CONTRACT LAW II

Partnership under the Partnership Act,1932 & main features of Limited Liability
Partnership Act,2008

[DATE]
JAGRITI JAISWAL
 INTRODUCTION ............................................................................................................................. 4
Partnership Act, 1932..................................................................................................................... 4
DEFINITION.................................................................................................................................... 5
ESSENTIALS OF PARTNERSHIP ........................................................................................................ 5
Agreement between partners: ................................................................................................. 5
Two or more people:. ............................................................................................................... 5
Sharing of profit: ................................................................................................................... 5
Business motive: ....................................................................................................................... 5
Mutual business: ...................................................................................................................... 6
JOINT HINDU FAMILY BUSINESS ......................................................................................................... 6
FEATURES OF A JOINT HINDU FAMILY BUSINESS ............................................................................. 6
Dayabhaga: .............................................................................................................................. 6
Mitakshara: ............................................................................................................................... 6
ADVANTAGES OF JOINT HINDU FAMILY ............................................................................... 7
DISADVANTAGES OF JOINT HINDU FAMILY BUSINESS ...................................................... 7
DIFFERENCE BETWEEN PARTNERSHIP AND JOINT HINDU FAMILY BUSINESS .................. 7
Formation- .................................................................................................................................... 7
Addition of a new partner or member ........................................................................................... 7
Mutual agency - ............................................................................................................................. 7
Liability -........................................................................................................................................ 7
Minor - .......................................................................................................................................... 8
Limit on number of persons - ......................................................................................................... 8
Dissolution .................................................................................................................................... 8
Governing Law............................................................................................................................... 8
KINDS OF PARTNERSHIP .......................................................................................................... 8
GENERAL PARTNERSHIP ...................................................................................................... 8
LIMITED PARTNERSHIP ........................................................................................................ 8
LIMITED LIABILITY PARTNERSHIP .................................................................................... 8
PARTNERSHIP AT WILL ......................................................................................................... 9
KINDS OF PARTNERS ................................................................................................................ 9
ACTIVE PARTNER/MANAGING PARTNER .......................................................................... 9
DORMANT/SLEEPING PARTNER ........................................................................................ 10
NOMINAL PARTNER ............................................................................................................ 10
PARTNER BY ESTOPPEL...................................................................................................... 10
PARTNER IN PROFITS ONLY ............................................................................................... 10
SUB- PARTNER ..................................................................................................................... 10
 MINOR PARTNER ................................................................................................................. 11
OUTGOING PARTNER .......................................................................................................... 11
MINOR’S POSITION IN A PARTNERSHIP FIRM ............................................................................... 11
MINOR ADMITTED TO BENEFITS OF PARTNERSHIP ...................................................... 11
RIGHTS OF MINOR............................................................................................................... 12
LIABILITIES OF MINOR....................................................................................................... 13
Liability during minority[ Section 30(3)].................................................................................. 13
Liability after attaining the age of majority............................................................................... 13
CONCLUSION ............................................................................................................................... 13
REGISTRATION OF FIRM ............................................................................................................ 14
Introduction ................................................................................................................................. 14
Meaning ...................................................................................................................................... 15
When is partnership registered ..................................................................................................... 15
Proof of registration ..................................................................................................................... 15
Fundamental Problems Faced by not Registering a Firm .............................................................. 16
The Process of Registration under Indian Partnership Act, 1932 ................................................... 16
Step 1: Selection of Name ........................................................................................................ 16
Step 2: Draft the Partnership Deed ........................................................................................... 17
Step 3: Notarize and Execute the Deed ..................................................................................... 18
Step 4: Application of PAN ...................................................................................................... 19
Step 5: Registration of the Partnership Deed ............................................................................ 19
Step 6: Receiving Certificate.................................................................................................... 20
Other Registrations .................................................................................................................. 20
Shop and Establishment Registration ....................................................................................... 20
Trade License .......................................................................................................................... 20
Professional Tax Registration ................................................................................................... 21
GST Registration ..................................................................................................................... 21
FSSAI Registration .................................................................................................................. 22
Drug License ........................................................................................................................... 22
Private Security Agency License .............................................................................................. 23
Import Export Code ................................................................................................................. 23
Furnishing false Particulars ...................................................................................................... 23
Rectification of Mistakes ......................................................................................................... 23
Subsequent alterations after the Registrations ........................................................................... 24
Business name of the Firm ........................................................................................................... 25
Advantages of Registration .......................................................................................................... 25
 Benefits to the Firm ................................................................................................................. 25
Benefits to Creditors ................................................................................................................ 25
Benefits to Partners .................................................................................................................. 26
Benefits to Incoming Partners .................................................................................................. 26
Benefits of Outward-bound Partners ........................................................................................ 26
Challenges Faced by Evey Business Partnership .......................................................................... 27
Problems with Partnerships ...................................................................................................... 27
Liability ................................................................................................................................... 27
Raising Capital ........................................................................................................................ 27
Protecting your stake in a Partnership ...................................................................................... 27
Public faith .............................................................................................................................. 27
Conclusion .................................................................................................................................. 28
DISSOLUTION OF FIRM .............................................................................................................. 28
Dissolution without the Intervention of the court (Section 40-43) ................................................. 28
Section- 40: - Dissolution by Agreement .................................................................................. 28
Section- 41: - Compulsory Dissolution ..................................................................................... 28
Section-42: - Dissolution on the happening of certain contingencies ......................................... 29
Section- 43: - Dissolution by notice of partnership at will ......................................................... 29
Dissolution by the court (Section 44) ........................................................................................... 29
Liability of Partners after Dissolution (Section 45) ....................................................................... 30
Rights of Partners to have business wound up after Dissolution (Section 46) ................................ 30
Continuing authority of Partners for purpose of winding up (Section 47) ...................................... 30
Mode of settlement of accounts between Partners (Section 48) ..................................................... 31
Payment of firm debts and of separate debts (Section 49) ............................................................. 31
Personal profits earned after dissolution (Section 50) ................................................................... 31
Return of premium of premature dissolution (Section 51) ............................................................ 31
Conclusion .................................................................................................................................. 32
Limited Liability Partnership Act 2008 ............................................................................................ 32
Introduction ................................................................................................................................. 32
Meaning of a Limited Liability Partnership .................................................................................. 32
The Legal Framework of a Limited Liability Partnership ............................................................. 32
Extent of liability of a Limited Liability Partnership and its partners ............................................ 34
Features of a Limited Liability Partnership .................................................................................. 34
A Hybrid form of organisation ................................................................................................. 34
Limited Liability Partnership is a Body Corporate .................................................................... 34
Perpetual Succession................................................................................................................ 35
 The Separate Legal Entity of an LLP ....................................................................................... 35
LLP an Artificial Legal Person ................................................................................................. 35
Number of Partners in a LLP ................................................................................................... 35
Common Seal .......................................................................................................................... 35
An Investigation by a Competent Authority .............................................................................. 36
Profit Motive ........................................................................................................................... 36
LLP Agreement........................................................................................................................ 36
Conversion into LLP ................................................................................................................ 36
Compromise or Arrangement ................................................................................................... 37
Absence of Mutual Agency ...................................................................................................... 37
Case Laws ................................................................................................................................... 37
Mohammad Ibrahim v. Mr Nikhilesh Mittal (2016) ................................................................... 37
Jayamma Xavier v. Registrar of Firm (2021) ............................................................................ 37
SRL Advisor LLP v. Delhi II (2021) .......................................................................................... 38
M/S Diamond Nation v. Deputy State Tax Commissioner (2019) ............................................... 38
Advantages of LLP ...................................................................................................................... 38
Disadvantages of LLP.................................................................................................................. 39
Conclusion .................................................................................................................................. 39
INTRODUCTION
Partnership is a form of business organization in which two or more persons come together to carry
out business. A partnership can be thought of as the development of a sole proprietorship in which a
single individual carries on his business with his personal resources, skills and efforts.
The major disadvantage of being a sole proprietor is that since just one person is involved within the
business, it’s difficult for him to rearrange huge resources and investments in the business. On the
other hand, in a partnership, several individuals are involved and they can pool their resources
together to build and manage a larger business. Further, if there is a loss in business, it can be divided
among the parties/partners of the partnership firm.
When two or more people agrees to share losses and profits in partnership firm is partnership. In
partnership, all the parties not have equal in profits and losses. There are different types of partnership
according to the extent of their liability and their participation in the firm.

Partnership Act, 1932

Once upon a time the level of trade and commerce int the society was different, the needs of man were
different. Only one person wants to produce something and also sell it. Trade commerce was not so
developed. With the passage of time, the development of trade commerce went on, the needs of man
kept on increasing, the nature of business also changed. First of all, sole trade has been the prevalent
business in the forms of business, but sometimes partnership business also started coming into
existence. Considering the responsibilities of business according to the needs of the society,
partnership business started developing.
When the practice of partnership business started increasing in the society, there was also a need for
related laws and regulations because it is the duty of a state to control any business. The State of India
also compiled legislation related to partnership and the Indian Partnership Act 1932 was enacted.
The Indian Partnership Act 1932 enacts all the provisions concerning partnership. This act is useful
act to control partnership business. Even today, India's economy is being run by partnership industries
because it is not so easy to operate a company. In the Indian economy, either solo business is being
done or partnership business is being done. Most of the industries are operating on a single or
partnership basis. In order to operate such industries, the major responsibility for conducting these
trades also falls on the state. On this basis the Indian Partnership Act 1932 becomes important which
enacts the conduct of business and the agreements between the partners to settle disputes between
them.
The Act compiles the laws relating to partnership and provides certainty to the trade and commerce of
the partnership. Any business which is being carried on by more than 1 person under a particular
contract, this type of business is called partnership business.

DEFINITION
Section 4 of the Indian Partnership Act defines a partnership as “Partnership is the relation between
persons who have agreed to share the profits of a business carried on by all or any one of them
acting for all”.
Partnership is an association between two or more individuals or parties who have accepted to share
the profits generated from the business under the supervision of all the members or behalf of other
members.

ESSENTIALS OF PARTNERSHIP
Agreement between partners: It is an association of two or more individuals, and a partnership
arises from an agreement or a contract. The agreement (accord) becomes the basis of the association
between the partners. Such an agreement is in the written form. An oral agreement is even handedly
legitimate. In order to avoid controversies, it is always good, if the partners have a copy of the written
agreement.

Two or more people: In order to manifest a partnership, there should be at least two (2) persons
possessing a common goal. To put it in other words, the minimal number of partners in an enterprise
can be two (2). However, there is a constraint on their maximum number of people.

Sharing of profit: Another significant component of the partnership is, the accord between partners
has to share gains and losses of a trading concern. However, the definition held in the Partnership Act
elucidates – partnership as an association between people who have consented to share the gains of a
business, the sharing of loss is implicit. Hence, sharing of gains and losses is vital.

Business motive: It is important for a firm to carry some kind of business and should have a profit
gaining motive.
Mutual business: The partners are the owners as well as the agent of their firm. Any act performed
by one partner can affect other partners and the firm. It can be concluded that this point acts as a test
of partnership for all the partners.

Unlimited liability: Every partner in a partnership has unlimited liability.

JOINT HINDU FAMILY BUSINESS

The joint Hindu family, or Hindu undivided family, or simply HUF, is an extended family prevalent
throughout India. A joint Hindu family business is composed of many generations that live in the same
household and are bound by a common relationship, that is to say, it is composed of all the persons who
are direct descendants of one common ancestor. Under section 2(31) of the income-tax Act, 1961, the
Hindu undivided family is treated as a person. Also, for the purpose of assessment under the act it is,
HUF, is regarded as a separate entity.

Technically, at the time of the Hindu Marriage, the Hindu Undivided Family takes place by itself, but
for the purpose of tax, it is still not a separate entity, because it can only become a separate entity for
the tax purpose when a child is born. Actually, according to the law, there have to be at least two persons
dependent on the Karta, that is to say, the manager, and hence when a child is born, the father or the
mother can become a Karta, with two companions. Once the Joint Hindu Family is formed, it gets its
own permanent account number (PAN).

As said, there is always a Karta in the Hindu undivided family, which can technically be anyone, but
mostly the eldest members of the family become Karta. And in such a manner Hindu undivided family
remains a person in the eyes of the law, from generation to generation.

A Joint Hindu Family Business is an entity, rooted in permanence since its business operations are
hardly affected by the death or passing of any of its members. Lunacy or bankruptcy suffered by any
member does not have an impact on the activities of such a business. Despite this, there are some
limitations of a joint Hindu family business as well as some advantages, that will be discussed below.

All business dealings within a joint family business in India are regulated by the Hindu Law, and not
the Partnership Act, which controls other business models. The business is usually overseen by the
eldest member of the family or the head, called the Karta. All other members have equal rights over
their ancestral properties and are called co-parceners.

FEATURES OF A JOINT HINDU FAMILY BUSINESS

The business ventures of such a family model are strictly controlled by the Hindu Law, which is made
up of two components, the Daya Bhaga and the Mitakshara.

Dayabhaga: The Dayabhaga system is widely followed in West Bengal and Assam, wherein, both
male and female members of the family are allowed to be co-parceners. Also, a son can claim right to
ancestral property, only after the death of his father.

Mitakshara : The Mitakshara model is heeded to by all states in India, excluding West Bengal. It
allows proprietorship to only male members of a joint family business meaning that only men in the
family are allowed to be co-parceners.
In both the models, the Karta exercises ultimate control over business activities, and his decision is
final.

ADVANTAGES OF JOINT HINDU FAMILY

There are many advantages of Hindu Undivided Family, which are as under:

In the Hindu undivided family, the Karta is in a possession of absolute power, and hence if any sort of
disagreements occurs, chances of which are obviously very high given the number of members, then in
such cases the Karta can easily resolve the problem.

 The Hindu undivided family gets the benefit in the tax as well.

 As the joint Hindu family is formed by the members of the same family, the level of loyalty,
co-operation, and mutual understanding is always high.

 As the Joint Hindu family is a person in the eyes of Law, like any other company, it can never
cease to exist.

 Since the Karta holds the absolute power in the Hindu undivided family, it is easy to maintain
the balance between power and liability.

DISADVANTAGES OF JOINT HINDU FAMILY BUSINESS

 The model of an HUF does not allow external members or additional participants, other than
the family members, thus leaving no space for additional capital or investments from the
market.

 The expansion of such a business is limited, as all decisions are internal and solely family-
centric.

 The Karta may not always be the most qualified person to lead the family business. In such
cases, the decisions made by him and his business acumen may be questionable.

DIFFERENCE BETWEEN PARTNERSHIP AND JOINT HINDU

FAMILY BUSINESS
Formation-The basis of Partnership firm is a contract between persons whereas a Hindu undivided
family is created by status i.e., a person becomes its member by virtue of his being born in the
particular family.

Addition of a new partner or member - When a new partner has to be introduced into a
partnership firm, consent of all the partners is needed for the same whereas no such consent is needed
for the addition of a member into the joint Hindu family. A person becomes the member of the family
on being born in that family.

Mutual agency - There is mutual agency between the partners of a particular firm, and the act done
by any of the partners binds the firm whereas there is no such mutual agency between the members of
a joint Hindu family. The Karta of the joint Hindu family has all the powers to act on the behalf of the
family and he is the only person who can represent the family.

Liability - The liability of a partner is not only joint liability or limited to his share in the partnership
business, the liability is several liability also. Such liability is unlimited and even a partner’s personal
property can be attached for the partnership debts. On the other hand, the liability of the coparceners,
on the other hand, is limited only to the extent of their shares in the family business.
Minor - A minor cannot become a partner in a firm, he can be admitted only for the benefits whereas
a person becomes a coparcener right from his birth.

Limit on number of persons - There is a limit on the number of partners in a firm, i.e., 10 in
banking business and 20 in any other business whereas there is no limit on the number of coparceners
in joint Hindu family.

Dissolution - In the absence of any agreement to the contrary, partnership is dissolved on the death
of any partner whereas joint Hindu family continues to operate even after the death of a coparcener.

Governing Law - A partnership is governed by the provisions of the Indian Partnership Act, 1932
whereas a joint Hindu family business is governed by Hindu law.

KINDS OF PARTNERSHIP
A partnership is divided into different types depending on the state and where the business operates.
Here are some general aspects of the three most common types of partnerships.

GENERAL PARTNERSHIP
A general partnership comprises two or more owners to run a business. In this partnership, each
partner represents the firm with equal right. All partners can participate in management activities,
decision making, and have the right to control the business. Similarly, profits, debts, and liabilities are
equally shared and divided equally.

In other words, the general partnership definition can be stated as those partnerships where rights and
responsibilities are shared equally in terms of management and decision making. Each partner should
take full responsibility for the debts and liability incurred by the other partner. If one partner is sued,
all the other partners are considered accountable. The creditor or court will hold the partner’s personal
assets. Therefore, most of the partners do not opt for this partnership.

LIMITED PARTNERSHIP
In this partnership, includes both the general and limited partners. The general partner has unlimited
liability, manages the business and the other limited partners. Limited partners have limited control
over the business (limited to his investment). They are not associated with the everyday operations of
the firm.

In most of the cases, the limited partners only invest and take a profit share. They do not have any
interest in participating in management or decision making. This non-involvement means they do not
have the right to compensate the partnership losses from their income tax return.

LIMITED LIABILITY PARTNERSHIP

In Limited Liability Partnership (LLP), all the partners have limited liability. Each partner is guarded
against other partners legal and financial mistakes. A limited liability partnership is almost similar to a
Limited Liability Company (LLC) but different from a limited partnership or a general partnership.
PARTNERSHIP AT WILL
Partnership at Will can be defined as when there is no clause mentioned about the expiration of a
partnership firm. Under section 7 of the Indian Partnership Act 1932, the two conditions that have to
be fulfilled by a firm to become a Partnership at Will are:

 The partnership agreement should have not any fixed expiration date.
 No particular determination of the partnership should be mentioned.
Therefore, if the duration and determination are mentioned in the agreement, then it is not a
partnership at will. Also, initially, if the firm had a fixed expiration date, but the operation of the firm
continues beyond the mentioned date that it will be considered as a partnership at will.

KINDS OF PARTNERS
Here we will look at six types of partners we come across on a regular basis. This list is not
exhaustive, the Partnership Act does not restrict any unique kind of partnership that the partners want
to define for themselves. Let us take a look at some of the important types of partners.

ACTIVE PARTNER/MANAGING PARTNER

An active partner is also known as Ostensible Partner. As the name suggests he takes active
participation in the firm and the running of the business. He carries on the daily business on behalf of
all the partners. This means he acts as an agent of all the other partners on a day to day basis and with
regards to all ordinary business of the firm.

Hence when an active partner wishes to retire from the firm he must give a public notice about the
same. This will absolve him of the acts done by other partners after his retirement. Unless he gives a
public notice he will be liable for all acts even after his retirement.

There are firms that are built around having active partners fill management roles, which can require
the corporate structure to factor in how this will affect the advancement of subordinate employees. If
the upper management is entirely composed of active partners, it may preclude the possibility of staff
members rising to higher positions.

An active partner is comparable to a member of a board of directors who also serves in a day-to-day
position at a company. This can create complexities in the management and decision making of the
operation. If that partner takes on an active role in the company, the choices the founder makes
might be questioned by the partner even if their position within the company is subordinate to the
founder’s position in the hierarchy. A founder, for instance, may seek a partner to help finance the
launch or growth of their business.

Furthermore, if the active partner does not properly fulfil the duties they have taken on within the
company, punitive action to address their behaviour may require additional steps. For instance, if an
active partner fails to complete projects on time or otherwise is derelict, terminating their
employment might not be possible without also buying out their stake in the company.

In addition, the profits and losses normally are shared equitably, but partners also can specify while
completing the partnership-forming paperwork to only share in part of the profits and losses.
DORMANT/SLEEPING PARTNER
This is a partner that does not participate in the daily functioning of the partnership firm, i.e. he does
not take an active part in the daily activities of the firm. He is however bound by the action of all the
other partners.

He will continue to share the profits and losses of the firm and even bring in his share of capital like
any other partner. If such a dormant partner retires, he need not give a public notice of the same.

NOMINAL PARTNER
This is a partner that does not have any real or significant interest in the partnership. So, in essence, he
is only lending his name to the partnership. He will not make any capital contributions to the firm, and
so he will not have a share in the profits either. But the nominal partner will be liable to outsiders and
third parties for acts done by any other partners.

PARTNER BY ESTOPPEL
If a person holds out to another that he is a partner of the firm, either by his words, actions or conduct
then such a partner cannot deny that he is not a partner. This basically means that even though such a
person is not a partner he has represented himself as such, and so he becomes partner by estoppel or
partner by holding out. Doctrine of estoppel is one of the most common and famous doctrine which if
put in a simple phrase says that – “the person can’t deny from his statement”.

A partner by estoppel is a partner who displays by his words, actions or conduct that he is the partner
of the firm. In a very similar manner as it was in Agency by Ostensible Agent, which can sound vague
and fraudulent as he/she is not a partner in the firm, but is displaying so. To be a partner there has to
be an agreement, this is an example of an Implied Agreement and hence, the person claiming to or
fraudulently trying to become the partner is now liable to share the losses incurred.

If any suit is filed against the firm, he will be equally liable. As it works on the principle of – “All
partners are Jointly and Severally liable”.

Holding-out refers to “show-off” or “presenting a show”. Now to establish this, it shall be proved that
the representation made by the person was Spoken, written or through Conduct it was implied and that
the person was fully aware about this representation and its consequences.

In the case of Lake v. Dupe of Argill (1944), it was held that a Retiring partner can become the
partner by holding out.

PARTNER IN PROFITS ONLY

This partner will only share the profits of the firm, he will not be liable for any liabilities. Even when
dealing with third parties he will be liable for all acts of profit only, he will share none of the liabilities.

SUB- PARTNER
A sub-partner is a partner who associates someone else in his share of the firm. He gives a part of his
share to the person. It is important to note that, the relationship is not between the sub-partner and the
partnership firm but is between the partner who has hired him and the sub-partner. Therefore, a sub-
partner is a non-entity of the firm and he does not hold any liability towards the firm.

A sub-partner usually agrees to share profits which are derived from the third party. Such a partner
cannot represent himself as a partner in the original firm. Furthermore, he doesn’t reserve any right in
the original firm nor he is liable for acts done by partners of the firm. He can only claim his agreed
share of profits from the partner who has contracted him to be a sub-partner.
MINOR PARTNER
A minor cannot be a partner of a firm according to the Contract Act. However, a partner can be
admitted to the benefits of a partnership if all partner gives their consent for the same. He will share
profits of the firm but his liability for the losses will be limited to his share in the firm.

Such a minor partner on attaining majority (becoming 18 years of age) has six months to decide if he
wishes to become a partner of the firm. He must then declare his decision via a public notice. So,
whether he continues as a partner or decides to retire, in both cases he will have to issue a public
notice.

OUTGOING PARTNER
Retirement has always been an option for a firm to work on continuously for long periods without
being dissolved. As it is, the outgoing partner is a partner who voluntarily takes retirement from the
firm without dissolving it. Since he leaves the existing firm, therefore he is called an outgoing or
retiring partner.

Though, he is liable for all his debts and obligations incurred before his retirement.

Similarly, an Incoming partner is the one who voluntarily or by business means enters in a firm to
share the liabilities and debts of a firm.

MINOR’S POSITION IN A PARTNERSHIP FIRM

According to Section 3 of the Indian Majority Act, a person who has not attained the age of majority
i.e. 18 years, is known as minor.

Section 4 of the Indian Partnership Act, 1932, defines partnership and partner as follows:

‘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. Persons who have entered into a partnership with one another
are called individually “partners” and collectively a “firm”, and the name under which their business is
carried on is called the “firm name”.

In simple words, a partnership is an agreement between the persons to share the profits of a business
and the persons who enter into this agreement are called partners.

As we have seen in the Indian Contract Act, 1872, minors cannot be a party to an agreement. An
agreement involving a minor is void-ab-initio. However, the Indian Partnership Act has its own sets of
legal rules regarding minors.

MINOR ADMITTED TO BENEFITS OF PARTNERSHIP

A partnership firm cannot be formed with a minor as the only other member. The relation of partnership
arises from a contract. In Shriram sardarmal didwani v. Gourishankar, it was held that a minor is
incompetent to contract and, therefore, a contract of partnership cannot be entered into with a minor.
In CIT v. Dwarkadas & Co, the Supreme Court held that a minor cannot become a full-fledged partner
in an existing firm. The only concession that section 30 gives is that a minor may be admitted to the
benefits of an existing firm. The Hon’ble judge then continued to observe:

“Section 30 of the Indian Partnership Act, clearly lays down that a minor cannot become a partner,
though, with the consent of the adult partners, he may be admitted to the benefits of partnership. Any
document which goes beyond this section cannot be regarded as valid for the purpose of registration.”

In S.C. Mandal v. Krishnadhan it was held that under S. 4 of the Partnership Act, a firm means a group
of people who have entered into a contract of partnership among themselves and reading it with S. 11 of
the Contract Act, it can be interpreted that a minor cannot be a part of the contracted partnership. A
minor can only be admitted to the benefits of a partnership, and that partnership has to exist
independently. Also, there cannot be a contract between two minors. In short, there should be a
partnership between two major partners before a minor can be admitted to its benefits.

RIGHTS OF MINOR

 A minor admitted to the benefits of a partnership has all the rights of a full partner.
 Such minor is entitled to his agreed shares of the property and of the profits of the firm.
 Such minor has the right to access and taking copies of the book of accounts of the firm. It
follows that he has no right of access to those other books of the firm which do not contain
matters of account.[Section 30(2)]
 Such minor is not personally liable to the third parties for the debts of the firm, but his
liability is limited only up to his shares in the partnership assets and profits.
For example, if the partnership assets fall short in distinguishing the debts of the firm the separate
personal property of the minor cannot be applied for the payment of the debts.

 Such minor cannot bring any suit against the partners for an account or payment of his share
of the property or profits of the firm unless he first serves his connection with the
firm.[Section 30(4)]
 Such minor is not entitled to take part in the conducting of the business as he has no
representative capacity to bind the firm.
 Where the minor becomes a partner by his own choice or by failure to give within the
specified time i.e. six months after attaining the age of majority, he becomes personally
liable to the third parties for all the debts of the firm retrospectively from the date of his
admission to the benefits of partnership.
Rights of the minor if he elects not to become a partner:

1. His rights and liabilities shall continue to be those of a minor up to the date of giving public
notice;
2. His share shall not be liable for any acts of the firm done after the date of the notice;
3. He shall be entitled to sue the partners for his share of the property and profits.

 If after attaining the age of majority but before choosing to become a partner the minor
represents and knowingly permits himself to be represented as a partner in the firm, he will
be personally liable to anyone who on the faith of such representation granted credit to the
firm on the ground of ‘holding out’.
LIABILITIES OF MINOR
Liability during minority [ Section 30(3)]
Sub-section 3 of section 30 says that “such minor’s share is liable for the acts of the firm, but the minor
is not personally liable for any such act.”

In Addepally Nageswara Rao and Bros v. CIT, the Andhra Pradesh High Court held that:

“In case he contributes capital or is entitled to get benefit in the profits of the firm, it is to that extent
that the liability can be fastened on the minor. But in no case, the person of the minor or his other
property which he has not brought into the assets of the partnership can be held liable. That is the purport
and scope of Section 30(3) of the Indian Partnership Act.”

Liability after attaining the age of majority

Sub-section (5) to (9) of section 30 of the Indian Partnership Act deal with consequences of a minor
partner attaining majority as follows

 He is given six months’ time to decide whether he should leave the firm or continue in it by
becoming a full-fledged partner. This is called the minor’s choice, namely the right to opt
out of the firm or stay in it. [Section 30(5)]
 Where the minor claims that he had no knowledge of his admission and, therefore, he should
be allowed six months from the date of knowledge, the burden of proof lies on minor that
he had no knowledge.[Section 30(6)]
When minor becomes a partner

1. He will be treated as a normal partner, but he also becomes personally liable for all the
acts of the firm done since he was first admitted to the benefits of partnership.[Section
30(7)(a)]
2. His share in the property and profits of the firm shall remain the same as it was during his
minority.[Section 30(7)(b)]
Where the minor elect not to become a partner

1. His rights and liability will continue to be the same up to the time on which he gives
public notice.[Section 30(8)(a)]
2. From the date of public notice, the liability of his share ceases for any future acts of the
firm.[Section 30(8)(b)]
3. He becomes entitled to sue the partners of the firm to recover his share of property and
profits.[Section 30(8)(c)]

 Where in spite of notice, the minor does an act which amounts to a representation that he is
a partner in the firm, Section 28 i.e. holding out of this act immediately come into existence
and liability would arise towards any person who gave credit to the firm putting his faith
upon the representation.[Section 30(9)]

CONCLUSION
From the above discussion, we can say that a partnership firm cannot be formed with a minor as the
only other member. The relation of partnership arises from a contract. According to section 11, a
minor is not competent to contract. In Dwarkadas khetan case Hon’ble Supreme Court held that a
minor cannot even become a full-time partner in the existing firm. In CIT v. Shah Mohandas
Sadhuram, it was held that a minor may be admitted to the benefits of an existing firm.

REGISTRATION OF FIRM
Introduction
Many young students and graduates dream of owning a firm, but what stops them from pursuing this
lucrative and highly responsible career path? Is it the lack of clarity over the bigger picture as to how a
law firm comes into existence. This is too minuscule, a hurdle to stop you from pursuing your dream.

This article shall give you the clarity to start your firm and registered under the Indian Partnership Act.
Join me as I take you through the process of registering your law firm under the Partnership Act.
Without any further delay let’s cut to the chase.

The fundamental premise of understanding of the statutory provisions associated with the area of
partnership is principally derived from the understanding of the Indian Partnership Act 1932. This
was one of the earlier precedents set in the Indian statutory history which fundamentally evaluates and
analyses the critical junctures associated with the process of partnership in India. However, this is
essentially a relic of our colonial past which is undoubtedly a no forged one. The fundamental notion
of partnership as an act of mutual trust is essentially not codified.

However, the principal notion associated with the development of such is act is critically evaluated as
major milestone in the statutory history of Indian jurisprudence which undoubtedly requires major
changes in its modus operandi. Although many judicial precedents have been in resolute, however none
of them have critically made a justification. The fundamental notion of this understanding is based on
the fact that partnership as an act is invariably based on the fact that partnership as an act requires a
factor of mutual trust and dignity in an amicable manner which is needed in an amicable manner and
can’t be forfeited. However, a codification of such a document requires an invariable amount of
flexibility as it necessitates a laudable amount of combination of statutory compliance and values.
However, the law of the land necessarily needs a value phase but in a case of fact value conjectures the
fact and the matter of compliance always presides over the value. However, in a rapidly changing
business environment where the impersonal business entity such as a company are in prominence, the
concept of partnership as a business needs much modification to gain legitimacy and value in changing
business environment.

Having said that, among the number of pros and cons, the legitimacy of the partnership as a business
entity needs particular speculation and analysis of the business environment as a new form of business
known as the “Limited Liability Partnership” has evolved into a mainstream business establishment
model where the concerned business developers can opt for a relative term of risk and liability which
was fundamentally missing in the partnership agreement and was a much needed change, which is
particularly appreciated by the business communities across the world for the amount of flexibility it
provides for the new business commodities such as startups and other ventures. However. an exclusive
understanding of the registration of the firms under the Indian Partnership Act, 1932.

Meaning
Persons who have entered into a partnership with one another are called individually ‘Partners’ and
collectively ‘A firm’ and the name under which their business is carried on is called the firm name.
Partnership firms in India are administered by the Section 4 of the Indian Partnership Act, 1932.
While it is not necessary to enter one’s partnership firm as there are no fines for non-registration, it is
appropriate since the certain rights are denied to an unregistered firm.

When is partnership registered

The registration of a partnership is at the sole discretion of the partners. The Partnership Act does not
demand registration as a mandatory process that has to be adhered to.

However, it is always advisable to register the firm under the act since it gives the firm other advantages
that send an implied message of the act favouring registered firms than the unregistered. Only registered
firms are considered legally existing.

The firm can be registered at any time before the existence or during the continuance of the partnership.
However, if a firm wishes to enforce a legal right arising out of any legal document by filing a case, the
firm shall do so only after the registration of the partnership deed is done.

Another instance where registration of the firm becomes compulsory is when the firm wishes to adopt
a new form of organization such as LLP or company more easily.

The firm is registered when the registrar of firms is satisfied with the compliance of section 58 of the
partnership act. This compliance with section 58 shall be discussed in detail in the furtherance of the
article.

It is important to note that registration at the income tax department is still mandatory for both registered
and unregistered firms by the registrar.

Proof of registration
According to Rule 9 under Indian Partnership Act, a documented proof of registration or incorporation
for that matter is a registration certificate signed by Registrar.
A certified copy of any entry relating to the firm in the Register of firms shall act as conclusive proof
of the registration of the firm.

Any statement, notice of intimation recorded or noted in the registrar of firms shall be conclusive proof
of any fact stated therein.

Fundamental Problems Faced by not Registering a Firm

The following can be understood as the principal disadvantages faced by a partner if he/she does not
register the firm under Indian Partnership Act, 1932:

(1) A partner is not entitled to file a suit in any court of law against the other partners or the firm for the
execution of any right emerging from any undertaking or right bestowed by the Partnership Act.

(2) A right evolving from an undertaking cannot be implemented in any Court of law by or in support
of one’s firm against any other firm.

(3) Moreover, the firm or any of its associates cannot assert a set off (i.e. fundamental negotiation of
debts possessed by the argufied parties to one another) or other actions in a disagreement with a third
party.

The Process of Registration under Indian Partnership Act, 1932

The primary initiative regarding the process of registration or incorporation of partnership firm is to
forward an application filling Form No. 1. As per the provision of section 58 it should include
following details:

1. The name of the firm.

2. The full names and permanent resident address of the partners.
3. The timespan of the firm.
4. Business the date when each partner effuses to the firm.
5. The principal place of business transaction of the firm.
6. The names of any other places where the firm carries its functional obligations.
Step 1: Selection of Name
Choose a name that is very different, unique and easy to remember that will represent the business. As
discussed earlier in this article the business name of the firm has to satisfy those conditions to be eligible
to qualify as a proper business name. It is highly recommended to check for existing trademark
applications to avoid overlapping.

The guides for a proper business name are restated again for your convenience.

 The name of the partnership firm shall not be identical or similar to existing firms in the
same business.
 The name of the partnership firm may include names of the members included in the register
of members.
  The name of the partnership firm shall be of consonance with the provisions of The Names
and Emblems (Prevention of Improper Use) Act, 1950.
 The name of the partnership firm may end with suffixes such as “and Company”, “and Co.”
or “and Associates”.
 The firms are restricted from using words that suggest support or patronisation of the firm.
 The name of the partnership firm may use “And”/” &” to differentiate principal name/centre
name/surname of the accomplice of the business.
 It is mandatory to use “and”/” &” either in the middle of the full first names and full centre
names, full surnames of the partners or before the last full first name or full centre name or
full surname of the accomplices.
Step 2: Draft the Partnership Deed
The next important part of the registration process is preparing the partnership deed. The partnership
deed is a mother document of the partnership. Hence there is a need for foolproof drafting.

Components of a basic Partnership deed is as follows.

1. Firm’s name.
2. Name, address and details of the partners.
3. Date of commencement.
4. The ratio of apportionment of profits and losses.
5. Interest on capital.
6. The proportion of capital contribution by the partners.
7. Salary payable.
8. Settlement of outstandings with executors of dead.
9. Method to compute the goodwill.
10. The procedure of admission of partner and retirement of a partner.
In case if there is no partnership deed then the following rules will apply irrespective of the approval or
disapproval by partners.

1. Equally distributed profit and loss.

2. No salary shall be provided to any partner.
3. There shall be no interest on capital paid.
4. No interest shall be attracted when a drawing is made.
5. On mutual agreement, the firm shall pay interest of 6% p/a to the partner who has an
advanced loan.
However, there are several other important clauses to make the partnership deed watertight and also to
avoid litigation in the future.

 Capital Contribution clause is a covenant in the Partnership deed as to the capital

contribution by the partners. It is not compulsory for all the partners to contribute initially;
it is just a mutual agreement.
The contribution need not be limited to only cash but also assets. Such contributions shall be measured
so as to record the proportion of contribution.

 Duty and Responsibility clause is very essential because partners come together to form a
partnership. Each partner might have a different set of goals and aspirations to achieve, to
any deviations in this regard the clause has to be elaborate enough to outline the duties and
responsibility of every partner in every aspect.
 Profit-sharing clause outlays the proportion in which the profit shall be shared. The sole
avoid objective of any firm is profit sharing. Likewise, the loss is also apportioned in the
same ratio.
The ratio shall be decided by the partners themselves. The customary practice being that the
apportionment ratio is based on the capital contribution done by the partners.

 Dispute Resolution is always essential as disputes do always arise no matter how much
ever the partners try to avoid it. But the resolution method has to be decided early on in the
deed.
For petty matters, it shall be small voting, for a much bigger problem it shall be arbitration or
approaching courts. It is always appreciated to go to arbitration first and the same shall be drafted in the
deed.

 Result of violation is a clause which entails the consequence of the breach of the deed or
any violation thereof. As a customary practice on the occurrence of any such incident, the
partners will surrender their stake to someone the firm decides and not sue the firm for the
same.
 Leaver clause helps the firm to retain the partners in a long-term relationship with the firm.
This clause gives the authority to hold back a part of capital by the firm, irrespective of the
reason for which the partner has left.
 Non- Compete clause demands the partners not to get involved in a similar type of business
or to disclose any trade secrets or strategies to its competitors or for the purpose of personnel
profit. It protects the proprietary interest of the firm partners.
 Admission of a new partner should be a dedicated clause. As it might harm the interest of
the existing partners, a proper procedure as to how a new partner is admitted has to be
written down to avoid future disputes. Introduction of a new partner means a share in the
pie that is available to the existing partner. There are high chances of problems being created
by this process, it is better to have this clause.
Step 3: Notarize and Execute the Deed
Once the deed is ready it shall be reviewed by the partners and if necessary, by experts to avoid any
technical error. The final Deed shall be printed on a non-judicial stamp paper with a value of 100/- or
more depending upon the value of properties that are present in the deed. The parties are thus requested
to verify the state stamp duty act of the respective state in which it is registered.

The process of E-Stamping shall be done to avoid the pain of stamping physically. Stock Holding
Corporation of India Limited is the new recording agent of E-Stamping process in India.

Another way of executing the deed is by franking. It is a process which renders the document stamped
and carry the same effect of the stamping. Before parties sign the deed, it shall be taken to the nearest
bank and requisite amount shall be paid. The bank shall stamp the deed stating that the stamp duty has
been paid.
All the partners or their authorised agents have to sign the deed in the presence of the other partners and
the witness. It is a customary practice that every partner retains a copy of the original signed deed for
their reference. Then the signature of the witness is obtained.

The partnership act does not require the deed to be notarized but it is advisable to notarize the deed
because it adds more credibility to the deed. Litigations questioning the genuineness of the deed shall
be avoided just by notarizing it. It is a mere customary practice of this industry.

Step 4: Application of PAN

The partnership firm is not a separate entity as a Joint Stock Company which is separate from that of
the owners or shareholders. However, still, the partnership firm has to acquire a separate PAN for the
purpose of compliance with the statute.

Acquiring of PAN can be done before or after the registration of the firm. However, in certain states, it
is mandatory to acquire PAN before the registration process is done. Even if the firm is not registered
the PAN has to be acquired by the firm.

Step 5: Registration of the Partnership Deed

As per section 58 and Rule 3 of the Indian Partnership Act 1932, Form 1 has to be filled by the partners.
The form contains the following information.

1. Name of the firm. (full name)

2. Full name, address and details of the firm.
3. Duration of the firm.
4. Location of the firm.
5. Other places where the business transaction occurs.
The registration is done by the registrar of Firms (ROF) in the jurisdiction of the place of operation of
the business. The following documents are necessary for the registration of the firm:

1. Duly filled form 1 attached with a Rs 3 court fee stamp or Original Deed.
2. Photocopy of the duly prepared Deed on a minimum Rs 200 stamp paper.
3. Registered property documents photocopy.
4. Affidavit or NOC on Rs.10 and Rs.5 Notary stamp If the place is rented.
5. Ownership proof of other places.
6. Address proof and PAN of the partners (self-attested version)
7. Rent or lease agreement of the business place if any.
8. Two passport size photos of each partner.
9. Identity proof of the partners. (any)
10. Utility bills of the registered office.
It is preferable that the notarized version of the above said documents shall be encouraged to avoid any
disqualification by the ROF on grounds of genuinely.
Step 6: Receiving Certificate
Once the registrar is satisfied with the documents submitted, he shall intimate any outstanding fees or
stamp duty that has to be paid. The fees vary according to the area, it is better to ask the registrar in
advance for any such fees that have to be paid.

Once this process is over the certificate will be mailed to the business address. The firm does not have
to wait to operate until the certificate is received as the registration itself is not compulsory.

Other Registrations
Shop and Establishment Registration
The registration under Shops and Establishment Act differs from state to state and is regulated by the
respective state’s Labour Department. It is applicable for all entities who do not come under the ambit
of The Factories Act, 1948. This is to prevent the rights of the employees.

Any establishment commercial in nature includes shops, educational institutes, hospitals, societies, etc.
The exception is given to the factories as it is governed by the Factories act.

Approach the state’s Labour department for applying for registration.

Documents Required:

1. PAN Card / Aadhar Card.

2. Registration fee as per state regulation.
3. PAN of the firm.
4. Utility Bills.
5. NOC of the owner if the place is rented.
6. Partnership Deed.
7. Other documents as per the state’s Labour Department.
Trade License
This license shall be obtained by the firm if involved in any trade-related activity to protect the interest
of the public at large and to protect them from the harmful trade-related activity of the established trade.
This license also ensures compliance with other laws that are applicable to the specific establishment.

The license shall be obtained from the specific municipal corporation under whose jurisdiction the entity
falls under. However, the license is not compulsory in some states. Please refer to the specific state acts
to ensure so is the fee.

Documents Required:

1. PAN Card / Aadhar Card.

2. Registration fee as per state regulation.
3. PAN of the firm.
4. Utility Bills. (Premise proof)
 5. NOC of the owner, if the place is rented.
6. Partnership Deed.
7. Cancelled cheque leaf of the firm.
8. Bank Statement of the firm.
9. Site plan of the establishment.
10. Other documents as per the respective municipal jurisdiction.

Professional Tax Registration

For the purpose of the Professional Tax Act, partner of a firm is considered as a professional. Such a
partner must obtain the registration 30 days from such an appointment. This ensures that the
professional tax is deducted from the source salary of the employee.

Every employer must collect the tax from the employee or customarily it is cut at the source and the
same amount shall be paid to the respective state department. After which the return of the professional
tax must be filed. For which registration under Professional Tax Act is a must.

Documents Required:

1. PAN Card / Aadhar Card.

2. Salary and Attendance Register.
3. Attested PAN of the firm.
4. Partnership Deed.
5. Cancelled cheque leaf of the firm.
6. Bank Statement of the firm.
7. Other documents as per the respective States’ tax department.
8. NOC of the owner if the place is rented.
GST Registration
The new GST laws tax all entities and persons who are involved in the sale of goods or services.
Whosoever hit the threshold of 20,00,000 (1000000 for North Eastern states) in turnover shall register
under this law. The registration is compulsory within 30 days of hitting the threshold. If the business
activity is involved in the supply of service or good inter-state it is a must to register under the law. The
registration is done online but is very complicated.

Documents Required:

1. PAN Card / Aadhar Card.

2. Attested PAN of the firm.
3. Certificate of registration of the firm.
4. Bank Details.
5. The digital signature of the partners.
 6. Other documents based on the type of application.

FSSAI Registration
Under the Food Safety and Standards Act, 2006 all entities who are involved in the process of “food
business” is required to get registered under this act. Irrespective of the firm being for profit or not, it
shall apply to both private and public entities. However, this registration is very subjective to the type
of activity and the location.

If the firm reaches the threshold of 12,00,000 in the financial year, it shall obtain the FSSAI State
License. Any operation in the inter-state level, Export and Import shall obtain the FSSAI Central
License.

Documents Required:

1. Application Form.
2. Declaration form.
3. PAN Card / Aadhar Card.
4. Passport size photo of the partners.
5. Attested PAN of the firm.
6. Certificate of registration of the firm.
7. Bank Details.
8. Turnover forecast.
9. Digital signature of the partners.
10. Other documents based on the type of application.
Drug License
The Drug License is granted by the competent authority under the Drugs and Cosmetic Act, 1940 to
conduct business related to medicines, drugs or cosmetics. Without obtaining this license business of
such a nature can’t be conducted. This act also covers AYUSH medication, for professionals involved
in these drugs will also have to obtain this license.

Documents Required:

1. Partnership Deed.
2. PAN Card / Aadhar Card.
3. Attested PAN of the firm.
4. Certificate of registration of the firm.
5. Bank Details.
6. Cancelled Cheque leaf.
7. Biodata of the partners.
8. Other documents based on the type of application.
Private Security Agency License
The Private Security Agencies Regulation Act, 2005 (PSARA) is the act that governs the regulation of
entities involved in the private security agency business. The registration under this act is a must for all
the firms that are involved in this type of business.

Documents Required:

1. Certificate of registration
2. Address Proof.
3. Documents related to Security Guard.
4. PAN of the firm.
5. Income Tax Return of each partner.
6. Passport size photo.
7. MOA of the firm and the training institute.
8. Any other documents demanded by the state officials.
Import Export Code
This IEC code is a 10-digit alphanumeric code associated with the PAN. It is mandatory for all
businesses who are involved in Import and Export activity. The IEC shall be applied to the
Director General of Foreign Trade. All the Import and Export need to acquire this IEC but, when it
comes to the Import and Export of the specific commodity that affects the national interest, the license
shall be obtained with specifying the reason for the same.

Documents Required:

1. IEC questionnaire to be filled.

2. PAN of the firm and of all the partners.
3. Cancelled Cheque.
4. Digital signature of all the partners.
5. Address proof. (utility bills)

Furnishing false Particulars

A person shall be imprisoned for up to 3 months or a fine or both in case of furnishing information
that is false or at least known to be not to be true, relating to the documents, statements or any records
thereby provided to the registrar.

Rectification of Mistakes
The registrar has all the powers to rectify any mistake relating to or inconsistent with the statements
filed by the partners and so shall make necessary changes in the register as well.

Rectification shall also be made at the request of the partners regarding any record or statement filed to
the registrar regarding the firm. The registrar is entitled to do so under sec. 64 of the act.
Subsequent alterations after the Registrations
Any alterations or change in the deed shall be notified to the registrar timely by means of the relevant
forms. This need may arise when the business firm wishes to move their place of business, change the
name of the business firm or any change that will affect the original Partnership deed has to be notified
to the registrar. However, it is to be noted that the mutual agreement between the partners. Follow the
steps below to do the same.

Alterations with respect to Firm’s name – Nature of business – location of the business

Such alterations shall be made by sending the Application Form within 90 days since the date of
alteration along with the specified alteration fee, signed and verified by the partners.

If the registrar is satisfied then he makes the relevant alterations in the register.

Alterations with respect to branches.

Such alterations related to branches such as discontinuing of operation in a branch or starting of

operation in a new branch shall be made by sending the Application Form within 90 days since the date
of such change along with the specified alteration fee, signed and verified by the partners and the same
shall be noted by the registrar in his register.

Alterations with respect to partners details.

Such alterations with respect to partners details such as a change in the name of the partner or the
permanent address of the partner shall be made by sending the Application Form within 90 days since
the date of such change along with the specified alteration fee and the same shall be noted by the
registrar in his register.

Alterations with respect to the Constitution of the firm.

Such alterations with respect to Constitution of the firm such as dissolution or alteration in the
constitution of the firm shall be made by sending the Application Form within 90 days since the date of
such change along with the specified alteration fee and the same shall be noted by the registrar in his
register.

Alterations with respect to minor partner attaining the age of majority.

When a minor partner on the attainment of majority wishes to continue his partnership or if he wishes
to get retired shall notify the registrar of the same with the application form stating his position related
to the firm. The registrar shall make the necessary change with respect to the same.

This undertaking is needed to be signed by all the associate partners, or by their respective agents
principally given authority in their behalf.

Secondly, all partners should necessarily solicit their signature application form or their authorised
agents in their behalf in the occupancy of a witness who must be Advocate, Gazetted Officer, Vakil or
Magistrate of Registered Accountant. If a partner declines to sign the application form, registration
cannot happen unless that partner’s name is dribbled.

The application as mentioned above has to be sent to the Registrar at the enumerated address along with
the prescribed fees. As per section 71 of Indian Partnership Act, states are authorized to make their own
regulations with respect to prescribe the fee structure for registration or incorporation of partnership.
However, Schedule I of Indian Partnership act states the at most or maximum prescribed fees that can
be charged by the states. As per Schedule I, the maximum registration fees for a statement under section
58 is Rs.525.

Business name of the Firm

 The name of the partnership firm shall not be identical or similar to existing firms in the
same business.
 The name of the partnership firm may include names of the members included in the register
of members.
 The name of the partnership firm shall be of consonance with the provisions of The Names
and Emblems (Prevention of Improper Use) Act, 1950.
 The name of the partnership firm may end with suffixes such as “and Company”, “and Co.”
or “and Associates”.
 The firms are restricted from using words that suggest, support or patronisation of the firm.
 The name of the partnership firm may use “and/&” to differentiate principal name/centre
name/surname of the accomplice of the business.
 It is mandatory to use “and/&” either in the middle of the full first names and full centre
names, full surnames of the partners or before the last full first name or full centre name or
full surname of the accomplices.

Every firm must adhere to the above-mentioned rules while considering the name for the business firm.

Once the business name is selected, register for trademark to avoid other business misleading the public
with the same name, it also provides for additional legal protection.

Advantages of Registration
The registration of a firm is done not only towards the benefit of the firm but also for those who deal
with it. The following benefits are obtained from the registration of a firm:

Benefits to the Firm

The firm gets an unmitigated right towards the third parties in civil suits for getting its rights
discharged. In the non-existence of registration, the firm is not entitled to sue outside partners in
courts.

Benefits to Creditors
A creditor can employ any partner for recuperating his money due from the firm. All partners whose
names are set in the registration are personally accountable to the unknowns. So, creditors can restore
their money from any partner of the firm.
A creditor shall on-demand request any partner to repay the debts of the firm. All the partners who have
their names written on the deed are equally responsible to repay the debt to the third party. This allows
the creditors to claim their money due to them by the firm.

Since creditors enjoy such benefits from the registered firm, the credibility of the firm increases
drastically. Though both registered and unregistered firms are valid in the eyes of law, creditors prefer
to advance loans to such type of firms.

Benefits to Partners
The partners can seek the help of a court of law against each other in case of disagreement among
partners. The partners can sue external parties also for restoring their amounts, etc.

Benefits to Incoming Partners

A new partner can contest for his rights in the firm if the firm is registered. If the firm is not
registered then he will have to rely upon the trustworthiness of other partners.
The incoming partner shall enforce his dues against the existing partners if defaulted. If there is no
registration of the firm the same shall not be enforced against the existing partners.

Again, this increases the credibility of the firm in the eyes of others. This credibility is very important
to the firm as an incoming partner does not only share the profits but also contributes additional capital
to the firm. A simple registration can cost a fortune. The registration of partnership cost somewhere
around Rs 3000 to 6000.

Benefits of Outward-bound Partners

The registration of a firm acts as an advantage to the outward-bound partners in numerous ways.
The outward-bound partners may be divided into two categories:

(i) On the demise of a partner,

(ii) On the superannuation of a partner.

On the demise of a partner his heirs are not accountable for the obligations acquired by the firm
after the date of his demise. In case of a superannuation partner, he remains to be accountable up
to the time he does not give public notice. The public notice is not recorded with the Registrar and
he terminates his liabilities from the date of this notice. So, it is vital to get a firm registered for
getting this benefit.

Any partner of the firm can sue the other partner, ex-partner or the firm when there is a dispute arising
out of the partnership deed which is a contract or any right arising out of the partnership act for such
purpose. On the contrary, the partner can’t exercise such powers if the firm is not registered.

If partners wish to file a suit against any third party to exercise any right arising out of a contract or any
other legal instrument, it is necessary that the firm is registered and partner so doing must be a partner
whose name is registered in the register of firms. The same does not apply for third parties to sue against
a firm.
However, this immunity does not apply in case of criminal liability of the partner against others.

Partners of a registered firm can exercise their right to set-off debt against creditors.

Illustration: if x firm and a creditor y mutually owe Rs 20,000 to each other than the firm shall exercise
the power of set-off their debt against y’s outstanding debt.

Challenges Faced by Evey Business Partnership

Problems with Partnerships
A partnership firm involves a lot of human interaction and working together with co-partners. Human
relationships are complex and create a lot of friction. This human interaction makes it more complex
than any other form of business model.
With all partnerships originate potential glitches. We all recall when Enron recognized that the
partnerships they shaped were used unsuitably, expanding the company’s financial reports which
depositors and thousands of Enron staffs trusted on in pivotal to buy or sell its stock. These
partnerships, fixed with other major accounting errors, ruined the public’s assurance in the company
and Enron sank into insolvency.
Exit from a partnership becomes difficult as the transfer of partnership share of a partner is subject to
the agreement of the other partners. Upon approval of the other partners, the existing partners shall
transfer his shares to someone.

Liability
The unlimited liability of a partner is a challenge to this form of business as a partner has to pay off
the debts of the firm even at the cost of his personal property. A high degree of liability is expected
from the partner.

Raising Capital
The most frequent challenge that is faced by a partnership firm is the limitation on the capital that
shall be pooled. The firm can only raise capital from a limited number of partners. If a need arises
new partners have to be invited, however, it is not an easy deal as a firm’s reputation and credibility
has to be high.
It is problematic to elevation capital in general partnerships since all common partners have
unrestrained liability. Selecting an LP or LLP may be more striking to investors, as it allows a limited
partner to participate without taking on any accountability. As stated above, however, there are
limitations to LPs and LLPs that must be taken into thought. Moreover, LPs and LLPs are more
affluent to form than a general partnership.

Protecting your stake in a Partnership

There are several benefits to forming a partnership, but also numerous entities to watch out for when
acquiring on a partner. In all cases, partners must have a legal covenant that places limitations on each
partner’s decision-making abilities. The agreement must condition, among more things, how choices
will be made, profits will be allocated, and disagreements will be determined. If in case the
partnership does not work out, the legal covenant should also designate in facts how partners can be
credited out, how fresh partners will be acknowledged to the partnership, or what steps would be
taken if the partnership wants to be suspended.

Public faith
Public faith in this form of business model always has not been very warm due to the above-
mentioned challenges. But it shall be overcome by taking appropriate measures.
Conclusion
On a concluding note, it can be observed that the essential notion associated with the
partnership and its associated statutory provision needs an essential visitation as the relics of
the colonial past are fundamentally needed to be polished to accommodate them to our social
realities which requires a visitation to our social realities.

DISSOLUTION OF FIRM
Section 39 of the Indian Partnership Act, 1932[4] defines dissolution of partnership firm. It defines the
dissolution of partnership between all the partners of a firm is called the dissolution of the firm.

Dissolution of partnership firm is different from the dissolution of partners. Dissolution of the firm
means to discontinue all the business activities within the firm. When the activities are stopped and the
assets are used to pay off the debt it amounts to the dissolution of the firm. When a partner agrees to
continue the same firm even after the retirement of a partner then it is called dissolution of partners and
not firm. As the firm is still in process by the partner but the partnership between the partner is finished.

Dissolution of firm leads to the dissolution of partnership too. There is a contractual relationship among
the partners which works with the firm. If the firm is dissolved then the partnership is also dissolved.

The Indian Partnership Act, 1932 defines dissolution in different ways. Section 40 to 44 states
dissolution of partnership firm.

Dissolution of a partnership firm can be done in 2 ways:

 Dissolution without the intervention of the court (section 40-43)

 Dissolution by the Court (Section 44)
Dissolution without the Intervention of the court (Section 40-43)
Section- 40: - Dissolution by Agreement
A firm may be dissolved with the consent of all the partners or in accordance with a contract between
the partners. The firm may be dissolved by the consent of all the partners or by entering into an
agreement to dissolve the firm. This is one of the simple methods of dissolution of partnership firm
and intervention of the court is not required in this.

Section- 41: - Compulsory Dissolution

A firm may be dissolved by the following points:

 Insolvency of partner: In case all the partners become insolvent or all the partners except
one partner become insolvent then firm may be dissolved.
  Unlawful business: in case any unlawful activities are happening in the business of the firm
to be carried on or for the partners to carry it on in partnership, the firm may be dissolved.
Unlawful activities like selling of drugs, trading with alien countries, dealing in illegal
products etc.
 For example, A, a resident of India and B a resident of China are partners. If war breaks out
between the two countries, then the partnership will become unlawful and hence it is
dissolved automatically.
Section-42: - Dissolution on the happening of certain contingencies
This section focuses on the dissolution of the firm on happening of certain events. Dissolution of the
firm can take place if the following events take place:

 Expiry of fixed term: If the contract of a partnership firm is on a fixed term. Then,
dissolution of that firm will take place on the expiry of that contract. when the contract
expires dissolution will take place.
 If the firm was formed for a certain number of tasks. Then on completion of that task, the
firm ceases to exist. If the firm is constituted for a particular task, then on completion of
that task firm will dissolve, unless there is a contract or agreement.
 Dissolution can also take place with the death of a partner. Dissolution of the firm can take
place only when the other partner chooses too. If he wants to continue the firm even after
the death of a partner then there will be no dissolution of the firm. Only the partnership will
be dissolved.
 When one of the partners or all the partners is insolvent then dissolution can take place.
Even the insolvency of one partner can dissolve the firm.
 Dissolution can also take place if any one of the partners resigns. If one partner thinks not
to continue further then he/she can resign but this will also dissolve the firm.

Section- 43: - Dissolution by notice of partnership at will

Partner in a partnership firm can dissolve it by giving notice of dissolution to other partners. The notice
should be communicated to the other partners as mentioned in the agreement and if not mentioned then
a mode of communication should be reasonable. The notice of dissolution should not be in between any
transaction and is a partner give notice of dissolution in between the transaction his notice should be
held until the time the transaction is completed. The notice should be clear and should not be confusing
in any sense. It should be properly communicated to the other partners.

Dhulia-Amalner Motor Transport … vs Raychand Rupsi Dharamsi and Ors. section 43 is

explained in 3 points. It requires three things: (1) the giving of a notice, (2) the notice has to be in
writing, and (3) the notice must express an intention to dissolve the firm. Unless these 3 things are
complied with, the provision of section 43 of the Act would not come into operation at all.

Dissolution by the court (Section 44)

Dissolution of a firm can be done by suing the other partner and bringing the case before the court. The
court may dissolve a firm on any of the following grounds:

 When one of the partners becomes of unsound mind and is unable to continue further than
in this case a suit may be brought up by the other partner to dissolve the firm. Unsoundness
of a partner does not automatically dissolve the firm but it can be a ground for dissolution.
It is not necessary that the unsoundness should be permanent.
  If a partner has become permanently incapable of performing his duties as a partner, then
another partner can sue for dissolution of the firm. The Court may order for dissolution of
the firm. Incapable to perform his duties can be due to any reason like going abroad for long
time or imprisonment of a partner for a long time. As a partner won’t be able to perform his
duties, the court will order for dissolution of the firm.
 If there is any misconduct by a partner other than the suing partner due to which firm has
suffered loss, then the court may order the dissolution of the firm. Misconduct or guilty of
conduct which is likely to affect prejudicially the carrying on of the business. Then the other
partner can sue the partner for misconduct which is the ground for dissolution of the firm.
 Agreements are the most important document that all the partners must follow. If any partner
breaches the agreement regarding the conduct of business, then the other partner can sue
him for breach of an agreement which is a ground of dissolution. The court may order for
dissolution of a firm if a partner is found guilty of constant breach of the agreement and it
becomes impossible to continue the business.
 When a partner transfers whole of his share/interests to the third party for permanently then
it can be a ground for dissolution of firm or has allowed his share to be charged under the
provisions of rule 49 of Order XXI of the First Schedule to the Code of Civil Procedure,
1908 (5 of 1908) or has allowed it to be sold in the recovery of arrears of land revenue or
of any dues recoverable as arrears of land revenue due by the partner.
 If the firm is suffering from continuous loss, then the court may order for dissolution if there
is no capital available for further growth.

Liability of Partners after Dissolution (Section 45)

Section 45 defines liability for acts of partners done after dissolution. The partner, in this case,
continue to be liable as such to the third parties for any act done before the dissolution. Liability of a
partner does not finish automatically, the liability of a partner finishes when all the event are finished
that has been taken up before the dissolution of the firm until public notice is given of the
dissolution. A Partner who dies or who is adjudicated an insolvent or a partner who retires from the
firm is not liable under this section for acts done after the date on which he ceases to be a partner.
Notice of dissolution can be given by any partner.

Rights of Partners to have business wound up after Dissolution (Section 46)

After the dissolution of the firm, every partner is entitled to equal rights or according to the contract.
All the partners are entitled to the property of the firm applied in payment of the debts and liabilities
of the firm and to have the surplus distributed among the partners or their representatives according to
their rights. These rights are given when winding up of the firm is taking place.

Continuing authority of Partners for purpose of winding up (Section 47)

After the dissolution of the firm the authority of each partner to bind the firm continues so far as for
being necessary to wind up the affairs of the firm and to complete the transactions begun but
unfinished at the time of dissolution. This section focuses on the transactions that are unfinished until
the time of dissolution. Partners have to finish all the transactions that are related to a 3rd party for the
purpose of winding up the business. It also states that firm is not bound by the acts of a partner who
has been adjudicated insolvent but this provision does not affect the liability of any person who has
after the adjudication represented himself as a partner of the insolvent.
Mode of settlement of accounts between Partners (Section 48)
This section defines all the modes in which the accounts can be settled among partners after dissolution.

The following rules shall be observed subject to agreement by the partners:

 All the losses of the company including deficiencies of capital shall be paid out of profits
first, then out of the capital and lastly, if necessary, by the partners individually in
proportions to which they are entitled to share profits.
 All the assets of the company including all the sums contributed by the partners shall be
applied in the following manner:
 In paying all the debts of the firm to the third parties
 in paying each partner rateable what is due to him from the firm for advances as
distinguished from capital
 in paying to each partner rateable what is due to him on account of capital
 The residue shall be divided among the partners in the proportions in which they were
entitled to share profits.

Payment of firm debts and of separate debts (Section 49)

Payment of Joint debts and separate debts due form any partner is explained in this section.

The property/assets of the firm shall be applied first in payment of the debt of the firm and if there is
any surplus then of each partner shall be applied in payment of his separate debts or paid to him.

The separate property of any partner shall be applied first to the payment of his separate debts and then
the surplus in the payment of the debts of the firm.

Personal profits earned after dissolution (Section 50)

The provision of clause (a) of section 16(Personal profits earned by partners) shall apply to the
transactions by surviving partner or by the representative of a deceased partner after the firm is
dissolved on account of the death of a partner and before its affairs have been completely wound up.

Return of premium of premature dissolution (Section 51)

Where a partner paid a premium on entering into partnership and the firm is dissolved before the
expiration of that term due to death of a partner, then he shall be entitled to repayment of the premium
or of a part as may be reasonable. The term upon which he became a partner and to the length of time
during which he was a partner such part will be repaid as may be reasonable except the dissolution is
mainly due to his own misconduct the dissolution is in pursuance an agreement containing no
provision for the return of the premium or any part of it .
Conclusion
In Indian Partnership Act, 1932 provisions are given by which a partnership firm can be
dissolved before the court or outside the court. The grounds on which dissolution of firm
takes place is written clearly in the act. The act is to make things clear and just in a
partnership firm so that partners do not take advantage of each other. Act also help us to
maintain a stable environment in the firm.

Limited Liability Partnership Act 2008

Introduction
The Indian economy is growing with leaps and bounds. With its growth, the role played by its
entrepreneurs has been acknowledged globally. Entrepreneurship, knowledge and risk capital pool
provide a further stimulus to India’s economic growth. In this scenario, a need was felt for a new
system of the corporate that could deliver an alternative to the traditional partnership which had
unlimited personal liability and statute-based governance structure of the limited liability.
Limited Liability Partnership (LLP) is a form of business enterprise in India but different from other
business organisations such as sole proprietorship, company and partnership, etc. LLP is an
incorporated partnership registered and formed under the Limited Liability Partnership Act, 2008 in
India. It has limited liability as the name suggests, has a separate legal entity, and perpetual
succession. It is the most suitable form of business organisation for small and medium enterprises.
This form of enterprise amalgamates the characters of both traditional partnership firms and limited
liability corporations. A change in the partners doesn’t affect its existence, rights or liabilities.

Meaning of a Limited Liability Partnership

In a partnership firm, the partners have unlimited liability for their total debts and the legal
consequences thereof. In a partnership firm, the assets are prone to get attached to fulfil the debts and
liabilities of the firm, the limited liability partnership solved this problem. This means that a limited
liability partnership is a kind of business partnership where all the liabilities of a partner are restricted
only to the money, he/she invests. In other words, in case the partners are unable to make a profit in
the business, creditors cannot confiscate their personal assets. LLP has a legal existence though, and
its identity is separate from the partners.

The limited liability partnership structure is mainly based on the UK LLP Act, 2000 and Singapore
LLP Act, 2005. One can find LLPs in countries like the United Kingdom, the United States of
America, some Gulf countries, Australia and Singapore.

The Legal Framework of a Limited Liability Partnership

Any two or more persons conjoining to carry out a lawful business with an aim to make a profit may
set up an LLP. The Companies Act, 2013 is not well-matched for the liability and governance
structure wished-for for LLPs. The general focus of the legislation to standardise widely-held
companies is distinctive. Therefore, in harmony with the proposals of the Irani Committee, it was felt
that separate legislation should be enacted for LLPs.

The organisation and administration of partnership firms are at the state level under the Indian
Partnership Act, 1932 where a partnership firm involves full joint and several liabilities on the
partners. This is the reason for many enterprises employed in fields such as Biotechnology,
Intellectual Property, Information Technology, and other knowledge-based fields, find traditional
partnerships incompatible. Even for multi-disciplinary combinations, traditional partnerships are
considered inappropriate that comprise a large number of partners that are looking for a flexible
working environment but with limited liability.

The LLP structure, however, would stimulate growth and facilitate such enterprises to expand their
trade and business across different states in India as well as abroad.

On 2nd November 2005, the Ministry of Corporate Affairs cited a concept paper on LLP Law on its
website. This was to enable all interested stakeholders to express their opinions and suggest
constructions for the Ministry to consider on various aspects of LLP Law. The concept paper was also
spread to other concerned departments, autonomous bodies and ministries for their comments like:

 Securities and Exchange Board of India (SEBI),

 Comptroller and Auditor General of India (C&AG),

 Insurance Regulatory Development Authority (IRDA), etc.

Many suggestions and comments were sent to the Ministry of Corporate Affairs on the concept paper
after which these were examined in the context of international practices in this area of law. The
Indian Act, however, has been prepared while keeping in mind the Indian requirements.

Finally, the Limited Liability Partnership Act, 2008 was passed by the Parliament for governing the
LLP and its businesses in the country. Section 2 of this Act defines that the LLP is a type of
partnership that is registered under this Act and the LLP agreement states the written agreement
between the LLP partners themselves or the LLP itself and its partners. This agreement is supposed to
define the duties, liabilities, rights and powers of the partners in the LLP.

From the inputs received by the Ministry of Corporate Affairs, it was also proposed that the
framework should not be restricted to only professional services as recommended earlier by Naresh
Chandra Committee and thus the LLP Act does not restrict the advantage of LLP structure to some
classes of professionals only. Now that the Limited Liability Partnership Act governs the LLPs, the
Indian Partnership Act, 1932 is not applicable to these partnerships.

Certain other committees, which made proposals for legislation on LLPs in India are as follows:

 Bhat Committee, (1972)

 Naik Committee, (1992)
 Expert Committee on Development of Small Sector Enterprises, (1997)
 Study Group on Development of Small Sector Enterprises, (2001)
Extent of liability of a Limited Liability Partnership and its partners
Section 27 of the Limited Liability Partnership Act, 2008 describes the extent of liability of LLP.
According to this section, an LLP is not bound by anything that is done by a partner if in dealing with
a person because the partner in fact has no authority to act on behalf of the LLP in doing a particular
act and in such a case the partner’s act is considered void and the LLP is not liable for the partner.
Only the concerned partner is responsible for the liability and not the LLP itself.

An LLP is also not bound by anything if the person that the LLP is dealing with has knowledge that
the LLP has no authority or does not know or believe him to be a partner of the LLP. However, the
LLP is liable if its partner, for the wrongful doing or omission on the part of the partner, is liable to
any person in the course of business dealing with the LLP or its authority thereof. An obligation of the
LLP that arises as a result of a contract or otherwise shall be the sole obligation of the LLP and these
liabilities of the LLP shall be met out of the property owned by the LLP.

Section 28 of the Limited Liability Partnership Act, 2008 describes the extent of liability of a partner.
A partner is not liable personally, either directly or indirectly for an obligation just because of being a
partner of the LLP. However, for any wrongful doing or omissions by the partner in the course of
doing business, the partner is liable but other partner/partners shall not be personally liable for the
wrongful act or omission of one partner of the LLP.

Section 29 of the Limited Liability Partnership Act, 2008 states that a person is liable if he/she by
words spoken, written or by his/her conduct represents as one of the partners of the LLP and an
outsider in the belief of this person’s representation of the LLP, extends him/her credit, but the
Section does not make a mention of the extent of the liability.

Section 30 of the Limited Liability Partnership Act, 2008 is actually an exception to the limited
liability position of an LLP because it has provision for the instance in which an LLP and even its
partners can end up having unlimited liability. Section 30 of the said Act is very broad in its coverage
of fraud committed against the creditors of the LLP or against any other person for a fraudulent
purpose in the course of business. It also covers all or any of the debts or other liabilities of the LLP.
This Section generally takes away the limited liability characteristic of an LLP if any fraud committed
is established and creates the risk of an LLP retaining its limited liability position.

Features of a Limited Liability Partnership

A Hybrid form of organisation
The Government of India has facilitated a business environment for entrepreneurs, service providers
and professionals by creating a hybrid business structure to meet the global competition such as
limited liability partnership. An LLP can be said to be a hybrid form of organisation because it has
features of a partnership firm governed by the Partnership Act, 1932 and a company governed by
the Companies Act, 1956 / 2013. The LLPs however, are administered by the Registrar of Companies.

Limited Liability Partnership is a Body Corporate

A body corporate can be a partner to an LLP as per Section 5 of the Act. As per Section 2(1)(d) of the
LLP Act, 2008 a “body corporate” means a company that is incorporated/registered outside India, but
does not include a corporation sole, a co-operative society that is not registered under any law for the
time being in force, and any other body corporate that is not a company according to Section 3 of the
Companies Act, 1956. It includes the following:

 An LLP registered under the LLP Act;

 An LLP incorporated outside India;
  An Indian company that is either private or public;
 An individual.
Perpetual Succession
Section 3(2) of the LLP Act provides that an LLP is a body corporate that has a legal entity of its own
and is separate from its partners hence, it has perpetual succession. In other words, an LLP is capable
of acquiring, owning, holding, disposing of property, shares, securities etc., in its own name be it
movable/immovable or tangible/intangible. An LLP can therefore sue and even be sued. Also, it is
capable of doing and undergoing other acts as a body corporate would do or undergo.

The Separate Legal Entity of an LLP

The LLP is a separate legal entity with unlimited capacity, meaning that an LLP can do anything that a
natural person can do. It has the power to hold property in its name, enter into contracts, any change
in the partnership doesn’t affect its existence. LLP is a legal entity separate from that of its partners.
The LLP’s existence as a separate legal entity makes it more like a company than a partnership firm.
The liability of the partners of an LLP is limited only to their contribution and a partner is not liable
for another partner’s misconduct, negligence or commitment to an act of fraud. All the assets and
liabilities of an LLP are its own and no partner is permitted to claim any exclusive right in the
property or assets owned by the LLP during its continuance or at the time of its dissolution/winding
up. Likewise, the creditors also cannot bring any action against the partners personally.

LLP an Artificial Legal Person

To appreciate LLP as an artificial person one should know that the law finds it necessary to give an
entity, such as a firm, certain rights and responsibilities that are generally held by humans. When that
entity is founded, it is known as an artificial person that exists independently of its partners and is
treated as a separate person. An LLP is considered an artificial legal person because it is formed
through a legal process and is cloaked with all the rights of an individual. Although an LLP is
invisible, intangible, immortal, it is not fabricated because it really exists.
Number of Partners in an LLP
As per Section 6 of the LLP Act, 2008 any individual or body corporate can become a partner in an
LLP. However, an individual will not be qualified for becoming a partner of an LLP, if:

 The person is of unsound mind certified by a court of competent jurisdiction, or

 The person is undischarged.
According to this Section, every LLP should have at least two partners. In the instance that the
number of partners of an LLP reduces below two and the LLP still continues to do business for more
than six months then the only partner of the LLP after those six months and who has the knowledge of
this fact, becomes personally liable for the obligations of the LLP encountered during that period.
Section 7 of the said Act talks about designated partners of an LLP and states that the LLP should
have at least two designated partners who are individuals and sets the condition that at least one of
them should be a resident in India.

Any partner of the LLP may become a designated partner by giving prior consent according to the
LLP agreement and a partner may conclude being a designated partner in compliance with the LLP
agreement. Every LLP should have at least two partners, but there is no limit on the maximum
number of partners in the LLP Act, 2008.

Common Seal
Common seal means a stamp used for stamping documents generally having the name of the company
to show that they have been approved officially. An LLP being an artificial person does not have a
body like a natural being. Accordingly, it acts through its partners and designated partners. Having a
common seal for an LLP is not mandatory. However, if it decides to have one as per Section 14(c) of
the Act, then the common seal of the LLP should have its name engraved along with the place and
date of its incorporation. It should at all times remain under the custody of some responsible official
and it should be used in the presence of at least two of its designated partners.

An Investigation by a Competent Authority

Section 43 of the Act, provides that the Union Government has powers to investigate the dealings of
an LLP by appointing a competent inspector or authority for the purpose. However, an investigation
of the LLP can be carried out even if the Central Government has information that the plan of the
business was to commit fraud against its creditors, partners, or any other person for an unlawful
purpose. Investigation can also be carried out if the administration of the LLP is not as laid out in the
LLP Act. An LLP is subject to investigation even if the registrar or any other investigating or
regulatory agency submits a negative report about the functioning of the said LLP.

Profit Motive
The indispensable ingredient for forming an LLP is having lawful business with an objective to make
a profit. Thus, an LLP cannot be incorporated for non-economic or charitable purposes. An LLP offers
flexibility for profit sharing differently to each partner. In other words, if the partners agree then the
profit-sharing, as well as the loss-sharing ratio, may be different for the different partners of the
LLP. The partners of the LLP even have the flexibility that one or more partners would share profits
only and no losses at all if it is mutually agreed by them.

LLP Agreement
An LLP agreement must be prepared in detail and very carefully as it provides the foundation of the
LLP, the obligations and mutual rights of the partners. The LLP Act offers a great degree of flexibility
in terms of contribution of capital by the partners, profit/loss sharing ratio between the partners,
admission of a partner, the retirement of partners, dispute resolution, and the management of affairs of
the LLP, etc. As a result of all the aforementioned details, the LLP agreement becomes an important
document.

Section 23 of the LLP Act, has provisions regarding the LLP agreement. It provides that the mutual
rights and duties of the LLP and its partners should be as per the LLP agreement between the partners
or between the partners and the LLP. The LLP agreement and any changes made in the agreement
should be filed with the Registrar of LLP in case there is no agreement between the partners of the
LLP, then their mutual rights and duties and the mutual rights and duties of the LLP and the partners
should be governed by the provisions given in the first schedule of the LLP Act.

Conversion into LLP

A firm or a private company or an unlisted public company can be converted into an LLP in
agreement with the provisions of the LLP Act, 2008. After the conversion, on and from the date of the
certificate of registration acquired by the entity the effects of the conversion should be as specified in
the LLP Act, 2008. The provisions for the conversion of a firm into an LLP is listed in clauses 2 and 3
of the Second Schedule of the LLP Act, The eligibility of a private limited company to be converted
into an LLP are listed in clause 2 of the Third Schedule of the Act. The conversion from an unlisted
public company to an LLP is provided in clauses 2 and 3 of the Fourth Schedule of the LLP Act,
2008.
Compromise or Arrangement
Any compromise or arrangement including merger and consolidation of LLPs should be in agreement
with the provisions of the LLP Act, 2008. Sections 60 and 61 of the LLP Act, 2008 deal with
‘Compromise and Arrangement’ respectively of an LLP. Section 60 states that an LLP or any of its
partners/creditors/liquidator under winding up can vote for a compromise or arrangement through the
Tribunal as per the directions given by the Tribunal. Section 61 on the other hand, provides that the
Tribunal has powers to oversee that the compromise or arrangement ordered by it is carried out. If the
Tribunal is content that the compromise or arrangement ordered cannot work properly then it may
order for the LLP to wind up.

Absence of Mutual Agency

The fundamental principle of mutual agency of partners in a partnership is not present in an LLP, and
its partners are the agents of LLP alone and not of the other partners. Thus, lack of mutual agency
makes no partner liable on account of the independent/unauthorised actions of other partners. Hence
the individual partners are not liable for the liability that is incurred by another partner’s wrongful
acts.

Case Laws
Mohammad Ibrahim v. Mr Nikhilesh Mittal (2016)
The plaintiff, in this case, asserts that he entered into a sale agreement with the defendants for
purchasing a suit property for a consideration of Rupees eight crore. The plaintiff also claims that he
paid a sum of Rupees fifty lakhs in cash to the defendants as earnest money. In spite of the acceptance
of the earnest money, the defendants are taking steps for transferring the suit property to a stranger
purchaser. Therefore, the plaintiff has filed the aforesaid suit. The High Court of Calcutta, on
examination of the title deed relating to the suit property, found that the defendants are not the actual
owners of the said property.

Onex Projects LLP is a registered LLP and it is the actual owner of the said suit property according to
the title deed annexed to the injunction application. The defendants, in this case, are some of the
partners of the said LLP. The High Court of Calcutta observed after reading the plaint and the
injunction application by the plaintiff that they did not ever claim to have entered into an agreement
for sale with the LLP for purchase of the suit property.

The Court did not find any privity of contract between the plaintiff and the LLP which is the owner of
the suit property. Although the defendants are some of the partners of the said LLP firm, the plaint
does not say that these defendants had the authority on behalf of the LLP firm to enter into any
transaction with regard to the suit property as their agents. No case of fraud was made out against the
defendants for attracting Section 30 of the Limited Liability Partnership Act, 2008. The High Court
of Calcutta on deliberating on the facts and circumstances presented before it held that the plaintiff
failed to make out a strong prima facie case to go for trial.

Jayamma Xavier v. Registrar of Firm (2021)

In this case, the petitioner claims to be the nominated partner of Sleep lock LLP which is LLP as the
name suggests and is registered under the Limited Liability Partnership Act, 2008. The Sleeplock
LLP, then formed a partnership firm along with Gourav Raj. A partnership deed was executed and the
said deed was submitted for registration before the respondent. The respondent dismissed the
application for registration on the ground that an LLP cannot be a partner of a firm. The petitioner
said that the partnership was formed for processing, manufacturing, trading, importing, exporting,
distribution and sales of foam, coir and other rubber products, through retail outlets and through
online platforms. The petitioner submitted that a partnership along with an LLP is not barred under
the Partnership Act since an LLP is a legal entity having perpetual succession and a common seal and
it is separate from its partner as provided under the LLP Act. Also, under Section 14 of the LLP Act,
an LLP is capable of suing and being sued, once it is registered. Thus, the petitioner claims that an
LLP has the right of acquiring, developing or disposing of movable or immovable properties and
hence an LLP is liable to be treated as a person. The respondent cannot have any objection therefore
to register a partnership with an LLP which is a person. The LLP was also given a Certificate of
Incorporation.

The respondent in the filed statement maintained its stand of the impugned order reasoning that some
of the provisions relating to liability were inconsistent in the Limited Liability Partnership Act, 2008
and the Indian Partnership Act, 1932. Section 25, 26 and 49 of the Indian Partnership Act, makes the
partners become jointly and severally liable with all the other partners. It also makes them severally
liable for the acts of the firm, of which such a person is a partner. However, under Section 28 of the
LLP Act, the provisions with respect to the liability of the partnership firm is limited to the contents
(extent provided in the agreement) of the LLP agreement. The respondent added that such a provision
runs contrary to Section 25 and 49 of the Indian Partnership Act. Therefore, the issue before the court
was whether an LLP can be considered a person that can be allowed to form a partnership with an
individual.

The Kerala High Court said that to examine the contentions raised by the learned Government Pleader
it was vital to have a look at the applicable provisions contained in the Indian Partnership Act, 1932 as
well as in the LLP Act, 2008.

The Court said in its judgement that Section 4 of the Partnership Act permits establishing a
partnership between one or more persons. In this instant case, the partnership deed was implemented
between an individual and an LLP which is a body corporate having a legal entity of its own and
coming within the definition of “person”. The separate individual liability of the partners of the said
LLP would not be relevant because the LLP itself would have liability that was independent of the
liability of the partners. The Court elaborated that the difference in the provisions under the
Partnership Act and LLP Act relating to the liability of the firm or the individual partners would not
come in the way of entering into a partnership with an LLP. Hence the Court directed the respondent
to reconsider the request of the petitioner for registration.

SRL Advisor LLP v. Delhi II (2021)

M/S Diamond Nation v. Deputy State Tax Commissioner (2019)

Advantages of LLP

 An LLP is a legal entity that is separate from its partners. Therefore, it can sue or be sued
by a third party. Again, a partner can’t be held accountable for the misconduct or
carelessness of the other partner.
 Partners of an LLP can actively participate in the management of the business of LLP.
There is no separation of management from ownership.
 There is no minimum capital investment specified for an LLP. A partner’s contribution
consists of both tangibles, movable and immovable or intangible property.
 In an LLP, the partners have the flexibility to draft the agreements of an LLP which
defines the responsibilities, roles, powers and rights of the partners in an LLP and to each
other.
 The liability of partners in an LLP is limited to the extent of the amount that they have
agreed to contribute.
  If a fraud has been committed by a partner and it is so proved, only then that partner is
held accountable for his/her actions.
 The LLP has to comply with only three annual requirements that are, annual returns filing,
filing of the statement of accounts, income and tax returns filing.
 All companies, private or public, regardless of their share capital, are required to get their
accounts audited, but this is not mandatory for an LLP. This is recognised as a significant
benefit.
 An LLP has to get a tax audit done only in cases when:

 The contributions of the LLP exceed Rs. 25 Lakhs,

 The annual turnover of the LLP exceeds Rs.40 Lakhs.

 For income tax purposes, an LLP is treated at par with a partnership firm. Therefore, an
LLP is liable for paying income tax but the share of its partners in LLP will not be liable
to tax.
 The ‘deemed dividend’ provisions under income tax law, will not be applicable to an
LLP.
 An LLP can be wound up very easily within two to three months, unlike a private limited
company.
Disadvantages of LLP

 As compared to a partnership firm an LLP has a separate legal status which requires
extensive legal paperwork.
 Unlike a company, an LLP does not have the concept of equity or shareholding. Venture
capitalists are reluctant to make investments in an LLP because in order to make
investments they would have to become partners in an LLP and eventually have to take
some responsibility as partners.
 There are higher penalties that an LLP has to pay if it fails to comply with the
requirements as per law, as compared to a private limited company.
 An LLP is required to file an income tax return each year even if it is not active or does
not have any activity. Irrespective of the turnover, the LLPs are taxed at 30%.
 For an LLP to get formed, it requires at least two partners. An LLP will have to be
terminated if for any reason the number of partners is reduced to one.

Conclusion
The concept of LLP came to India through the United States, which introduced it after the
financial crisis in the period 1980-1990 first in the city of Texas. It soon gained popularity in
the other states of the United States and ultimately enabled the passing of the LLP legislation.
The concept of LLPs exists in many countries that look at an LLP as a tax flow-through
entity intended for professionals enabling them to have an active role in managing the
partnership. Generally, professionals who opt for an LLP are lawyers, accountants,
consultants, and architects.

LLP helps to overcome the drawbacks of a company and partnership firm business model,
where there is a need for a hybrid form of entity that can have the characteristics of
both. LLP although a newly introduced form of business partnership in India is finding
favour with small and medium-sized businesses. Thus, the LLP Act also recognises the
changing needs of the business environment in the current period in India, especially during
the crisis created by the pandemic.

Bibliography
 Indian Partnership Act, 1932
 Limited Liability Partnership Act, 2008No table of figures entries found.
 http://blog.ipleader.in
 http://www.geektonight.com
 http://lawcorner.in
 http://mbahub.in
 http://lddashboard.legistative.gov.in
 https://www.toppr.com
 htpps://www.vedantu.com
 htpps://www.taxmann.com