Ownership Structures — Partnership

Statement I: A partnership is a voluntary association of two or more persons who agree to carry on some business jointly and share its profits and losses.

Statement II: The persons who enter into partnership are individually called 'partners' and collectively called 'firm'.

1. Only I is correct
2. Only II is correct
3. Both I and II are correct
4. Both I and II are wrong

Answer

Both I and II are correct

Reason — Both statements describe partnership correctly. Statement I gives the correct definition of partnership as a voluntary association of two or more persons agreeing to carry on a business jointly and share profits and losses. Statement II correctly states that the persons who enter into partnership are individually called 'partners' and collectively called a 'firm', while the name under which they carry on business is called the 'firm name'.

An unregistered partnership firm cannot enforce its claims against a third party in a court of law.

1. True
2. False

Answer

True

Reason — One of the major consequences of non-registration of a partnership firm is that the firm cannot enforce its claims against a third party in a court of law. This is why registration of a partnership firm, though not compulsory, is highly desirable.

Which of the following is not a feature of partnership?

1. Partnership is based on mutual trust and confidence.
2. Partnership business can be carried on by all the partners or by any of them acting on behalf of others.
3. Partners can transfer his share in the partnership without the prior consent of all other partners.
4. A partnership firm has no separate legal existence independent of the partners.

Answer

Partners can transfer his share in the partnership without the prior consent of all other partners.

Reason — This is not a feature of partnership. In fact, the opposite is true — "Restriction on Transfer of Interest" is an essential feature of partnership, which means no partner can transfer his share in the partnership without the prior consent of all other partners.

Which of the following statement is incorrect?

1. Each partner is liable to an unlimited extent for the firm's obligations towards outsiders.
2. A partnership can be formed only for the purpose of carrying on a business.
3. Each partner is liable for acts performed by other partners on behalf of the firm.
4. An association of persons who jointly own a house without carrying on a business can be considered as partnership.

Answer

An association of persons who jointly own a house without carrying on a business can be considered as partnership.

Reason — This statement is incorrect. A partnership can be formed only for the purpose of carrying on a lawful business. An association of persons who jointly own a house without carrying on a business is not a partnership, because the essential element of a business activity is missing.

Which of the following statements regarding partnership is incorrect?

1. Secrets are known to partners.
2. Coordination between partners is not required.
3. Ownership is shared by partners.
4. Agreement is essential.

Answer

Coordination between partners is not required.

Reason — This statement is incorrect. In a partnership, coordination between partners is essential because the business is carried on by all the partners or by any of them acting on behalf of all. Since every partner is an implied agent of the others and the firm, proper coordination among partners is necessary for smooth functioning of the business.

Which of the following is NOT a merit of partnership?

1. Ease of formation
2. Scope for expansion
3. Uncertain life
4. Combined abilities and judgement

Answer

Uncertain life

Reason — Uncertain life is a demerit, not a merit, of partnership. Partnership business suffers from instability because insolvency, insanity, retirement or death of any partner may cause an abrupt end to the business. Ease of formation, scope for expansion, and combined abilities and judgement are all merits of partnership.

Assertion (A): A partnership can only be formed for a lawful business.

Reasoning (R): Illegal activities like smuggling or theft can be considered as a partnership if profits are shared.

1. Both A and R are true, and R is the correct explanation of A.
2. Both A and R are true, but R is not the correct explanation of A.
3. A is true, but R is false.
4. A is false, but R is true.

Answer

A is true, but R is false.

Reason — Assertion (A) is true because a partnership can be formed only for the purpose of carrying on a lawful business. Reasoning (R) is false because illegal acts such as theft, dacoity and smuggling cannot be called a partnership, even if profits are shared among the persons involved.

Which of the following statements regarding partnership is correct?

1. Less amount of funds are available
2. They are difficult to form.
3. Partnership business suffers from instability.
4. Secrets are not known to all members.

Answer

Partnership business suffers from instability.

Reason — Partnership business suffers from instability (uncertain life) because insolvency, insanity, retirement or death of any partner may cause an abrupt end to the business. The other options are incorrect — partnerships have more funds than sole proprietorship, are easy to form, and secrets are known to all partners.

Statement I: Registration of partnership firms is compulsory under the Partnership Act 1932.

Statement II: The registration of a firm is a difficult process.

1. Only I is correct
2. Only II is correct
3. Both I and II are correct
4. Both I and II are incorrect

Answer

Both I and II are incorrect

Reason — Statement I is incorrect because registration of partnership firms is NOT compulsory under the Partnership Act 1932; it is optional. Statement II is also incorrect because the registration of a firm is a simple process — the firm has to submit a statement in the prescribed form along with the prescribed fee to the Registrar of Firms.

Which of the following is not a consequence of non-registration?

1. An unregistered partnership firm cannot enforce its claims against a third party in a court of law.
2. It can sue any of its partners.
3. Partners of an unregistered firm cannot sue the firm to enforce their claims.
4. Partners of an unregistered firm cannot file a suit against each other.

Answer

It can sue any of its partners.

Reason — This is not a consequence of non-registration. In fact, the actual consequence is the opposite — an unregistered firm CANNOT sue any of its partners. The other three options correctly state the consequences of non-registration of a partnership firm.

Statement I: Every partner has unlimited liability in LLP.

Statement II: Every partner has limited liability in General Partnership.

1. Only I is correct
2. Only II is correct
3. Both I and II are correct
4. Both I and II are wrong

Answer

Both I and II are wrong

Reason — Statement I is wrong because in LLP (Limited Liability Partnership), the liability of partners is limited to their agreed contributions to the LLP, not unlimited. Statement II is also wrong because in a General Partnership, the liability of every partner is unlimited — the firm's creditors can realise their debts from the personal property of any partner.

Which of the following is not correct about Limited Liability Partnership (LLP)?

1. An LLP is a body corporate having a separate legal entity and perpetual succession.
2. An LLP must not maintain annual accounts reflecting the true and fair view of its state of affairs.
3. The liability of partners in LLP is limited to their agreed contributions to the LLP.
4. As there is no limit on the number, an LLP can raise huge funds for expansion and growth of business.

Answer

An LLP must not maintain annual accounts reflecting the true and fair view of its state of affairs.

Reason — This statement is incorrect. An LLP MUST maintain annual accounts reflecting the true and fair view of its state of affairs. The other three options are correct features of an LLP.

Arun and Amrita agree to start a business together by pooling their resources and sharing profits. What type of business structure are they forming?

1. Sole Proprietorship
2. Partnership
3. Joint Stock Company
4. Cooperative Society

Answer

Partnership

Reason — Partnership is a voluntary association of two or more persons who agree to carry on some business jointly by pooling their resources (capital and managerial skills) and share its profits and losses. Since Arun and Amrita are two persons agreeing to pool resources and share profits, they are forming a partnership.

A partnership firm cannot sue a third party in a court of law unless:

1. It has a minimum of three partners.
2. It is registered with the Registrar of Firms.
3. It operates in more than one state.
4. It has a partnership deed.

Answer

It is registered with the Registrar of Firms.

Reason — An unregistered partnership firm cannot enforce its claims against a third party in a court of law. To be able to sue a third party, the firm must first get itself registered with the Registrar of Firms by submitting the prescribed statement along with the prescribed fee.

Aman and Rohan started a business as partners. They verbally agreed to share profits equally but did not create a written agreement. Later, they had a dispute about profit sharing. What could have prevented this dispute?

1. Registering the firm
2. A written partnership deed
3. Seeking legal advice before starting
4. Limiting the number of partners

Answer

A written partnership deed

Reason — A written agreement of partnership, called the Partnership Deed, contains all the terms and conditions on which the partnership has been formed (including the profit sharing ratio). It is signed by all the partners and serves as a record for future, helping to resolve disputes that may arise among partners. A written partnership deed would have clearly recorded the profit-sharing arrangement and prevented this dispute.

Registration of a partnership firm is compulsory under the Partnership Act, 1932.

1. True
2. False

Answer

False

Reason — Registration of partnership firms is NOT compulsory under the Partnership Act 1932. The Act provides that if the partners so desire, they may get the firm registered at the time of formation of partnership or afterwards. However, registration is highly desirable due to the consequences of non-registration.

Why is it recommended to have a written partnership deed?

1. It is mandatory for registration under the Companies Act.
2. It serves as a legal record to resolve disputes.
3. It reduces the firm's tax liability.
4. It ensures limited liability for all partners.

Answer

It serves as a legal record to resolve disputes.

Reason — A written partnership deed is preferable because it serves as a record for future and helps to resolve disputes, if any, that may arise among the partners. It contains all the terms and conditions on which the partnership has been formed and is signed by all the partners.

A partnership firm is not registered. The firm lent ₹50,000 to a customer, but the customer failed to repay it. Can the firm take legal action against the customer?

1. Yes, as registration is optional
2. No, because the firm is not registered
3. Yes, if the partners agree unanimously
4. No, unless the firm gets registered before filing the case

Answer

No, because the firm is not registered

Reason — An unregistered partnership firm cannot enforce its claims against a third party in a court of law. Since the customer is a third party and the firm is unregistered, it cannot take legal action against the customer to recover the ₹50,000 loan. This is a major disadvantage of non-registration.

Statement I: Partnership is an association of two or more persons.

Statement II: Partnership is an agreement between two or more persons.

1. Only I is correct
2. Only II is correct
3. Both I and II are correct
4. Both I and II are wrong

Answer

Both I and II are correct

Reason — Both statements are correct. Statement I is correct because partnership is an association of two or more persons (there must be at least two persons to form a partnership). Statement II is also correct because partnership is the outcome of an agreement between two or more persons — the relation of partnership arises from the formation of a contract, not from status or birth.

Which of the following is NOT a demerit of partnership?

1. Unlimited liability
2. Limited Resources
3. Secrecy
4. Lack of public confidence

Answer

Secrecy

Reason — Secrecy is a merit of partnership, not a demerit. A partnership firm is not required to publish its annual accounts, and the affairs of a partnership business can easily be kept secret and confidential. Unlimited liability, limited resources, and lack of public confidence are all demerits of partnership.

Meera, a partner in a firm, withdraws her share of capital without informing the other partners, resulting in financial strain on the firm. Which feature of partnership prevents such actions?

1. Mutual consent among partners
2. Written agreement
3. Sharing of profits and losses
4. Unlimited liability

Answer

Mutual consent among partners

Reason — Partnership is based on mutual trust, confidence, and mutual consent among partners. No partner can transfer his share or withdraw capital from the firm without the prior consent of all other partners. The feature of restriction on transfer of interest, which operates through mutual consent, prevents such unilateral actions by any partner.

A company required funding for expansion but did not want unlimited liability for its partners. What type of partnership would best suit their needs?

1. General Partnership
2. Partnership at Will
3. Limited Liability Partnership (LLP)
4. Particular Partnership

Answer

Limited Liability Partnership (LLP)

Reason — In an LLP, the liability of partners is limited to their agreed contributions to the LLP. Also, since there is no limit on the number of partners, an LLP can raise huge funds for expansion and growth of business. Hence, LLP best suits a company that requires expansion funding but does not want unlimited liability for its partners.

In a partnership at will, any partner can dissolve the firm by giving notice to the other partners.

1. True
2. False

Answer

True

Reason — A partnership at will is a partnership formed for an indefinite period. The time period or the purpose of the firm is not mentioned at the time of its formation. It can be dissolved by any partner by giving a notice to the other partners of his desire to quit the firm.

Two friends, Ajay and Sameer, jointly own a property but do not run a business with it. Can this arrangement be considered a partnership?

1. Yes, because they jointly own a property
2. No, because they are not running a business
3. Yes, if they share the rental income equally
4. No, because partnership must involve more than two people

Answer

No, because they are not running a business

Reason — A partnership can be formed only for the purpose of carrying on a business. An association of persons who jointly own a house or property without carrying on a business is not a partnership. Since Ajay and Sameer are not running any business with their property, this arrangement cannot be considered a partnership.

Assertion (A): In a Limited Liability Partnership (LLP), the liability of the partners is limited to their agreed contribution.

Reasoning (R): An LLP is a hybrid form of business organisation combining features of a partnership and a joint-stock company.

1. Both A and R are true, and R is the correct explanation of A.
2. Both A and R are true, but R is not the correct explanation of A.
3. A is true, but R is false.
4. A is false, but R is true.

Answer

Both A and R are true, and R is the correct explanation of A.

Reason — Assertion (A) is true because in an LLP, the liability of partners is limited to their agreed contributions to the LLP. Reasoning (R) is also true because LLP is a hybrid form of business organisation combining features of both partnership firm and joint stock company. R correctly explains A because the feature of limited liability in LLP is derived from the joint-stock company aspect of this hybrid form of organisation.

A client sues a partnership firm for not delivering goods on time. The court orders all partners to pay compensation using their personal assets. What feature of partnership leads to this situation?

1. Unlimited liability
2. Mutual agency
3. Sharing of profits and losses
4. Restriction on transfer of interest

Answer

Unlimited liability

Reason — Each partner is liable to an unlimited extent for the firm's obligations towards outsiders. If the firm's assets are inadequate to meet its debts in full, even the personal property of the partners can be attached to satisfy claims. This is exactly what is happening in this case, where the court has ordered partners to pay compensation using their personal assets.

Define partnership.

Answer

Partnership — A partnership is a voluntary association of two or more persons who agree to carry on some business jointly and share its profits and losses. The persons who enter into partnership are individually called 'partners' and collectively a 'firm'. The name under which they carry on business is called the 'firm name'.

According to the Indian Partnership Act, 1932, "Partnership is the relation between persons who have agreed to share profits of a business carried on by all or any one of them acting for all."

According to L.H. Haney, "Partnership is the relation between persons competent to make contract, who agree to carry on a lawful business in common with a view to private gain."

State three features of partnership.

Answer

Three features of partnership are:

1. Two or More Persons — Partnership is an association of two or more persons. There must be at least two persons to form a partnership. According to Section 464 of the Companies Act 2013, the maximum number of partners has currently been set at 50 partners per firm.

2. Agreement — Partnership is the outcome of an agreement between two or more persons. The relation of partnership arises from the formation of a contract and not from status or birth. The agreement may be oral or in writing.

3. Sharing of Profits — The agreement between the partners must be to share the profits of business. There can be no partnership without the intention of mutual gain. The profits must be distributed among the partners in an agreed ratio. Similarly, losses should also be shared among the partners.

A partnership firm operating a travel agency is facing legal issues because one partner took a loan in the firm's name without informing the other partners. How does the principle of mutual agency apply to this situation?

Answer

The principle of mutual agency means that the partnership business can be carried on by all the partners or by any of them acting on behalf of the others. Every partner is an implied agent of the other partners and of the firm. Each partner is liable for acts performed by other partners on behalf of the firm.

In this situation:

1. Since the partner took the loan in the firm's name in the normal course of business, the firm and the other partners are bound by his act, even though they were not informed.

2. All partners are jointly and severally liable to repay the loan to the lender because of mutual agency.

3. Each partner can bind the others by his acts performed in the ordinary course of business. The act of one partner is treated as the act of the firm.

4. The other partners cannot escape liability merely on the ground that they were not consulted.

Thus, the principle of mutual agency holds all partners liable for the loan taken by one partner in the firm's name.

What is implied agency in partnership?

Answer

Implied Agency — Implied agency in partnership means that every partner is automatically considered an agent of the other partners and of the firm, even without any express authorization. Each partner can bind the other partners and the firm by his acts performed in the normal course of business.

The key points of implied agency are:

1. Partnership business can be carried on by all the partners or by any of them acting on behalf of others.

2. The act of one partner, done in the ordinary course of business, is treated as the act of the firm.

3. Each partner is liable for acts performed by other partners on behalf of the firm.

4. One partner can bind the others by his acts performed in the normal course of business.

Implied agency arises out of the relationship of mutual trust and confidence among the partners and is one of the essential features of partnership.

State the advantages of registering a partnership.

Answer

The advantages of registering a partnership firm are:

1. Firm can sue outsiders — The firm can file suits against third parties to enforce its claims in a court of law.

2. Partners can sue the firm — Partners can file suits against the firm to enforce their claims.

3. Partners can sue each other — Partners can file suits against each other to settle their disputes.

4. Liability of retired partner ceases — The liability of a partner ceases once a notice of retirement is given to the Registrar.

5. Right of set-off — Partners can claim a set-off in proceedings by third parties against the firm.

6. Information about firm — Information about the firm can be obtained by a person who wants to join the firm.

What is general partnership?

Answer

General Partnership — A general partnership is a type of partnership in which the liability of every partner is unlimited. The firm's creditors can realise their debts from the personal property of any partner. The key features of general partnership are:

1. Unlimited Liability — Every partner has unlimited liability for the debts of the firm.

2. Active Participation — Every partner can take active part in the management of the firm's business, unless otherwise agreed upon between the partners.

3. No Separate Legal Entity — The firm does not have a separate legal entity independent of the partners.

4. Dissolution — Death, lunacy or bankruptcy of a partner dissolves the firm.

5. Need Not Be Registered — Registration is not compulsory in a general partnership.

Distinguish between partnership at will and particular partnership.

Answer

"Partnership overcome the shortcomings of sole proprietorship". Justify this statement for or against and give a reason.

Answer

For the statement.

Yes, partnership overcomes the shortcomings of sole proprietorship. The reasons are as follows:

1. Larger Financial Resources — Sole proprietorship suffers from limited financial resources as one person cannot provide huge capital. Partnership overcomes this by pooling the financial resources of two or more partners.

2. Combined Abilities and Judgement — Sole proprietorship is limited by the abilities of a single person. In partnership, the skill and experience of all the partners are pooled together. Combined judgement of several persons helps reduce the chances of errors and leads to balanced decisions.

3. Greater Continuity — In sole proprietorship, the life of business depends on the life of the proprietor. Partnership offers greater continuity due to two or more partners.

4. Sharing of Risk — A sole proprietor alone bears all the risks of business. In partnership, risks are shared among partners.

5. Scope for Expansion — Sole proprietorship has limited scope for expansion. In partnership, more partners can be taken in to meet the financial and managerial requirements of growing business.

Hence, the statement is justified — partnership form of business organisation was evolved to overcome the shortcomings of sole proprietorship.

"Partnership is an extension of sole proprietorship". Evaluate this statement.

Answer

For the statement.

Yes, partnership is an extension of sole proprietorship. The statement can be evaluated as follows:

1. Expansion of Business — As the size of business expands, one person is unable to provide the necessary capital and managerial skills. Two or more persons form a partnership to carry on business by pooling their financial resources and managerial skills.

2. Overcoming Limitations — The partnership form of business organisation was evolved to overcome the limitations of sole proprietorship and joint Hindu family business in respect of limited financial resources and managerial skills.

3. Pooling of Resources — Just as a sole proprietor uses his own resources to run the business, partners pool their resources (capital, skills, and judgement) to run the business together.

4. Direct Motivation — Like in sole proprietorship, in partnership too, ownership and management are vested in the same persons. Every partner is motivated to work hard and ensure the success of the firm.

5. Flexibility — Both forms enjoy flexibility of operations and freedom from legal restrictions and government control.

Hence, partnership is an extension of sole proprietorship, formed when the business grows too large to be managed by a single proprietor.

How is a partnership formed?

Answer

Formation of Partnership — A partnership can be formed only through an agreement between two or more persons. This agreement may be oral or in writing.

The steps in the formation of partnership are:

1. Agreement — Two or more persons (minimum 2, maximum 50) come together and agree to carry on a lawful business together.

2. Written Agreement Preferred — Although the agreement may be oral or written, a written agreement is preferable because it serves as a record for future and helps to resolve disputes.

3. Partnership Deed — The written agreement of partnership is called the Partnership Deed. It contains all the terms and conditions on which a partnership has been formed.

4. Signing the Deed — The partnership deed is signed by all the partners.

5. Mutual Consent for Alterations — The Partnership Deed is not a public document. It can be altered at any time with the mutual consent of all the partners. No legal formalities are involved in its alteration.

6. Registration (Optional) — Registration of the firm with the Registrar of Firms is not compulsory but is highly desirable. The firm may get itself registered at the time of formation or afterwards.

Discuss the merits and demerits of partnership.

Answer

Merits of Partnership — The partnership form of business organisation enjoys the following advantages:

1. Ease of Formation — Partnership is simple and inexpensive to establish and easy to operate. No legal formalities or formal documents are involved. Only an agreement is required. Even the registration of the firm is not compulsory. Similarly, a partnership can be dissolved easily at any time.

2. Larger Financial Resources — It is possible to collect a large amount of capital due to a number of partners. New partners can be admitted to raise further capital whenever necessary. Credit-worthiness is also high because every partner is jointly and severally liable for all the debts of the firm.

3. Combined Abilities and Judgement — The skill and experience of all the partners are pooled together. Combined judgement of several persons helps reduce the chances of errors of judgement and leads to balanced decisions. Partners may be assigned duties according to their talent. Therefore, benefits of specialisation are available.

4. Direct Motivation — Ownership and management of business are vested in the same persons. There is direct relationship between effort and reward. Every partner is motivated to work hard and to ensure the success of the firm.

5. Close Supervision — Every partner is expected to take personal interest in the affairs of the business. Different partners can maintain personal contacts with employees and customers. Fear of unlimited liability makes the partners cautious and avoids reckless dealings.

6. Flexibility of Operations — Partnership business is free from legal restrictions and government control. Partners can make changes in the size of business, capital and managerial structure without any approval.

7. Secrecy — A partnership firm is not required to publish its annual accounts. Audit of accounts is not essential and no reports are to be filed with the government authorities. Therefore, the affairs of a partnership business can easily be kept secret and confidential.

8. Protection of Minority Interest — Management of partnership is democratic. Every partner has a right to be consulted and can express his opinion. All important decisions are taken with the mutual consent of all the partners.

9. Cooperation — Partnership encourages mutual cooperation and trust amongst people. Partners work in common for the benefit of all and do their level best to make the business prosperous.

10. Scope for Expansion — There are greater possibilities for the expansion and growth of business. More partners can be taken in to meet the financial and managerial requirements of growing business.

Demerits of Partnership — A partnership suffers from the following limitations:

1. Limited Resources — There is a limit to the maximum number of partners in a firm. Therefore, it is not possible to collect huge financial resources. Borrowing capacity of partners is also limited.

2. Unlimited Liability — Every partner is fully liable for the debts of partnership business. Fear of risk may restrict initiative and growth of business. Private properties of partners can also be taken up for business liabilities.

3. Uncertain Life — Partnership business suffers from instability. Insolvency, insanity, retirement and death of any partner may cause an abrupt end to the business.

4. Conflicts — Lack of confidence, unity, and inefficiency among partners may lead to delayed decisions. Chances of conflict are high because each partner has an equal right to take part in the management of the firm.

5. Risk of Implied Agency — Every partner is an implied agent of the firm. A dishonest partner may cause a great loss to the firm. All the partners may suffer due to the negligence or dishonesty of one partner.

6. Lack of Public Confidence — A partnership does not enjoy the trust of the public. The reason is that the affairs of a partnership are not given publicity. No reports are published by a partnership concern and it is free from government regulations.

7. Blocking of Capital — A partner wanting to withdraw his capital from the firm cannot do so unless other partners agree to it. He cannot transfer his share to outsiders without the approval of the other partners. He may, therefore, be deprived of a higher return on his capital outside the partnership.

Distinguish between partnership and sole proprietorship.

Answer

An unregistered partnership firm faces challenges in recovering debts from a client who refuses to pay. What are the consequences of non-registration in this case, and how could the issue have been avoided?

Answer

Consequences of Non-Registration in this case:

An unregistered partnership firm suffers from certain legal disabilities which directly affect debt recovery:

1. Cannot sue third parties — The firm cannot enforce its claims against any outsider in a court of law. Hence, it cannot sue the defaulting client for recovery of the debt.

2. Cannot sue its partners — The firm cannot file a suit against any partner to enforce its rights.

3. Partners cannot sue the firm or one another — Partners of an unregistered firm cannot sue the firm or other partners to enforce rights arising from the partnership agreement.

4. Restriction on set-off — The firm cannot claim a set-off exceeding ₹100 in a court case.

How the issue could have been avoided:

This difficulty could have been avoided by getting the partnership firm registered with the Registrar of Firms. For registration, the partners should submit a statement in the prescribed form along with the prescribed fee. The statement must include the firm’s name, principal place of business, other places of business, date of joining of each partner, names and permanent addresses of all partners, and the duration of partnership, if any. It must be signed by all the partners.

After the Registrar is satisfied, he enters the firm’s name in the Register of Firms and issues a certificate of registration.

Once registered, the firm would have had the legal right to file a suit against the client and recover the debt through a court of law. Thus, timely registration would have protected the firm’s legal remedies.

What is partnership deed? State its contents.

Answer

Partnership Deed — A written agreement of partnership is called the Partnership Deed. A partnership can be formed only through an agreement between two or more persons. This agreement may be oral or in writing. A written agreement is preferable because it serves as a record for future and helps to resolve disputes, if any, that may arise among the partners.

The Partnership Deed contains all the terms and conditions on which a partnership has been formed. It is signed by all the partners. Partnership Deed is not a public document. It can be altered at any time with the mutual consent of all the partners. No legal formalities are involved in its alteration.

Contents of Partnership Deed:

A partnership deed usually contains the following details:

(a) Name and address of the firm.

(b) Names and addresses of the partners.

(c) Nature of the firm's business.

(d) Duration of partnership, if any.

(e) Amount of capital invested by each partner.

(f) Profit sharing ratio.

(g) Amount permitted to be drawn by each partner.

(h) Rate of interest, if any, on capital and drawings.

(i) Salary, fee or commission payable to any partner.

(j) Procedure for admission and retirement of a partner.

(k) Procedure for dissolution of the firm and settlement of accounts on dissolution.

(l) Rights and duties of partners.

How is a partnership registered? What are the consequences of non-registration?

Answer

Registration of Partnership Firm:

Registration of partnership firms is not compulsory under the Partnership Act 1932. The Act provides that if the partners so desire they may get the firm registered at the time of formation of partnership or afterwards.

The registration of a firm is a simple process. The procedure is as follows:

1. Submission of Statement — In order to get itself registered, a partnership firm must submit a statement in the prescribed form along with the prescribed fee to the Registrar of Firms.

2. Particulars in the Statement — The statement should contain the following particulars: (a) Name of the firm; (b) The principal place of business; (c) Names of other places where the firm carries on business; (d) The date when each partner joined the firm; (e) Names in full and permanent addresses of the partners; (f) Duration of partnership, if any.

3. Signature — The statement must be signed by all the partners.

4. Entry by Registrar — If the Registrar of Firms is satisfied with the statement, he shall make an entry in the register of firms.

5. Certificate of Registration — The firm becomes registered when such an entry is made and a certificate of registration is issued by the Registrar.

6. Communication of Changes — After registration, the firm must communicate any change in the above-mentioned information to the Registrar.

Consequences of Non-Registration:

An unregistered partnership firm suffers from the following limitations:

(a) It cannot enforce its claims against a third party in a court of law.

(b) It cannot sue any of its partners.

(c) Partners of an unregistered firm cannot sue the firm to enforce their claims.

(d) Partners of an unregistered firm cannot file a suit against each other.

(e) It cannot claim adjustment of a claim exceeding ₹100. Suppose an unregistered firm owes ₹1,200 to A and A has to pay ₹1,000 to the firm. The firm cannot enforce adjustment of ₹1,000 in a court of law.

What is limited partnership? Explain its merits and demerits.

Answer

Limited Liability Partnership (LLP) — Limited partnership is now allowed in India under the Limited Liability Partnership Act, 2008. LLP is a hybrid form of business organisation combining features of both partnership firm and joint stock company.

(a) Merits of LLP:

1. Separate Legal Entity — An LLP is a separate legal entity independent of the partners. It is capable of owning and holding property in its own name.

2. Stability — It is much more stable than a general partnership because it is not dissolved by retirement, insolvency, death, etc. of a partner. It enjoys perpetual existence.

3. Limited Liability — The liability of partners in LLP is limited; they have not to take unlimited risk.

4. Huge Funds — As there is no limit on the number of partners, an LLP can raise huge funds for expansion and growth of business.

(b) Demerits of LLP:

1. Registration Required — It has to be registered under the Act. It has to spend time and money in the documents and formalities of incorporation.

2. Less Secrecy — There is less secrecy of business affairs as it has to fulfil legal requirements.

3. Reduced Credit Standing — Credit standing of an LLP is reduced due to the limited liability of partners.

A partnership firm dealing in handmade products is struggling due to limited funds and lack of access to large markets. The partners are considering converting the firm into an LLP. What advantages would LLP offer in this scenario?

Answer

Converting the partnership firm into a Limited Liability Partnership (LLP) would offer the following advantages:

1. Separate Legal Entity — An LLP has a legal identity separate from its partners. It can own property, enter into contracts, and conduct business in its own name. This would help the handmade products business deal more confidently with large customers, suppliers, and exporters.

2. Limited Liability — The liability of partners is limited to their agreed contribution. Hence, the personal assets of partners are not used to pay business debts, except in case of fraud.

3. More Capital — There is no limit on the maximum number of partners in an LLP. Therefore, the firm can admit more partners to bring in additional capital, skills, and business contacts.

4. Expansion of Markets — With more funds and better organisation, the LLP can expand production, open outlets, participate in exhibitions, and reach larger domestic and export markets.

5. Perpetual Succession — An LLP continues to exist despite the death, retirement, or insolvency of any partner. This gives stability to the business.

6. Better Credibility — Being a registered legal entity, an LLP enjoys greater credibility with banks, financial institutions, suppliers, and customers.

Distinguish between partnership and Joint Hindu Family business.

Answer