Introduction to Partnership Firm
A partnership is a business owned by two or more people. The partners share the profits and losses of the business, and they are each personally liable for all debts and obligations of the business.
There are two types of partnerships: general partnerships and limited partnerships.
In a general partnership, all partners have unlimited liability. This means that each partner is liable for the debts and obligations of the business, regardless of their individual involvement in the business.
In a limited partnership, there are one or more general partners who have unlimited liability and one or more limited partners who have limited liability. Limited partners are only liable for the amount of their investment in the partnership.
“Partnership is 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.” – The Partnership Act, 1932 (India)
“Partnership is a voluntary association of two or more persons to carry on a business for profit, with a view of sharing the profits thereof.” – Halsbury’s Laws of England
“Partnership is a relationship between two or more persons who agree to carry on a business in common with a view of profit.” – Black’s Law Dictionary
“Partnership is a legal relationship between two or more persons who agree to share the profits and losses of a business enterprise.” – The American Law Institute
“Partnership is a voluntary association of two or more persons to carry on a business for profit, with a shared management and control.” – The International Bar Association
To form a partnership, the partners must enter into a partnership agreement. The partnership agreement is a legal document that sets out the terms of the partnership, such as the contributions of each partner, the sharing of profits and losses, and the management of the business.
If you are considering forming a partnership, it is important to weigh the pros and cons carefully. You should also consult with an attorney or accountant to make sure that you understand the legal and tax implications of this form of business organization.
Here are some additional things to consider when deciding whether to form a partnership:
- The size and complexity of your business. If you are starting a small business, a partnership may be a good option. However, if you are starting a larger or more complex business, you may want to consider a different form of business organization, such as a corporation.
- The skills and experience of the partners. The partners should have complementary skills and experience to run the business successfully.
- The financial situation of the partners. The partners should be able to contribute financially to the business.
- The terms of the partnership agreement. The partnership agreement should be carefully drafted to protect the interests of all the partners.
Ultimately, the decision of whether to form a partnership is a personal one. There is no right or wrong answer, and the best choice for you will depend on your specific circumstances.
Features of Partnership Firm
Partnership is a common form of business organization where two or more individuals or entities collaborate to jointly operate a business for profit. Here are the key features of a partnership:
Multiple Owners: A partnership involves two or more individuals or entities known as partners. Partners pool their resources, skills, and expertise to run the business.
Mutual Agreement: A partnership is established through a mutual agreement among the partners. This agreement outlines the terms, rights, responsibilities, and obligations of each partner.
Profit and Loss Sharing: Partners share the profits and losses of the business based on the terms set in the partnership agreement. This sharing is usually proportional to the partners’ contributions, although other arrangements can be agreed upon.
Unlimited Liability: Partners have unlimited personal liability for the business’s debts and obligations. If the business faces financial difficulties, partners’ personal assets can be used to cover business debts.
Joint Management: All partners have the right to participate in the management of the business. While the extent of involvement may vary, major decisions are typically made jointly.
Pooling of Resources: Partners contribute capital, skills, knowledge, and resources to the partnership, enhancing the business’s capabilities and potential for growth.
Partnership Deed: A partnership deed is a legal document that outlines the terms of the partnership, including contributions, profit sharing, responsibilities, decision-making procedures, admission and withdrawal of partners, and dispute resolution.
Limited Life: The partnership’s existence is dependent on the mutual agreement of its partners. The death, withdrawal, or insolvency of a partner can impact the partnership’s continuity.
Taxation: A partnership itself is not taxed as a separate entity. Instead, partners report their share of the partnership’s profits on their individual tax returns.
Flexibility: Partnerships offer flexibility in terms of decision-making and business operations, enabling partners to respond quickly to changes in the market or industry.
Variations of Partnerships: Partnerships can take different forms, such as general partnerships (where partners share equal responsibilities and liabilities) and limited partnerships (which include general partners and limited partners with limited liability).
Pooling of Skills: Partners bring diverse skills and expertise to the business, which can lead to a well-rounded approach to problem-solving and innovation.
Personal Relationships: Partnerships often involve close personal relationships among the partners. Trust and effective communication are essential for the success of the partnership.
Risk Sharing: Risks and responsibilities are shared among partners, which can help distribute the burdens of business operations.
Dispute Resolution: Partnership agreements usually outline procedures for resolving disputes among partners, helping to prevent conflicts from adversely affecting the business.
Exit Strategy: A partnership agreement can include provisions for partner exits due to retirement, death, or other reasons, as well as mechanisms for valuing a partner’s share in the business.
Partnerships are popular due to their ability to harness collective resources and expertise while sharing both rewards and risks. However, partners should be aware of the implications of unlimited liability and the importance of a well-drafted partnership agreement to ensure smooth operations and dispute resolution.
Difference between Sole Trading Concern and Partnership Firm
The key differences between a Sole Trading Concern and a Partnership Firm:
|Aspect||Sole Trading Concern||Partnership Firm|
|Ownership||Owned and operated by a single individual||Owned and operated by two or more partners|
|Number of Owners||One||Two or more|
|Decision-Making||Single owner makes all decisions||Decisions are made jointly by partners|
|Liability||Owner has unlimited liability for debts and obligations||Partners have unlimited liability for debts and obligations|
|Profit and Loss Sharing||All profits and losses belong to the owner||Profits and losses shared among partners as per agreement|
|Business Continuity||Closely tied to the owner’s life||Can continue with new partners or restructured upon partner changes|
|Skills and Expertise||Limited to owner’s skills and expertise||Benefits from diverse skills and expertise of multiple partners|
|Capital Contributions||Solely funded by owner’s capital||Partners contribute capital and resources|
|Privacy||Greater privacy due to limited legal requirements||Requires more transparency among partners and public disclosure|
|Taxation||Owner reports business income as personal income||Partners report their share of profits on personal tax returns|
|Formation Complexity||Simpler and requires fewer formalities||Requires a partnership agreement, legal documentation|
|Flexibility||More flexibility in decision-making||Decision-making involves discussion and consensus among partners|
|Risk Sharing||Owner bears all business risks||Risks and responsibilities are shared among partners|
|Dispute Resolution||Owner makes sole decisions||Decisions and resolutions are made jointly among partners|
|Exit Strategy||Easier to dissolve or exit the business||Exit strategies involve agreement and compensation among partners|
Reasons for Starting (Advantages of) Partnership Business
Here are some of the reasons for starting a partnership business:
- Shared expertise and resources: Partners can pool their expertise and resources to start a business that they would not be able to start on their own. For example, one partner may have business experience, while another partner may have financial expertise.
- Ease of formation: Partnerships are relatively easy to form and maintain. There is no need to file any paperwork with the government, and the partnership can be dissolved by the partners at any time.
- Flexibility: Partnerships can be structured in a variety of ways to meet the needs of the partners. For example, the partners can agree to different levels of management involvement, and they can allocate profits and losses in different ways.
- Taxation: Partnerships are taxed as pass-through entities, which means that the partners’ share of the profits is taxed on their individual tax returns. This can be beneficial for partners who are in a high tax bracket.
- Access to capital: Partnerships can more easily raise capital than sole proprietorships. This is because partners can contribute their own money and assets to the business, and they can also borrow money from banks and other lenders.
- Shared decision-making: Partnerships can benefit from shared decision-making. This can lead to better decision-making, as partners can bring different perspectives to the table.
- Increased opportunities: Partnerships can offer increased opportunities for partners. For example, partners can share in the profits and losses of the business, and they can also share in the growth of the business.
- Risk Sharing: Business risks and responsibilities are distributed among partners, reducing the burden on any single individual. This can help manage challenges and uncertainties more effectively.
- Effective management and control: Partnerships can benefit from the shared management and control of the business. This can lead to better decision-making, as partners can bring different perspectives to the table.
- Long-Term Perspective: Partnerships often have a longer perspective and sustainability due to the combined effort and commitment of multiple individuals.
Challenges (Disadvantages) of Partnership Business
Here are some of the challenges (disadvantages) of partnership business:
- Unlimited liability: All partners are personally liable for all debts and obligations of the business. This means that if the partnership fails, the partners could lose their personal assets, such as their homes or cars.
- Difficult to dissolve: Partnerships can be difficult to dissolve, especially if there are disagreements between the partners.
- Potential for conflict: Partnerships can be challenging to manage, as there is the potential for conflict between the partners. This is especially true if the partners have different personalities or goals for the business.
- Disputes among partners: If the partners disagree on important matters, such as the direction of the business or the allocation of profits, it can lead to conflict and even the dissolution of the partnership.
- Difficult to raise capital: Partnerships can be more difficult to raise capital than corporations, as investors may be hesitant to invest in a business where they are not the only ones at risk.
- Taxation: Partnerships are not subject to corporate taxes, but the profits are passed through to the partners and taxed on their individual tax returns. This can be complex and time-consuming, and it can also increase the tax liability of the partners.
- Liability of incoming partners: If a new partner joins a partnership, they may be held liable for the debts and obligations of the partnership that occurred before they joined. This is known as “retroactive liability.”
- Death or incapacity of a partner: If a partner dies or becomes incapacitated, it can disrupt the management of the partnership and lead to its dissolution.
It is important to carefully consider these challenges before deciding whether to start a partnership business. If you are considering this option, you should consult with an attorney or accountant to make sure that you understand the legal and tax implications of this form of business organization.
Meaning of Partnership Deed
A partnership deed is a legal document that formally establishes a partnership between two or more individuals or entities. It outlines the terms and conditions of the partnership, such as the contributions of each partner, the sharing of profits and losses, and the management structure.
The partnership deed is an important tool for protecting the interests of all partners. It can help to avoid disputes and ensure that the partnership is managed fairly and efficiently. It can also be used to attract investors or lenders, as it provides them with a sense of security about the business.
The partnership deed should be drafted by an experienced attorney to ensure that it is legally sound and enforceable. It should be tailored to the specific needs of the partnership and should be reviewed regularly to ensure that it reflects the current understanding and agreement of the partners.
Contents of Partnership Deed
The contents of a partnership deed can vary depending on the specific needs of the partners and the nature of the business. However, some of the common contents include:
- Names of the partners: The partnership deed should list the names of all the partners.
- Name of the partnership: The partnership deed should also specify the name of the partnership. The name should be unique and should not be the same as the name of any other business in the same jurisdiction.
- Date of commencement: The partnership deed should specify the date on which the partnership is being formed.
- Purpose of the partnership: The partnership deed should specify the purpose of the partnership. This could be to provide services, to sell products, or to engage in some other business activity.
- Contributions of each partner: The partnership deed should specify the contributions that each partner is making to the partnership. This could be in the form of cash, property, or services.
- Sharing of profits and losses: The partnership deed should specify how the profits and losses of the partnership will be shared. This could be in equal shares, or it could be based on the contributions of each partner.
- Management structure of the partnership: The partnership deed should specify how the partnership will be managed. This could be by all the partners, by a managing partner, or by a board of directors.
- Dissolution of the partnership: The partnership deed should specify the events that will trigger the dissolution of the partnership. This could be the death or bankruptcy of a partner, the sale of the partnership assets, or the decision of the partners to dissolve the partnership.
- Procedure for dissolving the partnership: The partnership deed should specify the procedure for dissolving the partnership. This could include the appointment of a liquidator, the distribution of the assets of the partnership, and the settlement of any debts and liabilities.
- Dispute resolution process: The partnership deed should specify the dispute resolution process. This could involve mediation, arbitration, or litigation.
It is important to note that the contents of a partnership deed can vary depending on the specific needs of the partners and the nature of the business. It is advisable to consult with an attorney to draft a partnership deed that meets the specific needs of the partners.
Types of Partners
Here are the different types of partners in a partnership firm:
- General partner: A general partner is a partner who is fully liable for the debts and obligations of the partnership. They have the right to participate in the management of the partnership and to share in the profits and losses of the partnership.
- Limited partner: A limited partner is a partner who is not liable for the debts and obligations of the partnership beyond their investment in the partnership. They do not have the right to participate in the management of the partnership, and their share of the profits is limited to their investment in the partnership.
- Active partner: An active partner is a partner who is involved in the day-to-day management of the partnership. They are responsible for making decisions about the business and ensuring that it is run effectively.
- Sleeping or dormant partner: A sleeping or dormant partner is a partner who is not involved in the day-to-day management of the partnership. They may contribute capital to the partnership, but they do not participate in the decision-making process.
- Nominal partner: A nominal partner is a partner who is named as a partner in the partnership deed, but who does not actually contribute anything to the partnership. They may be used to give the impression that the partnership is more financially stable than it actually is.
- Minor partner: A minor partner is a partner who is under the age of 18. They cannot enter into a contract, including a partnership agreement, without the consent of their legal guardian.
- Incoming partner: An incoming partner is a partner who is joining an existing partnership. They may be required to contribute capital to the partnership and to assume their share of the debts and obligations of the partnership.
- Outgoing partner: An outgoing partner is a partner who is leaving an existing partnership. They may be required to sell their interest in the partnership to the remaining partners or to the partnership itself.
- Secret partner: A secret partner is a partner who is not known to the public as a partner in the partnership. They may be involved in the management of the partnership, but their involvement is kept secret.
- Partner in profit only: A partner in profit only is a partner who does not contribute anything to the partnership but who is entitled to share in the profits of the partnership. They do not have any liability for the debts and obligations of the partnership.
- Quasi-partner: A quasi-partner is a person who is not a partner in the legal sense, but who is treated as a partner for certain purposes. For example, a creditor of the partnership may be able to sue a quasi-partner for the debts of the partnership.
Rights and Duties of Partners
Here are the rights and duties of partners in a partnership firm:
Rights of Partners:
Right to Participate in Management: Partners have the right to actively participate in the management and decision-making of the partnership. This includes being involved in strategic planning, operational decisions, and overall business management.
Right to Share in Profit: Partners have the right to receive a share of the profits generated by the partnership, as specified in the partnership agreement. Profit-sharing ratios are often determined based on capital contributions or other agreed-upon terms.
Right to Inspect and Take a Copy of Books of Accounts: Partners have the right to review the partnership’s financial records, books of accounts, and other relevant documents to ensure transparency and accountability.
Right to Get Interest on Additional Capital: If a partner contributes additional capital beyond their initial contribution, they may have the right to receive interest on that additional capital. This is usually outlined in the partnership agreement.
Right to Separate from the Firm: Partners generally have the right to leave or withdraw from the partnership, subject to the terms and conditions outlined in the partnership agreement. This may include providing notice and following specific procedures.
Right to Change the Rules: Partners might have the right to collectively amend or modify the terms of the partnership agreement. Changes to the agreement typically require the agreement of all partners.
Right to Express an Opinion: Partners have the right to express their opinions and viewpoints during partnership meetings and discussions. Open communication is essential for effective decision-making.
Right to Dissolve Partnership: Partners may have the right to initiate the dissolution of the partnership if certain conditions are met, such as the expiration of a fixed partnership term or unanimous agreement among partners.
Right to Appeal: If a partner disagrees with a decision or action taken by the partnership, they may have the right to appeal or seek resolution through dispute resolution mechanisms outlined in the partnership agreement.
Right to Use Partnership Property: Partners generally have the right to use partnership property and assets for business purposes, as specified in the partnership agreement.
Right to Be Indemnified: Partners have the right to be indemnified by the partnership for any legitimate expenses or liabilities incurred while carrying out partnership activities.
Right to Get Remuneration: Some partnership agreements allow partners to receive a predetermined salary or remuneration for their contributions to the partnership, in addition to profit sharing.
Duties of Partners:
Here’s an explanation of each of the duties of Partners:
Use of the Firm’s Property for Business Purpose: Partners are obligated to use the partnership’s property, assets, and resources solely for the purpose of conducting the partnership’s business. They should not use partnership property for personal benefit without proper authorization.
To Work Within the Authority: Partners are required to work within the scope of their authority as defined in the partnership agreement. This means they should not exceed their designated roles and responsibilities without proper consent from other partners.
Mutual Faith & Honesty: Partners owe each other a duty of mutual faith and honesty. They should act in good faith, avoid deceptive practices, and uphold honesty in all business dealings.
To Share in the Loss: Similar to sharing in the profits, partners are obligated to share in the losses incurred by the partnership, as specified in the partnership agreement. Loss-sharing ratios are often determined based on the partners’ agreed-upon terms.
Permission for Transfer of Interest: Partners generally need the permission of other partners before transferring or assigning their interest in the partnership to another individual or entity. This helps maintain the stability and dynamics of the partnership.
To Render Accurate Accounts: Partners have a duty to provide accurate and timely financial accounts and reports to fellow partners. This transparency ensures that all partners are informed about the financial health of the partnership.
To Work for Common Interest: Partners have a duty to work for the common interest of the partnership, rather than pursuing individual interests that could conflict with the partnership’s objectives.
Not to Disclose Secrecy: Partners are expected to maintain confidentiality and not disclose any confidential or proprietary information related to the partnership’s business activities to outsiders or competitors.
These duties play a crucial role in maintaining trust, accountability, and effective collaboration within the partnership. They are often explicitly stated in the partnership agreement to ensure that all partners are aware of their obligations and responsibilities. Partners should adhere to these duties to ensure the success and longevity of the partnership.
Types of Partnership
Limited Partnership: Limited partnerships consist of two types of partners: general partners and limited partners. General partners are responsible for managing the business and have unlimited liability for the partnership’s debts. Limited partners, on the other hand, contribute capital but don’t actively participate in management. Their liability is limited to the extent of their capital contribution. Limited partnerships are often used for investment-based partnerships where investors want limited liability.
General or Unlimited Partnership: This is the most common form of partnership. It can be further divided into two categories:
a. Partnership at Will: Partnerships at will have no fixed term and can be dissolved at any time by any partner without prior notice. It exists as long as partners agree to continue.
b. Particular Partnership: Particular partnerships are formed for a specific project or undertaking. Once the project is completed, the partnership is dissolved.
Legal Partnership: A legal partnership is formed when partners come together and fulfill the legal requirements for partnership formation, such as creating a partnership agreement, registering the partnership, and adhering to the legal formalities of the jurisdiction in which the partnership operates.
Illegal Partnership: An illegal partnership is formed to carry out activities that are prohibited by law. Engaging in such activities can lead to legal consequences, including penalties or fines. Examples of illegal partnerships might involve activities such as money laundering, drug trafficking, or other criminal enterprises.
Procedure of Registration and Renewal of Partnership Firm in Nepal
Registration of Partnership Firm:
Choose a Name: Select a unique and suitable name for your partnership firm. The name should not be the same as or similar to existing registered firms.
Prepare Partnership Deed: Draft a partnership deed that outlines the terms and conditions of the partnership, including profit-sharing ratios, roles and responsibilities of partners, capital contributions, etc.
Stamp Duty: The partnership deed must be executed on non-judicial stamp paper of a certain value, as required by law.
Application Form: Obtain an application form for partnership firm registration from the concerned government office (usually the District Administration Office).
Submit Documents: Submit the application form along with the partnership deed, affidavit, passport-sized photos of partners, and other required documents to the District Administration Office or the relevant authority.
Verification and Approval: The submitted documents will be verified, and if everything is in order, the authority will approve the registration of the partnership firm.
Payment of Fees: Pay the required registration fees as specified by the authorities.
Receive Certificate: Once approved, you will receive a certificate of registration for your partnership firm.
Renewal of Partnership Firm:
Renewal Period: Partnership firm registration typically needs to be renewed periodically, which may vary depending on local regulations.
Application for Renewal: Obtain the renewal application form from the relevant government office.
Update Information: Check if there have been any changes in partners, capital, or other relevant details. Update the partnership deed if necessary.
Submit Renewal Application: Submit the completed renewal application form along with any updated documents to the appropriate authority.
Verification: The submitted information will be verified to ensure compliance with regulations.
Payment of Renewal Fees: Pay the renewal fees as required.
Renewed Certificate: Once approved, you will receive a renewed certificate of registration for your partnership firm.
Please note that the steps mentioned above provide a general overview of the registration and renewal process for a partnership firm in Nepal. The specific requirements, documents, fees, and procedures may vary based on changes in laws, regulations, and local practices.
Effect of Non-registration and Non-renewal of a Partnership Firm in Nepal
Partners must renew the firm within 35 days from the end of each financial year. They should apply before the concerned department in the prescribed format, along with the required information and the receipts or bank voucher for the renewal fee. Upon receiving the due application, the concerned department shall renew the firm and mention the same in the registration inventory and the certificate of registration. No firm shall carry on any business by the same name without renewal.
By Section 41 of the Partnership Act 1964 AD (First Amendment 1987); the concerned office may impose different penalties in different matters as specified below:
- If partners carry any business without registration or renewal of the firm, every partner shall be liable to a fine of no more than Rs.50/-.
- If partners have provided false details in the application for registration, every partner shall be liable to a fine of no more than Rs.100/-.
- If the notice of any changes made in the details of the application and agreement of partners submitted at the time of registration has not been provided on time, the firm shall be liable to a fine not more than Rs. 100/-, and
When operating a business without registering, it may deprived of the various facilities including banking facilities provided by the government.
Modes of Dissolution of Partnership Firms in Nepal
In Nepal, a partnership firm can be dissolved through various modes, as you’ve listed. Each mode corresponds to specific circumstances under which a partnership may come to an end. Here’s an explanation of each mode of dissolution:
Dissolution by Agreement: Partners can mutually agree to dissolve the partnership. This requires the unanimous consent of all partners. The dissolution terms are typically outlined in the partnership agreement.
Dissolution by Notice: Partners may dissolve the partnership by providing a notice to other partners, as per the terms specified in the partnership agreement. This mode allows partners to dissolve the partnership even if the fixed term has not expired.
Dissolution at Any Time: a. Inability: If a partner becomes incapable of performing their duties, the partnership may dissolve. b. Non-Payment of Sum Due: If a partner fails to fulfill their financial obligations to the partnership, it can lead to dissolution. c. Court Action: Partners may seek dissolution through legal action if there is a breach of partnership terms or other circumstances warranting dissolution. d. Negligence: Partners who consistently neglect their duties can trigger dissolution if it negatively affects the partnership’s operations.
Dissolution by the End of Fixed Period: If the partnership agreement specifies a fixed term, the partnership will automatically dissolve upon the expiration of that term.
Dissolution on Completion of Fixed Work: If the partnership was formed for a specific project or undertaking, it will dissolve upon the successful completion of that project or work.
Immediate Dissolution: In certain situations, such as fraud, misconduct, or illegal activities, partners may opt for immediate dissolution to sever ties immediately.
Dissolution by Concerned Department: Regulatory bodies or government departments may order the dissolution of a partnership firm due to violations of laws, regulations, or other reasons deemed appropriate under the legal framework.
It’s important to note that the mode of dissolution chosen will depend on the specific circumstances and the terms outlined in the partnership agreement. Partners should carefully consider the implications of each mode and ensure that the chosen mode aligns with the legal and contractual requirements. Additionally, legal advice and consultation might be necessary to ensure that the dissolution process is carried out smoothly and in accordance with applicable laws and regulations in Nepal.