Partnership Part 2-Introduction to Business-Lecture Handout, Exercises of Business Fundamentals

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Lecture 5

PARTNERSHIP

Partnership is the second stage in the evolution of forms of business organization. It means an association of two or more persons to carry on a business for profit. According to Partnership Act, 1932 “Partnership is the relation between persons who have agreed to share the profits of a business, carried on by all or any of them active for all.”

PARTNERS

“The individuals who comprise a partnership are known as partners.”

KINDS OF PARTNERS

Partners can be classified into different kinds, depending upon their extent of liability, participation in management, share of profits and other facts.

1. Active Partner A partner who takes active part in the affairs of business and its management is called active partner. He contributes his share in the capital and is liable to pay the obligations of the firm. 2. Secret Partner A partner who takes active part in the affairs of the business but is unknown to the public as a partner is called secret partner. He is liable to the creditors of the firm. 3. Sleeping Partner A partner who only contributes is the capital but does not take part in the management of the business is known as sleeping partner. He is liable to pay the obligations of the firm. 4. Silent Partner A partner who does not take part in the management of business but is known to the public as partner is called silent partner. He is liable to the creditors of the firm. 5. Senior Partner

A partner who invests a large portion of capital in the business is called senior partner. He has a prominent position in the firm due to his experience, skill, energy, age and other facts.

6. Sub‐Partner A partner in a firm can make an agreement with a stranger to share the profits earned by him from the partnership business. A sub‐partner is not liable for any debt and can not interfere in the business matters. 7. Junior Partner A person who has a small investment in the firm and has a limited experience of business is called junior partner. 8. Major Partner A major partner is a person who is over 18 years of age. A person is allowed to make contract when he has attained the age of majority. 9. Minor Partner A person who is minor cannot enter into a valid contract. However, he can become a partner with the consent of all other partners. A minor can share profits of a business but not the losses. 10. Nominal Partner A partner who neither contributes in capital nor does he take part in the management of the business but allows he name to be used in the business is known as nominal partner. He is individually and jointly liable for the debts of the firm along with other partners. 11. Deceased Partner A partner whose life has expired is known as deceased partner. The share of capital and profit of such partner is paid to his legal heirs in lumpsum or in installment. 12. Limited Partner A partner whose liabilities are limited to his share in business is called limited partner. He cannot take active part in the management of the firm. 13. Unlimited Partner A partner whose liabilities are unlimited is known as unlimited partner. He and his personal property both are liable to clear the debts of the firm.

14. Incoming Partner docsity.com

A person who is newly admitted in the firm with the consent of all the partners is called incoming partner. He is not liable for any act of the firm performed before he became the partner unless he agrees.

15. Retired Partner A partner who leaves the firm due to certain reasons is known as retired partner or outgoing partner. He is liable to pay all the obligations and debts of the firm incurred before his retirement. 16. Partner is Profits only If a partner is entitled to receive certain share of profits and is not held liable for losses is known as partner in profits only. He is not allowed to take part in the management of the business. 17. Quasi Partner A person, who was the par4tner of a firm but has now retired from active participation in business and has left his capital in the business as a loan, receiving interest on it, is known as quasi partner. 18. Partner by Estoppel A person who holds himself out as a partner of a firm, before a third party or allows other to do so, though he is not a partner of that firm, is called partner by estoppel or holding out partner. He is not entitled to any right like other partners of the firm. He is not entitled to any right like other partners of the firm. He is personally liable to the third party for the credit given to the firm, on the faith of his representation.

KINDS OF PARTNERSHIP

There are three kinds of partnership which are described as under:

1. Partnership at will
2. Particular partnership
3. Limited partnership

PARTNERSHIP AT WILL

If the partnership is formed for an undefined time, it is called partnership at will. Any partner can dissolve it at any time by giving the notice. According to Partnership Act, 1932:

“If no provision is made in the agreement regarding the partnership, it is called partnership at will.” Partnership at will may be created under the following circumstances:

1. Indefinite Period If partnership has been formed for an indefinite period, it is called partnership at will. 2. Existence after Completion of Venture If partnership has been formed for a particular venture and after completion such venture it remains continue, it becomes a partnership at will. 3. Existence after Expiry of Period If partnership has been formed for a definite time period, so after the expiry of this period, it becomes partnership at will.

PARTICULAR PARTNERSHIP

If the partnership is formed for a particular object of temporary nature, it is called particular partnership. On completion of a particular venture, it comes to an end. Under this no regular business is done. For example: Partnership for the construction of a building and partnership for producing a film.

LIMITED PARTBNERSHIP

Limited partnership is that in which liabilities of some partners are limited up to the amount of their capitals. In this partnership, there is at least one partner who has unlimited liability. In Pakistan, this type of partnership is not formed. There is a separate partnership act for it.

MAIN FEATUTRES

Main features of partnership are:

1. Limited Partner There is at least one partner who has limited liability. 2. Unlimited Partner There is at least one partner who has unlimited liability.

3. Number of Partners There are at least two partners or maximum 20 in an ordinary business and not more than 10 in banking business. 4. Admission of New Partner New partners may be admitted in this partnership without the consent of limited partners but with the consent of unlimited partners. 5. Registration The registration of this partnership is compulsory by law. 6. Transferability of Shares Limited partner can transfer his shares to any other person with the consent of all other partners. 7. Inspection of Books Limited partner has a right to inspect the books of accounts. 8. Rights of Suggestions Limited partner has a right to give suggestions to others who manage the business. 9. Participation in Management A limited partner cannot take part in the management of the business. 10. Withdrawal of Capital A limited partner cannot withdraw his capital until he remains in partnership business. 11. Separate Legislation It is enrolled under the Limited Partnership Act, 1907, instead of Partnership Act, 1932.

TERMINATION OF PARTNERSHIP

All forms of partnership under Islamic law may be terminated as:

1. Notice

In all the above forms of partnership each partner has a fight to terminate the partnership by giving notice to other partners.

2. Death Partnership is also terminated on the death of a partner.