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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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