dormant Partner Partner in profits
Partner Partner only
Capital Yes Yes Yes Yes Yes
contribution
Participation Active No active Active No active No active
in the Participation participation participation participation participation
management
Liability Unlimited Limited Unlimited Limited Unlimited
Profit and Shares both Shares both Shares both Shares both Shares only
Loss Sharing Profit and Profit and Profit and Profit and profits and
Losses Losses Losses Losses NO Losses
Known to Yes May or May No Yes Yes
the outside not
world

6. Nominal/ Ostensible/ Quasi Partner – Such a partner neither contributes capital nor takes
part in the management of the firm. He does not share profits or losses but only lends his

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name and reputation for the benefit of the firm. He allows himself to be a partner to the firm
either knowingly or unknowingly. He is liable to the outsiders for the debts of the firm.
There are two types if nominal/ostensible/quasi partner:
a. Partner by Estopple – He is a person who by his words (spoken or written) or by his
conduct represents himself as a partner of the firm. He therefore becomes liable to the
creditors of the firm who have advanced money to the firm on the basis of such
representation.
For example:
A rich man, Mohan, is not a partner to ABC Enterprise but tells Rohan that he is a
partner to that firm. Knowing that Mohan is a partner in ABC Enterprise, Rohan sells
goods worth Rs. 50,000 to ABC enterprise. Later on the firm is unable to pay the
amount. Rohan can now recover this amount from Mohan who claimed to be a partner
in ABC enterprise. Thus, Mohan is a Partner by Estopple in ABC Enterprise.

b. Partner by Holding Out – When a person is declared a partner but he does not deny
this even after being aware of the same, he becomes liable to third parties who have
lent the firm money or credit to the basis of such declaration.
For Example:
Seema tells Rohan in the presence of Mohan that Mohan is a partner in ABC
Enterprise. Mohan does not deny the same. Later on Rohan lends an amount of Rs.
40,000 to ABC Enterprise on the basis of the impression that Mohan is a partner to
the firm.
The firm fails to repay the amount to Rohan. Mohan is now liable to pay Rs. 40,000 to
Rohan. In this case, Mohan is a partner by holding out.

7. Minor as a Partner –
• A person who is not completed 18 yrs of age is known as a minor.
• A minor cannot enter into a contract and therefore cannot be a partner.
• He may however be admitted as a partner with the mutual consent of all the other
partners.
• On being admitted he is entitled to share profits of the firm but his liability remains
limited to the extent of share capital and profits in the firm.
• He cannot take active part in the management of the business but can inspect the
books of accounts.
• He cannot file a case against the firm or his partners to get his share in the firm
except with he wishes to disassociate himself from the firm.
• On attaining majority, the minor must give a public notice within six months if he
wants to disassociate himself from the firm.
• If he does not give such a notice or does not wish to disassociate himself from the
firm then, his liability becomes unlimited from the date he was admitted to the
benefits of partnership.
• He’s also allowed to actively participate in the management of the firm.

8. Sub- Partner – He is an outsider / third person with whom the partner of the firm agrees to
share his profits. The sub partner cannot take part in the management and he’s not liable for
the debts of the firm.

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Merits of Partnership.
1. Ease of formation
2. Larger financial resources
3. Combined abilities and judgement
4. Direct motivation
5. Close supervision
6. Flexibility of operations
7. Secrecy
8. Protection of minority interest
9. Cooperation
10. Scope for expansion

Demerits of Partnership.
1. Limited resources
2. Unlimited liability
3. Uncertain life
4. Conflicts
5. Risk of implied authority
6. Restriction on transfer of interest
7. Reduced public confidence
8. Lack of secrecy

INSTRUCTIONS TO STUDY THIS CHAPTER:

• Please read your book for detailed information on the above topics.
• The length of the answer depends on the marks in the question paper and may not
only be substituted with what is mentioned in the notes.
• Examples can be used to elaborate your points for this chapter.
• For explanation of merits and demerits, refer text.