Liabilities of Partners

Formal partnerships are also called joint ventures and cooperative enterprises. They’re one of the most common business organizations, but they vary from simple to very complex. There must be some mutual interest between the two parties involved, and this interest must be significant for two or more people to decide to invest their time in one another’s company. A formal partnership is formed when an agreement is drawn up about the relationship between the parties, usually including specific terms and conditions that bind them together with varying degrees of obligations and rights.

What is a partnership?

A partnership is considered a business association of two or more persons legally joined together to carry on a trade or business to share the profits from that place.

An association in which partners contribute money and other resources such as property, labor, facilities, etc., where all parties are active participants in management and control of their respective shares, and where all partners share profit and loss from their activities is known as a general partnership while an association in which partners contribute money or capital only to carry on a trade or business where they have no right to participate in management but can share in the distribution of any profits made by the enterprise is called limited partnership.

Liabilities of Partners in Partnership Firm:

The country’s law in which the firm is registered, which governs the manner of its association, determines how much liability each partner shares. In recognition of varying degrees of liability, each partner agrees to contribute a predetermined amount of capital to the partnership business and is generally required to furnish a working capital in advance. It may also be agreed that partners will share equally in profits, or they may agree to share any profits equally with one another and continue as active partners after payment of their primary obligations.

1) Section 25 of the Partnership Act, 1932 states that a partner is entitled to the full benefit of his risk. On the other hand, if he has participated in the management of the company, he is liable to account for his share of profits or losses made by the company, in which case he may be entitled to repayment of the advance paid to him or claim limitation on capital contributed by him.

2) Section 26 of the Partnership Act, 1932 states that a partner is liable for any damage caused to a third party by the wrongful act of the firm. Therefore, if a partnership firm has made wrongful profit or loss, it shall be liable to pay compensation to third parties.

3) If a partner fails to carry out his performance as agreed in the partnership agreement, he shall be liable to make good any damage suffered by the company in consequence thereof. However, he needs to show that he has not breached his obligations under the partnership agreement.

4) Section 27 of the Partnership Act, 1932 states that where a partner has willfully acted against the firm’s interest, he is liable for any debts or damages so incurred and for loss suffered by the company.

5) Where a partner does not discharge his obligations under the partnership agreement, he shall be liable for all damages suffered by the company as a result of his wrongful act unless he proves that he has not breached his obligations about partnership matters.

6) If a partner breaches any agreement entered into with him and caused damage to the company, it shall be entitled to recover such damage from him if it can prove him capable of personal liability.

What is a LLP?

LLP is also known as a Limited Liability Partnership. Limited Liability Partnership is a hybrid form of business organization, which combines qualities of partnership and company. It enables individuals to carry out entrepreneurial activities while protecting the investors by giving them limited liability. Liability of partners in LLP is not limited as in Partnership Firm, so they are subject to the liabilities of business partners.

1) Actors: Various roles allow the LLP to operate effectively. These include those who manage the business and its day-to-day operations, finance its capital, and provide administrative and strategic advice on making it profitable.

2) Shareholders: The owners of an LLP are known as “shareholders,” which means that when a partner does not carry out his obligations under the partnership agreement. He shall be liable for any damages suffered by the company arising from his wrongful act unless he proves that he has not breached his obligations under the partnership agreement.

Conclusion:

In a partnership business, the liability of partners depends upon their contribution and participation. Accordingly, the liabilities of a partner in a partnership firm shall be as provided in Partnership Act, 1932. Similarly, in LLP, the liability of partners shall be as provided under the LLP Act, 2008. Hence the role of lawyers in partnership business or Limited Liability Partnership (LLP) cannot be undermined as they play a vital role in ensuring that liabilities are shared fairly.