Understanding Partnership Essentials: Types, Dissolution, and LLP Act
Essentials of Partnership
Meaning and Definition: Section 4 of the 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.”
Key Elements of a Partnership
- Two or More Persons: There must be at least two persons to form a partnership. A person cannot enter into partnership with themselves. The maximum number of persons in a partnership should not exceed 10 in the case of banking business and 20 in other types of business.
- Agreement: Partnership is the outcome of an agreement between persons. The relation of partnership arises from the formation of a contract and not from status or birth.
- Lawful Business: A partnership can be formed only for the purpose of carrying on a business. An association of persons who jointly own a house without carrying on a business is not a partnership.
- Sharing of Profits: The agreement between the partners must be to share the profits of the business. There can be no partnership without the intention of mutual gain.
- Mutual Agency: Partnership business can be carried on by all the partners or by any of them acting on behalf of the others. In other words, every partner is an implied agent of the other partners and of the firm.
- Utmost Good Faith: The relations between partners are based upon mutual trust and confidence. Every partner is expected to act in the best interests of other partners and of the firm as a whole.
- Unlimited Liability: Every partner is jointly and severally liable to an unlimited extent for the debts of the partnership firm.
Types of Partnership
Partnership at Will
- There is no agreement about a fixed period for the existence of a partnership.
- No provision with regards to the determination of a partnership.
Partnership for a Fixed Term
During the creation of a partnership, the partners may agree on the duration of this arrangement. This would mean the partnership was created for a fixed duration of time.
Particular Partnership
A partnership can be formed for carrying on continuous business, or it can be formed for one particular venture or undertaking. If the partnership is formed only to carry out one business venture or to complete one undertaking, such a partnership is known as a particular partnership.
General Partnership
When the purpose for the formation of the partnership is to carry out the business in general, it is said to be a general partnership.
Modes of Dissolution of Partnership Firm
According to Section 39 of the Partnership Act, 1932, “The dissolution of partnership between all the partners of a firm is called dissolution of the firm.” The Indian Partnership Act, 1932 recognizes the difference between ‘dissolution of partnership’ and ‘dissolution of firm’. Dissolution of a firm involves the complete breakdown of partnership relation.
Modes of Dissolution of a Firm:
Dissolution by Agreement:
A firm may be dissolved:
- With the consent of all the partners.
Compulsory Dissolution:
A firm is compulsorily dissolved:
- By the adjudication as insolvent of all the partners or of all partners except one.
- By the happening of any event which makes it unlawful for the business of the firm to be carried on or for the partners to carry it on in partnership.
Dissolution on the Happening of Certain Contingencies:
- The death of a partner.
- The insolvency of a partner.
- The retirement of a partner.
- The completion of the adventure.
Limited Liability Partnership Act 2008
Salient Features of LLP
LLP is a body corporate
According to Section 3 of the Limited Liability Partnership Act (LLP Act), 2008, an LLP is a body corporate formed and incorporated under the Act. It is a legal entity separate from its partners.
Perpetual Succession
Unlike a partnership firm, a limited liability partnership can continue its existence even after the retirement, insanity, insolvency, or even death of one or more partners. Further, it can enter into contracts and hold property in its name.
Separate Legal Entity
It is a separate legal entity. Further, it is completely liable for its assets. Also, the liability of the partners is limited to their contribution in the LLP. Hence, the creditors of the limited liability partnership are not the creditors of individual partners.
Mutual Agency
Another difference between an LLP and a partnership firm is that independent or unauthorized actions of one partner do not make the other partners liable. All partners are agents of the LLP, and the actions of one partner do not bind the others.
LLP Agreement
The rights and duties of all partners are governed by an agreement between them. Also, the partners can devise the agreement as per their choice. If such an agreement is not made, then the Act governs the mutual rights and duties of all partners.
Artificial Legal Person
For all legal purposes, an LLP is an artificial legal person. It is created by a legal process and has all the rights of an individual. It is invisible, intangible, and immortal but not fictitious since it exists.
Common Seal
If the partners decide, the LLP can have a common seal [Section 14(c)]. It is not mandatory though. However, if it decides to have a seal, then it is necessary that the seal remains under the custody of a responsible official. Further, the common seal can be affixed only in the presence of at least two designated partners of the LLP.
Limited Liability
According to Section 26 of the Act, every partner is an agent of the LLP for the purpose of the business of the entity. However, he is not an agent of other partners. Further, the liability of each partner is limited to his agreed contribution in the Limited Liability Partnership.
Minimum and Maximum Number of Partners
Every Limited Liability Partnership must have at least two partners and at least two individuals as designated partners. At any time, at least one designated partner should be resident in India. There is no maximum limit on the number of maximum partners in the entity.
Management of Business
The partners of the Limited Liability Partnership can manage its business. However, only the designated partners are responsible for legal compliances.
Business for Profit Only
A Limited Liability Partnership cannot be formed for charitable or non-profit purposes. It is essential that the entity is formed to carry on a lawful business with a view to earning a profit.