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  Legal Aspects ofBusiness • Module V: Indian Partnership Act, 1932: • Meaning and Definitions, Registration of partnerships, Types of partners, Dissolution, Limited Liability Partnership Act, 1932— Meaning and Definitions, Meaning of Designated partner, Registration of LLP, Types of Partners Dissolution. 1
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  Partnership Fundamentals Meaning andDefinition of Partnership: • Section 4 of the Indian Partnership Act 1932 defines Pp as “ the relation between persons who have agreed to share the profits of a business carried by all or any of them acting for all. ( The word profits imply LOSSES also) • • The minimum number is 2 and the maximum number is ---10 in case of banking business and 20 in case of other businesses. The persons are called “partners individually and a “firm” collectively. The business name is called firm name. 2
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  Essential Features ofPartnership Essential Features of Partnership • --Number: Minimum 2; Maximum 10 for banking 20 for others • --Agreement—Deed oral or written—usually written; • --Business conducted jointly; business includes lawful trade, occupation or profession. • --Profit Motive; • --Profit/loss must be shared in the agreed proportion. In the absence of any agreement, then equally irrespective of capital contributions. • --Carried by all or any of them (one or more of them) acting for all. • --The Partnership Act does not recognise separate entity. That means Partnership firm has no separate entity(existence apart from the partners composing it. • --Partners’ liability is unlimited, joint and several (individually) for all the debts of the firm 3
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  Registration of Partnershipfirms • Registration of Partnership is not COMPULSORY though an unregistered firm suffers from certain disabilities • Registration by itself does not create a partnership, it is only a reliable evidence and affords protection to outsiders. • Partners come together by way of a Partnership Deed • Registration can be done at any time by filing an application in the form of a statement giving necessary information to the Registrar of Firms. Necessary fees have to be paid. • Such an application or Statement shall contain: a) Name of the firm; b) the place or the principal place of business; c) the names of other places where the firm carries on business; d) the date on which each partner joined the firm and e) names in full and permanent addresses of all the partners and the duration of the firm • All the partners have to sign the application. A partner may authorise an agent to sign on his behalf. 4
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  Registration of Partnershipfirms Effects of Non-registration: • A partner cannot sue the firm or any partners to enforce a right arising from a contract or a right arising from the Partnership Act • An unregistered firm cannot sue a third party to enforce a right arising from a contract • Unregistered firm or any of its Partners cannot have a right of set-off in a proceeding initiated by a third party to enforce a right arising from a contract. • Third parties can file a suit against the firm or any of its partners However, Non registration does not affect: • The rights of a firm or a partner who have no place of business in India • The right of a partner to sue for the dissolution of the firm or for accounts of the dissolved firm or for the share of the dissolved firm • The powers of the official receiver or assignee to realise the properties of an insolvent partners • If in the original suit if the non-registration is not contested, it cannot be contested by another suit. 5
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  Registration of Partnershipfirms Alterations: In case of a registered firm, any alteration in any of the following shall be informed to the Registrar of Firms through proper application for effecting those changes: • Change in the name of the firm or the location of the principal place of business • Opening and Closing of branches • Changes in names and addresses of partners • Change in the constitution of the firm and its dissolution or election of a minor partner on attaining majority as partner or sever his connection. 6
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  Partnership Deed Partnership Deedand its contents: • A Partnership Deed is a written agreement among the partners providing for rules and regulations. It is signed by all the partners. It is stamped as per the Stamp Act. It is documented to prevent possible disputes & disagreements among the partners at a future date. Contents of a Pp deed: • --The name of the firm; • --Names and addresses of the partners; • --Nature of business; • --Date of commencement; • --Duration/Period; • --The amount of capital to be brought in by each partner; • --The amount of drawings that may be permitted in anticipation of profits and the manner of withdrawal; 7
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  Partnership Deed Contents ofa Pp deed (contd..) • --Interest on partner’s capital and the Rate of interest; • --Interest on partner’s drawings and the rate of interest; • --The amount of salary, commission or any other remuneration payable to any partner; • --The ratio of sharing profits or losses; • --The treatment of losses arising on account of insolvency of a partner; • --The manner of calculation of goodwill at the time of admission, retirement or death of a partner; • --The method of settlement of account in case of retirement of a partner; • --Details re: operation of the bank account; • --The manner of keeping books of account and audit; • --Sharing of managerial work/responsibilities; • --Dissolution and settling of accounts thereupon; • --Disputes and the manner of settlement. • If, in a partnership deed, certain items are absent or not agreed upon, then the provisions of the Partnership Act 1932 apply. 8
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  Rules in absenceof a Pp Deed • --Profits/losses are to be shared equally; • --Interest on partner’s capital is not allowed; • --Interest on partner’s drawings is not to be charged; • --Partner is not eligible for salary, commission, or any other remuneration for any extra work done; • --Interest on loans lent by partners @ 6% p.a. only; • --A change in the constitution of the firm does not alter the rights and duties of the partners; • --Partners have a right to participate in the management; • --Partner has a right to inspect the books of account; • --Partner is to be indemnified in respect of all acts done in the ordinary course of business; 9
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  Rules in absenceof a Pp Deed • Majority of partners has to decide all matters relating to day to day conduct of the business. Change in the nature of the business is to be decided with the consent of all the partners; • --Every partner has a right to protect the firm in case of an emergency; • --Admission of new partner only with the consent of all the existing partners; • --Every person must compensate the firm for any loss caused to it by fraud or wilful negligence in the management of business; • --Personal profits derived by diverting the benefits of the firm should be restored to the firm • --A partner should not carry on other business which is competing with the business of the firm. 10
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  Types of Partners •Actual or Ostensible Partners or Active: • Sleeping or Dormant partners: • Nominal Partners: • Partner in profits only:. • Sub-partner: • Partner by Estoppel or holding out • Minor as a partner for benefits 11
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  Types of Partners •Actual or Ostensible Partners or Active: a partner who is by agreement actively involved in the management of the business is known as Actual or Active or Ostensible partner. He is the agent of the firm and his actions bind the firm and other partners. • Sleeping or Dormant partners: A partner who does not take any active part in the business of the firm. He merely invests capital and claims a share of the profit as per agreement. However, he is equally liable for the acts of other partners and of the firm. • Nominal Partners: A partner who merely lends his name to be a partner without having any real interest in the business. He does not invest any capital and he does not share any profits of the firm. May be the reputation of such individuals may enhance the business of the partnership firm • Partner in profits only: By agreement he shares only profits and absolves himself from the losses. 12
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  Types of Partners •Sub-partner: When a partner shares profits with a third person, such third person may be called a sub-partner. A sub-partner is no way connected with the business and he/she cannot bind the firm or any of the other partners. He/she has no rights as well. • Partner by Estoppel or holding out: A person who is not a partner may be liable for the debts of the firm as if he were a partner. Such persons are known as PARTNER BY ESTOPPEL OR HOLDING OUT. He must have lent his name or by express words or by conduct must have represented himself to be a partner to outsiders. The other person acts on this representation. A retired partner who allows his name on the letterheads and other important documents is a partner by estoppel. • Minor as a partner for benefits: a Minor can be admitted ONLY FOR THE BENEFITS ( i.e, for profits only and not for losses). Minors have no contractual capacity. He cannot bind other partners or the firm but they can be partners for sharing profits only. Consent of all the existing partners necessary to admit minor as such a partner. However, on attaining majority, he may choose to continue his partnership or quit by giving a proper public notice. 13
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  Dissolution of Partnershipfirm • All the partners of a firm sever (cut off) their connections with the firm and the business of the firm is brought to a close. Such a complete closure of the firm’s business is called DISSOLUTION of a partnership firm. • • If one or more partners bring the dissolution but the business is not brought to a close, then it is called dissolution of partnership. The remaining partners continue the firm’s business. • The circumstances under which a partnership firm is dissolved are: • • If there is no agreement to continue the business of the firm: a) on the expiry of a fixed period if the firm was for a fixed period; b) on the completion of a particular venture/s if the firm was for a particular venture/s; c) on the retirement, death or insolvency of a partner. • On the death, retirement or insolvency of all partners except one. • On the happening of an event which makes the business of the firm illegal. • If the partnership is AT WILL by giving 14 days’ notice. • By court orders. 14
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  Dissolution of Partnershipfirm REALISATION ACCOUNT: • On dissolution of a partnership firm, all the assets and liabilities are realised. First the assets (except cash on hand and bank & P & L balances) and all external liabilities(i.e, excluding partners’ loan account, capital account, Reserve Fund and P & L Account) are transferred to an account styled REALISATION ACCOUNT at book values and thereafter actual realisations are recorded. The external liabilities are cleared first and then the partners can take their dues. The partners can also take over assets and liabilities at agreed values. The actual realisation/payment of liabilities may relate to an unrecorded asset/liability ( incl goodwill) and even such realisation/payment should be brought to realisation account. The expenses relating to realisation can also be debited to the realisation account. The profit or loss on realisation will then be transferred to the capital accounts in the profit sharing ratio. 15
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  Dissolution of Partnershipfirm Current accounts of partners on dissolution of a partnership firm: • The current accounts are maintained under Fixed Capital system. The fixed capital system is relevant as long as the firm is continuing the business. On dissolution of a firm, the balances of current accounts can be transferred to capital accounts of the partners and all adjustments on realisation can be through the capital accounts. 16
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  Limited Liability Partnership •Page 325 17
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  Limited Liability PartnershipAct, 2008 • A limited liability partnership (LLP) is a partnership in which some or all partners (depending on the jurisdiction) have limited liability. It therefore exhibits elements of partnerships and corporations. In an LLP, one partner is not responsible or liable for another partner's misconduct or negligence. This is an important difference from that of an unlimited partnership. In an LLP, some partners have a form of limited liability similar to that of the shareholders of a corporation • The law defines LLP as: “ a corporate business vehicle that enables professional expertise and entrepreneurial initiative to combine and operate in flexible, innovative and efficient manner, providing benefits of limited liability while allowing its members the flexibility of organising their internal structure as a partnership. • Minimum 2 partners required. No maximum limit • LLP is applicable to all types of enterprises. 18
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  Limited Liability PartnershipAct, 2008 Benefits of LLP: • Partners’ liability is limited as written in the agreement files at the time of registration • Low cost formation and easy to form. No requirement of any minimum capital. • No restrictions on the number of partners • No exposure to the individual assets of partners except in case of frauds • Partners are not liable for the acts of other partners. Partners are liable for their own actions • Less restrictions on LLPs re: compliance as compared to Companies • Less requirement as to maintenance of statutory records • LLP can sue and be sued in its own name. Individual partners cannot be sued for the acts of the LLP • Less Government intervention • Easy to dissolve or wind up • Professionals can form multi-professional LLPs • Audit requirement only if the contributions exceed Rs25 lakhs or turnover exceeding Rs40 lakhs Disadvantages of LLP : • They cannot issue IPOs and cannot raise capital from the public • Any act of any partner can bind the LLP 19
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  Limited Liability PartnershipAct, 2008 • In India, Limited Liability Partnership Act 2008, came into effect from 31st March 2009 and extends to the whole of India. • LLP is a hybrid form of organisation combining the features of Sole Proprietor, Partnerships and Companies. (Unlimited + Limited Liabilities in different proportions) • In India, for all purposes of taxation, an LLP is treated like any other partnership firm. • Liabilities limited to their agreed contribution in the LLP. • Further, no partner would be liable on account of the independent or unauthorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner's wrongful business decisions or misconduct. • LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession. Indian Partnership Act, 1932 shall not be applicable to LLPs and there shall not be any upper limit on number of partners in an LLP unlike an ordinary partnership firm where the maximum number of partners can not exceed 20, LLP Act makes a mandatory statement where one of the partner to the LLP should be an Indian. 20
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  Limited Liability PartnershipAct, 2008 • Provisions have been made for corporate actions like mergers, amalgamations etc. • While enabling provisions in respect of winding up and dissolutions of LLPs have been made, detailed provisions in this regard would be provided by way of rules under the Act. • The Act also provides for conversion of existing partnership firm, private limited company and unlisted public company into a LLP by registering the same with the Registrar of Companies (ROC) • Nothing Contained in the Partnership Act 1932 shall effect an LLP. • The Registrar of Companies (Roc) shall register and control LLPs also. • The governance of LLPs shall be in electronic mode based on the successful model of the present Ministry of Corporate Affairs Portal. • Distinction between LLP and a company is that LLP has less number of compliances as compared to companies. 21
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  Distinction between LLPand ordinary partnership Ordinary Partnership • Number of partners is restricted to 10 in case of banking business and 20 in case of others • Unlimited liability • Individual partners can sue and be sued • Each partner is Jointly and severally liable. LLP Though the minimum number is two, there is no restrictions on the maximum number of partners Limited Liability It is the LLP that can sue and be sued. Individual partners cannot be sued for the debts of LLP Each partner is liable for his own actions and not liable for the actions of other partners 22
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  Limited Liability PartnershipAct, 2008 Other points: • LLPs would be taxed as Partnerships. Individual partners are not taxed on the LLP income. They are responsible as individuals. They have to pay taxes on their individual incomes. • Existing partnerships can be converted into LLPs. 23