Business Law & Ethics PDF Notes
Business Law & Ethics PDF Notes
The law relating to partnership was earlier contained in Chapter XI of the Indian contract Act, 1872.
This act came into force from 1st October, 1932, except
Section 69.
What is Partnership?
As per Section-4, Partnership is the relation between persons who have agreed to share the profits
(iii) The business must be carried on by all or any of them acting for all.
All these essentials must coexist before a partnership can come into existence.
Types of Partnership
1. Partnership at will:
Such a partnership can be dissolved by any partner giving notice in writing to all the other
2. Specific Partnership:
This partnership is made for a fixed time period and after the completion of such time period, such
3. Particulars Partnership:
This partnership is created for completing a particulars task or contract or for a particular venture
or undertaking.
4. General Partnership:
In case of General Partnership, the Liability of all the partners is unlimited. Which means the
Creditors of such partners can recover the dues in full, from any of the partners by attaching their
personal property, if firm’s assets are found to be inadequate to pay off its debts. In India, all
But in case of minor, the liability of minor in case of General partnership will be limited up-to the
The Indian Partnership Act 1932 clearly defines a partnership. But how can we decide if a given
So the Act has also given us a litmus test to determine if a firm is a partnership. This is known as the True
Test of a Partnership.
The true test of a partnership is a way for us to determine whether a group or association of persons is
a partnership firm or not. It also helps us recognize the partners of the firm and separate them from
Let us take a look at the three important aspects of a true test of a partnership, namely
Author Note
So if family members of a HUF are running a business together this is not a partnership. Because
there is no agreement of partnership between them. The members of HUF are born into the HUF,
2] Profit Sharing
This is because there are cases of profit sharing that are still
A share of profits given to an agent or servant does not make him a partner
If a share of the profit is given to a widow or child of a deceased partner does not make them
partners
Part of the profits shared with the previous owner as a part of goodwill or as a form of
3] Mutual Agency
This is the truest test of a partnership, it is the cardinal principle of a partnership and treated as the
“Conclusive Evidence”.
the firm we can say that mutual agency exists. This means
that the actions of any partner/s will bind all the other partners
as well.
If such an agency exists between the parties who run a business together and share
BASE DEFINER:-
A, B and C are Partners in a Firm. D, an outsider, deals with the Firm through A. As between A, B and C, A
is the agent of B and C. As such A, B, and C can all sue D. D can also sue A, B and C.
A minor cannot become a partner in partnership firm but he can be admitted for the benefits of the
Rights:
firm.
Minor can access and inspect and can take copy of the
share but only when severing his connection with the firm, and
not otherwise.
On attaining majority, minor has a right to decide within 6 months to become a partner or not
to become a partner and if he decide to become a partner in partnership firm then his share in profits
Liabilities:
The liability of minor is limited up to the extent of his share in profits of the firm.
Minor has no personal liability for the debts of the firm incurred during his minority.
Minor cannot be declared insolvent, but if the firm is declared insolvent his share in the firm vests
Minor has to decide within 6 months on attaining the majority that whether he wants to become
a partner in a firm or not and if he does not decide then he automatically becomes the partner in
the firm.
If a minor becomes partner in a firm then he shall be personally liable to third parties for all acts
His rights and liabilities continue to be those of a minor up to the date of giving public notice.
His share shall not be liable for any acts of the firm done after the date of the notice.
TYPES OF PARTNERS
Who does not actively take part in the conduct of the partnership business
Dormant Partner share profits and losses and is also liable towards third party.
3. Nominal Partners: Nominal Partner is one who lends his name to the firm.
He does not share the profits of the firm and does not have any real interest in the firm.
He does not make any investment in the firm and also does not take part in the conduct of the
business.
However, nominal partner is liable toward third parties for all acts of the firm.
This partner is entitled to share the profits of the firm but he is not liable to share the losses of
the firm.
Such partner is liable to the third parties for all acts of the profits only.
5. Sub-Parmer: When a partner agrees to share his share of profits in a partnership firm with an
Sub-partner is not the partner of the partnership firm but he is the partner of a partner.
Such sub-partner does not hold any rights against the firm nor liable for the debts of the firm.
New partner can be admitted into the firm with the consent of all the partners.
Incoming partner is not liable for any act of the firm done before his admission as a partner.
Retiring outgoing partner remains liable towards third parties until public notice of his
retirement is given.
8. Partner by Holding out or Estoppel: When a person is actually not a partner of a partnership firm
but he represents himself as a partner through his conduct then such person is called as partner by
When a person (i) represents himself, or (ii) knowingly permits himself, to be represented as a
partner in a firm (when in fact he is not) he is liable, like a partner in the firm to anyone who on the
BASE DEFINER:-1
remained silent. Z, a trader believing A as partner supplied 100 T.V sets to the firm on credit. After
expiry of credit period, Z did not get amount of T.V sets sold to the partnership firm. Z filed a suit
against X and A for the recovery of price. Here in the given case, A, the Manager is also liable for
Author Note
If a partner retire form a partnership firm without giving the notice of his retirement then such
partner is liable as a partner by holding out towards creditors until public notice of his retirement
is given.
BASE DEFINER:-1
A partnership firm consisting of P, Q, R and S. S retires from the firm without giving public notice
and his name continues to be used on letterheads. Here, S is liable as a partner by holding out to
creditors who have lent on the faith of his being a partner.