Rules and Regulations for Running a Partnership Firm

Partnership Firms are made up of individuals who have entered into a business partnership with one another to carry on a business. The name under which their business is carried on is referred to as the “Firm Name.” Individual partners are referred to as “Partners,” while the entire partnership is referred to as a “Partnership Firm.”

A partnership firm is not a separate legal entity from its members; rather, it is a collection of their legal rights. It is simply the term given to the group of people who have come together to form it. Thus, in contrast to a corporation, which is a legal entity distinct from its members, a firm cannot own property or hire employees, and it cannot be either a debtor or a creditor, as is the case with a corporation. It is not permitted to sue or be sued by others.

PARTNERSHIP IS DEFINED IN THIS STATEMENT

A partnership firm is formed when two or more people join forces to start a business and distribute the earnings according to an agreed-upon formula. The term “partnership business” refers to any type of trade, occupation, or professional activity. When opposed to corporations, forming a partnership is less complicated and requires fewers compliances.

RULES AND REGULATIONS FOR PARTNERSHIP FIRMS

1. Contract for Partnership 

A contract results in the formation of a partnership. No such thing as position, operation of law, or inheritance can give rise to it. For example, upon the death of a parent who was a partner in a partnership firm, his son can claim a share of the partnership property, but he cannot become a partner without first agreeing with the other parties involved to do so.

In the same vein, members of a HUF engaged in a family company cannot be referred to as partners because their relationship is not based on a contract but rather on their social standing. The “contract” serves as the fundamental building block of a partnership.

2. Maximum No. of Partners in a Partnership is 20

Because a partnership is the product of a contract, it is necessary for at least two people to come together to form a partnership. There is no maximum number of partners specified in the Indian Partnership Act, 1932, however, according to the Companies Act of India, a partnership consisting of more than 10 individuals for banking business and more than 20 individuals for any other business would be considered illegal. Because of this, the number of partners in a partnership business should be regarded as having reached its maximum limit at this point.

A contract of partnership can only be entered into by those who are legally capable of doing so. Persons can be either natural or manufactured in origin. A Company, as an artificial legal person, has the authority to engage in a partnership relationship if the Memorandum of Association of the Company expressly authorises it to do so. It is even possible that two companies will form cooperation (Steel bros & Co. Ltd. Vs Commissioner of Income Tax)

Unlike other legal entities, such as corporations, partnerships are not recognised as having a separate legal entity from that of their participants, and hence are not permitted to engage in a partnership agreement with another partnership business or with individuals (Duli Chand vs Commissioner of Income Tax)

It is legal for members of one partnership firm to engage in a partnership contract with another partnership firm or a person in their capacity when they are acting on their behalf as partners under the terms of the partnership contract (in the firm’s name) (Jadavji Narsidas & Co. Vs Commissioner of Income Tax)

3. Carrying on of Business in a Partnership

Lastly, the parties must have decided to carry on a business together as a third key condition of forming a partnership. The term “business” is used in the broadest sense possible, and it refers to any trade, occupation, or profession that exists. So long as the goal is to carry out philanthropic work, the relationship will not be considered a partnership.

Additionally, if a group of people agree to share the income from a particular property or to divide the items purchased in bulk among themselves, there is no partnership and these individuals cannot be referred to as partners because they are not engaged in the conduct of a company in either situation.

4. Sharing of Profits

Among the most important requirements is that the agreement to carry on business must be made to distribute earnings equally among all of the partners. As a result, there would be no partnership when the firm is operated solely for charitable purposes rather than for profit, or where only one of the partners is entitled to all of the business’s profits. The partners, on the other hand, may agree to divide the earnings in any manner they see proper.

It should be noted that, while a partner may not be liable for the losses of a business, his or her obligation to third parties is unbounded under the law of partnership. A new type of partnership known as Limited Liability Partnerships (LLPs) has been developed in India to allow partners to limit their liability towards third parties. When the partners form a Limited Obligation Partnership, their liability to the outsiders is significantly reduced.

5. Mutual Agency in a Partnership

As part of the definition of partnership, the fifth factor stipulates that the business must be carried out by all of the partners or by any (one or more) of them acting on their behalf, so establishing a mutual agency.

In this way, every partner acts as both an agent and a principal for himself and the other partners, i.e. he can bind other persons by his actions and be bound by the actions of the other partners. The relevance of the feature of mutual agency can be attributed to the fact that it allows each partner to act on behalf of the other partners in the course of the business.

CONCLUSION

Persons from many walks of life who have the ability, managerial acumen, and expertise come together to carry on a business in the form of a partnership firm. Increased administrative strength, financial resources, talent and expertise, and risk reduction are all achieved as a result of this. Such businesses are best suited for comparably small enterprises such as retail and wholesale commerce, professional services, medium-sized mercantile establishments, and small manufacturing units, among other things. According to general practice, many organisations are initially formed as partnerships, which are then transformed into limited liability companies once they have proven themselves to be economically sustainable and financially appealing to their investors.

In the case of individuals who have formed a partnership with one another, they are collectively referred to as Partners. The partners may be referred to collectively as the Firm, and the name under which the business is conducted is referred to as the Firm’s name. A partnership is nothing more than an abstract legal connection between two or more people. A firm is a physical thing that represents the collective entity that all of the partners share. Consequently, a partnership is an unseen tie that ties the partners together, and a firm is the visible manifestation of this relationship, which is also bonded together as a result of the partnership.