Question

How does the law define partnership? Why would people choose to establish a partnership instead of a company? Discuss some of the important cases which developed the law of partnership. What are some of the most important legal principles established in those cases?

Answer 1

SOLUTION

The Indian Partnership Act 1932 defines a partnership as a relation between two or more persons who agree to share the profits of a business run by them all or by one or more persons acting for them all.

The agreement between the partners may be in oral or written. The law does not require written partnership agreement to form a partnership, it is accepted even the agreement is in oral form.

The following are the main differences between the company and partnership which affect the decision making of owners on whether to opt a company or a partnership.

1. Number of members

The new companies act 2013, has prescribed the maximum number of members in partnership firm should not be more than 100 members. in case of private companies, the maximum members is 200 and in case of public companies there is no limit and the minimum members in both the cases is 2.

2. Seperate legal entity

A partnership firm has no seperate legal entity distinct from its partners, A company, on the other hand, is a seperate legal entity different from its members.

3. Liability

In partnership each partner has unlimited liability and is personally liable for all the debts of the firm. In a company, on the other hand a shareholder has limited liability - limited to the extent of the share capital.

In partnership the partners have the option of entering into partnership as a limitted liability partners through the concept of limitted liability partnership.

4. Management

All the partners in a partnership firm are entitled to take part in the management of business, but in the case of a company the right to control and manage the business is vested in the hands of the board of directors elected by the shareholders.

5. Transfer of Interest

A partner cannot transfer his interest in the firm without the consent of all the partners. Incase of a private company also the transfer of shares requires the prior permission of the board of directors. but, incase of a public company a shareholder can transfer his/her shares freely without restriction and the transferee succeeds to all rights of members.

6. Registration

A partnership firm may or may not be registered. However, in case of a company registration is essential.

7. Minimum paid-up capital

there is no minimum prescribed capital in case of partnership firm. However, in case of a private company, the minimum paidup capital is Rs.100000 and in case of public company, the minimum paid up capital is Rs.5 lakhs.

Due to the above benefits the people opt for forming a partnership firm than company.

THE CASE WHICH DEVELOP LAW OF PARTNERSHIP

Lakshmibai v. Roshan Lal AIR 1972 Raj. 288

Partners in construction work/ by virtue of oral agreement

• Defendent contended that there is only debtor and creditor relationship
• plaintiff contended that he was entitled to profits and liable to contribute

The court held,

mere use of words 'partner' or 'partnership' in an agreement does not necessarily show that there is a partnership.

Decision

Held that there is partnership on the basis of corroborative evidence.

Carrying on of business

• includes trade, profession, occupation - all refers to joint operation for gain.
• continuity in the business v. partnership for a single transaction (sec 8)