Chapter 11: The Nature Of Partnership-Theory

Question 1

Define Partnership.

Answer 1

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.

Question 2

Define third party.

Answer 2

Third party means any person who is not a partner in the firm.

Question 3

Define “act of the firm”.

Answer 3

“Act of the firm” means act done by a partner (within his authority), which gives right enforceable by or against the firm.

Question 4

Define business under Partnership Act.

Answer 4

Business includes every trade, occupation and profession.

Question 5

List down essentials of a partnership. (7)

Answer 5

1. There must be an agreement.
2. There must be association of two or more persons.
3. Parties must agree to carry on business.
4. There must be sharing of profits among partners.
5. There must be mutual agency among partners.
6. No separate legal status.
7. Unlimited liability.

Question 6

Under essentials of partnership, elaborate.
1. There must be an agreement. (3 Points)

Answer 6

Partnership is created through an agreement between partners called “Partnership Deed”.
It does not arise from status or inheritance.
This agreement may be expressed or implied.

Question 7

Under essentials of partnership, elaborate.
2. There must be association of two or more persons.

Answer 7

To form a partnership, there must be at least two persons who are competent to contract. For any reason, if number gets reduced to one, it ceases to be a partnership.
Partnership Act does not specify maximum number of partners. However, as per company laws, maximum number of partners:
* In banking business are 10 &
* In other businesses 20 (However, number of partners can exceed 20 in professional firms).
If number of partners exceed these limits, partnership becomes illegal association.

Question 8

Under essentials of partnership, elaborate.
3. Parties must agree to carry on business.

Answer 8

If there is no business, there will be no partnership.
Therefore, in following cases, there is no partnership because there is no business:
* If purpose is to carry on some charitable work.
* If persons agree to share rental income of property.

Question 9

Under essentials of partnership, elaborate.
4. There must be sharing of profits among partners.

Answer 9

Sharing of profit is necessary for partners (though sharing of loss is not necessary) and is considered prima-facie evidence of partnership.
However, sharing of profit is not a conclusive evidence of partnership.
Following are parties who may receive profits of a business but they do not become partners:
1. A lender of money to a business (e.g. a bank)
2. An employee or agent as remuneration.
3. A retired partner or widow/child of a deceased partner.
4. A previous owner of the business as consideration for the sale of the goodwill or share.
5. A minor who is admitted to the benefits of an existing partnership.
6. A transferee of a partners’ interest.

Question 10

Under essentials of partnership, elaborate.
5. There must be mutual agency among partners.

Answer 10

A partnership is a mutual agency i.e. every partner is both an agent and principal of other partners.
He can bind other partners for his acts and similarly other partners can bind him for their acts.

Question 11

Under essentials of partnership, elaborate.
6. No separate legal status.

Answer 11

Partnership does not have separate legal status (like company). An agreement by a third party with partnership is actually an agreement with all partners as individual.

Question 12

Under essentials of partnership, elaborate.
7. Unlimited liability.

Answer 12

Partners have joint and several liability. i.e. every partner has unlimited liability for all the debts of partnership.
Creditors may compel any partner to pay the whole debts of firm.

Question 13

List down types of partnership.

Answer 13

1. Particular partnership.
2. Partnership at will.

Question 14

Describe particular partnership.

Answer 14

It is a partnership which is created for a particular project or period, e.g. producing a film.
* Such partnership is dissolved on completion of project or on expiry of the period. No notice of resolution is required.
* If partnership is continued after completion or expiry of time, this will become partnership at will.

Question 15

Describe partnership at will.

Answer 15

It is a partnership in which duration is not specified.
* Such partnership is dissolved when any of the partner gives notice of dissolution/retirement in writing.
- If date of dissolution is mentioned in the notice, it will be dissolved from that date.
- If no date of dissolution is mentioned in the notice, it will be dissolved from the date of communication of notice.
* If agreement states that partnership will be dissolved only with consent of all partners, this will not be partnership at will. (i.e. cannot be dissolved by individual partner).

Question 16

List down all types of partners. (7)

Answer 16

1. Actual/active partner.
2. Silent partner.
3. Sleeping or dormant partner.
4. Partners in profit only
5. Nominal Partner
6. Sub-partner.
7. Partners by estoppels or by holding out.

Question 17

Define Actual/active partner.

Answer 17

1. This is a partner who is actively engaged in the conduct of the business
2. He is known to third parties as a partner.
3. Such a partner is an agent of other partners, and can bind firm with his acts done in the ordinary course of business.
4. Public notice is required if he retires from firm.

Question 18

Define Silent Partner.

Answer 18

This is a partner who has no voice in the management of the partnership.
It shares profits and losses and is fully liable for debts of the firm.

Question 19

Define sleeping/dormant partner.

Answer 19

This is a partner who is not known to third parties as a partner.
He may or may not take part in conduct of business.
He invests his capital and is equally liable for debts of firm.
Public notice is not required if he retires from firm, and he is not liable for any act of the firm after his retirement.

Question 20

Define the term “partners in profit only”.

Answer 20

This is a partner who, by agreement, is entitled to share profits but does not share losses. However, his liability towards third parties is still unlimited.

Question 21

Define nominal partner.

Answer 21

This partner does not contribute any capital or share in profits, but lends his name to firm. However, his liability towards third parties is still unlimited.

Question 22

Define Sub-partner.

Answer 22

If a partner agrees to transfer his share of profits with an outsider, such an outsider is called a sub-partner. A sub-partner is not an actual partner. He has no right in the firm and is not liable for the debts of the firm.

Question 23

Define Partners by estoppels or by holding Out.

Answer 23

Explained in Chapter 13.

Question 24

Difference Between Partnership and Co-ownership. (6 Headings)

Answer 24

1. Formation.
2. Business.
3. Number of persons.
4. Sharing of profit.
5. Agency.
6. Transfer of interest.

Question 25

Difference Between Partnership and Co-ownership.
1. Formation.

Answer 25

Partnership:
It is created by agreement only.
Co-ownership:
Co-ownership is not necessarily a result of an agreement.

Question 26

Difference Between Partnership and Co-ownership.
2. Business.

Answer 26

Partnership:
In partnership carrying on business is essential.
Co-ownership:
Co-ownership does not involve the carrying on of a business.

Question 27

Difference Between Partnership and Co-ownership.
3. Number of Persons.

Answer 27

Partnership:
Minimum two competent to contract persons are required and a maximum of 20 persons can carry partnership other than banking business.
Co-ownership:
No limit on maximum number of co-owners.

Question 28

Difference Between Partnership and Co-ownership.
4. Sharing of Profit.

Answer 28

Partnership:
Sharing of Profit is one of the essential elements.
Co-ownership:
It does not involve sharing of profits.

Question 28

Difference Between Partnership and Co-ownership.
5. Agency

Answer 28

Partnership:
A partner is an agent of the firm for the purpose of business of the firm.
Co-ownership:
Co-owners are not agents to one another.

Question 29

Difference Between Partnership and Co-ownership.
6. Transfer of Interest.

Answer 29

Partnership:
A partner cannot transfer his interest without getting consent from other partners.
Co-ownership:
Co-owner can transfer his interest without consent of other co-owners.