Written by : DG Gupta

A financial professional, qualified Chartered Accountants and Company Secretary examinations and enriched with experience of all types of accounting, taxation and compliance of Manufacturing as well as Service Industries

Liabilities of a Partnership Firm

DG Gupta
DG Gupta, CA, CS

Aug 12, 2021 03:53

For new ventures, the most used types of structure is a partnership. It provides an opportunity to optimize money and time to establish a successful firm easily. People often prefer partnerships since they are simple to set up and do not necessitate many formalities or extensive paperwork. Furthermore, they give flexibility because modification of terms and conditions is possible with the partners' approval. In addition, the partnership can be terminated by agreement, mutual consent, insolvency, certain situations, or by judicial order.

What is Partnership?

A partnership is a one-of-a-kind contract governed by the Indian Partnership Act of 1932. Section 4 from the Indian Partnership Act 1932 defines partnership firm, "A partnership is formed when two or more individuals together run a business to generate a profit." When referring to a partnership, the term 'firm' is frequently used. A partnership should be created with a minimum of two participants.

Usually, the partnership firm is referred to as the principal. The partners are termed as its agents.

There are two sorts of partnerships in India: "partnership at will" and "specific partnership." A partnership at will gets created with a contract between partners. It does not specify the tenure of their collaboration. A particular partnership is formed when a person becomes a partner with another person for undertaking a specific activity.

Essential criteria to form a partnership

  • The parties involved as partners must sign a contract.
  • The objective is to make a profit and split it among the partners.
  • The agreement must state that the business will be carried out jointly or by any one of the partners acting on behalf of the other partners.

All limitations are under the purview of the partners in a partnership, and they are obligated to shoulder the partnership firm's liabilities. Let's have a look at the partnership liabilities, according to the various sections.

Partnership Firm Liabilities

The firm is liable to pay off all its debts. However, if it fails to do so, the burden falls on the business partners. Partners are accountable to meet the firm's obligations "jointly and severally." It implies that the company's creditors could sue any partner. Authorities also can take action against multiple partners at the same time. It is applicable regardless of what a partnership agreement states about the share of individual liabilities. If one of the partners settles the firm's liabilities more than their agreed sharing ratio of the outstanding debts, then they can reclaim the money that the other partner should have paid by taking judicial action against them, if required.

Liability of the partners regarding the acts of their partnership firm

Under acts of the Partnership Firm Liabilities, all partners will be held 'jointly and severally responsible for the firm's actions. It is applicable only if such activities were performed in the course of his duties as a partner in the company.

Liability of partnership firm for the wrongful act of its partner

If a partner's unlawful conduct or omission causes loss or harm to a third party, the firm is responsible to the same degree as the partner. Nevertheless, the partner should act in the usual course of the firm's activity or with the authorization of his partner.

Firm liabilities in case of misapplications by partners

In certain cases, the partnership firm's liabilities are inferred from the partners' misuse of authority and power. If a partner gets an amount of money from a third party and manipulates or misuses it, the business will be held liable for the resulting loss. Similarly, if the firm receives money or property from a third party and gets misappropriated by any partners, the entire liability falls on the firm's shoulders.

Liability of an incoming partner

The next facet of a partnership firm's liabilities is when a new partner joins. A new partner is responsible for the firm's responsibilities and acts as of the date of his entry into the business. However, the new partner may accept to assume responsibility for debts incurred before his admission. This agreement does not provide the previous creditor with the ability to sue the entering partner. He will only be accountable to his co-partners.

Liability of a retiring partner

Retirement, like the admission of a partner, has an impact on partnership firm liabilities. A retiring employee is not accountable for the firm's conduct after he retires. He is responsible rather before his retirement from the firm. However, in other circumstances, a departing partner may not even be liable for losses incurred before retirement if an agreement is reached between third parties and the company's current partners, absolving him of liability.

Rights and Liabilities of a Partner

Aside from partnership firm liabilities, a partner must fulfil various duties and rights of the partners. The Partnership Deed provides the mutual rights and responsibilities of the partners. When there is no partnership deed, or the deed is silent on any issue, the rights set out in the Partnership Act apply.

Let's get an overview of the rights of a partner in a partnership firm.

Rights of a partner
  1. The partner has the right to contribute to the firm's day-to-day management.
  2. The right to be consulted and heard while making business decisions.
  3. Right to access books of accounts and to own a copy of the same.
  4. The right to divide profits equally after mutually agreeing with the partners.
  5. The right to receive interest on capital contributed by the firm's partners.
  6. The right to receive interest on advancements by partners for commercial purposes.
  7. Right to be indemnified for payments, liabilities incurred, or for safeguarding the company against losses.
  8. The right to utilize partnership property purely for the benefit of the partnership business and not for himself.
  9. Right to refuse admission of new partners and expel current partners.
  10. The right to continue unless and until he ceases to be a partner.
  11. Right to profit-sharing after retirement
  12. Outgoing partner's/deceased partner's legal heirs' rights
Duties of a partner
  1. To manage the firm in the best possible way for everybody's benefit.
  2. To be just and loyal to one another
  3. To disclose complete information
  4. To carry out his responsibilities diligently
  5. Not to ask for remuneration for conducting the business
  6. To indemnify for losses incurred by deception or willful neglect
  7. To keep and use partnership property only for the benefit of the company
  8. To account for personal earnings
  9. To share losses
  10. To behave within one's authority
  11. Not to Transfer his Rights

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We believe partnership is among the most lucid forms of business entities. By forming partners, big goals are realized with the aid of more people. The combined efforts of all members result in the successful completion of business operations and legal compliances. Whether you run a partnership or want to form one, we have you covered by our services at Gotaxfile- one of the top professional accounting firms in the industry.

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DG Gupta
DG Gupta, CA, CS

Aug 12, 2021 03:53

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