Legal aspects of partnership business

Constitution of the partnership

In simple words, a partnership is that two or more people jointly carry on a business and share its profit or loss. The person who joined the partnership may be a natural person (individual) or a legal person (corporates). However, an HUF (Hindu Undivided Family) is not treated as a person as it is a group of persons of the same family carrying on the family business. Therefore, HUF cannot be included as a partner of the firm. A minor cannot be a full pledged partner of a firm, because a minor below the legal age of 18, is termed as lacking the legal competence to enter into a valid contract. Nevertheless, with the consent of all the partners, or the time being, minor may be admitted to the benefits of partnership.

The new Companies Act 2013 has prescribed the maximum number of members in case of a partnership firm should not be more than 100 members as partners.

Effects of registration of a partnership

The partnership can be made by partnership agreement (deed). Registration of partnership deed is optional. In case, partnership deed is not registered, the partners are to sue and to be sued in their individual capacity and not by firm’s name.

Liability of the partner

There are two types of partnership, general partnership and Limited Liability Partnership (LLP). In general partnership, all the partners are jointly and severally liable for the debts of the business. But, in a partnership firm registered as Limited Liability Partnership (LLP), the liability the liability of partner’s liability is limited to their share contributed in the partnership. Thus partner’s liability in LLP is similar to that of the shareholders of a Limited company, although they are directly managing the business like general partnership firm. A partner of LLP, unlike the general partnership, is not liable for wrongful business decisions or misconducts other partner/s.

When one of the partners declared as insolvent

If a partner is declared insolvent, he is no more a partner in the firm from the date he is declared insolvent by the court. Under the common law, the firm is automatically dissolved when one of the partners is declared as insolvent by the Court. However, the partnership need not be dissolved if it is expressly mentioned in the partnership deed that the remaining partners can continue the firm’s business when such incident takes place. The reconstituted firm is not liable for any act of insolvent former partner of the firm after the date of the court declaring him as insolvent.

Expulsion of Partner

The expulsion of a partner is normally not allowed by the law. However, if such clause is included in the partnership deed (agreement), a partner may be expelled from a firm by the majority of the partners, in good faith, exercise their power as conferred to them by the agreement. Here good faith means the parties to an agreement shall exercise their powers reasonably and not arbitrarily or for some irrelevant purpose. Certain conduct may lack good faith if one party acts dishonestly, or fails to have regard to the legitimate interests of the other party.

As per section 33 of partnership act, the expelled partner will be treated in the same way when a partner retires from the partnership.

Retirement of a partner

A partner may retire from the partnership with the consent of all other partners. He may also retire in accordance with an express agreement by the partners or by giving notice to other partners of his intention to retire. The retired partner is however liable to all the acts of the firm dealing with third parties before his retirement.