Question

Question 1)

Allocate about 400 words to briefly introduce the legal nature of partnerships and companies, with emphasis on the contractual principles governing the formation

and discharge of partnership agreement.

Answer 1

Legal nature of the partnership

The partnership is an agreement between two or more persons who decided to do business and share its profits and losses. To have a legal relationship between the partners, the partnership agreement becomes the basis. ... An oral agreement is equally valid.

When two or more persons join hands to set up a business and share its profits and losses it is called Partnership. Section 4 of the Indian Partnership Act 1932 defines partnership as 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’.

• Distribution of Profit Among Partners
• Guarantee of Profit to a Partner, Past Adjustments and Final Accounts
• Special Aspects of Partnership Accounts and its Maintenance

1. For Banking Business, Partners must be less than or equal to 10.
2. For Any Other Business, Partners must be less than or equal to 20.
3. If the number of partners exceeds the limits, the partnership becomes illegal.

Legal nature of the Company

SEPARATE PROPERTY As a company is a legal person distinct from its members, It is capable of owning, enjoying, and disposing of property in its own name. Although its capital and assets are contributed by its shareholders, they are not the private and joint owner of its property

1. DEFINITION OF A COMPANY  As per Sec. 2(20) of the Companies Act, 2013, ‘company’ means a company incorporated “under this Act”; or “under any previous company law”.  A company is an artificial person created by law, having “separate identity” and “perpetual succession”.

2. NATURE OF A COMPANY A company has a dual nature, as an association of its members but also as a person separate from its members. As soon as necessary formalities of incorporation are satisfied, a new entity comes into existence which is separate and distinct from its directors and shareholders.

3. CHARACTERISTICS OF A COMPANY  Incorporated association  Separate legal entity Limited liability Perpetual succession Common seal Transferability of shares Separate property Capacity to sue and be sued Artificial person Separation of ownership from management

4. INCORPORATED ASSOCIATION  Every company must be compulsorily registered or incorporated under the company’s Act, 2013.  According to sec 3 the minimum number of persons required for forming a private company is two, seven for a public company and one for one person company. These persons are also known as the subscribers to the memorandum.

5. SEPARATE LEGAL ENTITY  A company is in law regarded as an entity separate from its member. It has an independent corporate existence  Any of its members can enter into a contract with it in the same manner as any other individual can and he can not be held liable for the acts of the company even if he holds virtually the entire share capital

6. LIMITED LIABILITY  In a company limited by shares, the liability of members is limited to the unpaid value of the shares. A company limited by guarantee is an incorporated firm without share capital, and in which the liability of its members is limited to the amount each one of them undertakes to contribute at the time the firm is wound up.

7. PERPETUAL SUCCESSION Member may come and go but the company can go on forever. It continues to exist even if all its members are dead. The existence of a company can be terminated only by law Ex:- All members of a private company were killed by a bomb while in a general meeting held, The company continues to exist through the legal heirs of the deceased parties or members.

8. COMMON SEAL Common seal is the official signature of the company. Any document on which a common seal is affixed is deemed to be signed by the company.

9. TRANSFERABILITY OF SHARES In case of a public company the shares are freely transferable but in the case of a private company there will be certain restrictions on the transferability of shares.

10. SEPARATE PROPERTY As a company is a legal person distinct from its members, It is capable of owning, enjoying, and disposing of property in its own name. Although its capital and assets are contributed by its shareholders, they are not the private and joint owner of its property.

11. CAPACITY TO SUE AND BE SUED A company being a separate legal entity has the legal entity to sue others such as members, directors, debtors, outsiders, etc. Similarly, a company may also be sued by others such as members, directors, creditors, outsiders

Principles governing the formation and discharge of partnership agreement.

formation of partnership agreement.

A partnership is a business arrangement in which two or more people own an entity, and personally share in its profits, losses, and risks. The exact form of partnership used can give some protection to the partners. A partnership can be formed by a verbal agreement, with no documentation of the arrangement at all.

However, there may be subsequent disagreements among the owners at a later date, so it makes sense to create a written document that states how certain situations are to be handled. This partnership agreement should at least cover the following topics:

• The rights and responsibilities of each partner
• Whether partners are designated as general partners or limited partners
• The proportions of partnership gains and losses to be apportioned to each partner
• Procedures related to the withdrawal of funds from the partnership, as well as any limitations on these withdrawals
• How key decisions are to be resolved
• Provisions regarding how to add and terminate partners
• What happens to partnership interests if a partner dies
• What steps to follow to dissolve the partnership
• The proportions of residual cash paid out to the partners in a liquidation

Discharge of partnership agreement

A creditor can discharge a partnership firm from its debt liability. On such discharge, a partnership firm is said to receive an income. ... The COD income is distributed among the partners of a partnership firm. The COD income is distributed according to the terms of the partnership agreement.

By the discharge of partnership debt, a partner is benefited in two ways:

• the partner is discharged from his/her share of liability in the partnership debt; and
• the partner is accredited with additional income.

Thus a partnership firm’s partner receives an economic benefit upon discharge of the partnership debt. A partner who receives a COD income must maintain proper capital accounts. The distribution of assets and liabilities must be made among the partners according to this capital account balance. A partner who receives such COD income will have a Deficit Restoration Obligation (DRO). DRO means the obligation of a partner to restore the deficit capital accounts upon partnership liquidation.