Partnership Law
Partnership
Law:
3.1 Definitions in Partnership Law
Partnership is defined under Section 4 of the
Partnership Act, 1932:
“A relation between persons who have agreed to share the profits of a business
carried on by all or any of them acting for all.”
Key Terms:
- Partners:
Persons who enter into the partnership.
- Firm:
Collective name of the partners.
- Firm
Name: Name under which the business is conducted.
Example:
Ali, Ahmed, and Ayesha start a bakery business together, agree to share profits
and contribute capital. They form a partnership.
Business Relevance:
- Enables
sharing of capital, skills, and risk.
- Promotes
entrepreneurship without needing large capital.
3.2 Types of Partnership
- General
Partnership: Equal rights, unlimited liability.
- Particular
Partnership: For a specific venture or period.
- Partnership
at Will: No fixed term; can be dissolved at any time.
- Limited
Partnership: Some partners have limited liability.
Example:
A and B start a garment business for 2 years — this is a particular
partnership.
Advantages to Business Students:
- Flexibility
in management roles.
- Choice
of liability exposure.
- Practical
form of starting small businesses.
3.3 Essential Elements of a Partnership
- Agreement
between persons
- Existence
of business
- Profit-sharing
- Mutual
agency – Each partner can act on behalf of the firm.
Example:
If no intention to share profits exists, it's not a partnership.
3.4 Registration of Partnership Firms
Registration is not mandatory, but an unregistered firm
cannot:
- Sue a
third party.
- Enforce
a right arising from contract.
Procedure:
- Apply
to the Registrar of Firms.
- Provide
firm name, address, names of partners, etc.
Advantages:
- Legal
identity.
- Access
to court remedies.
- Credibility
with banks.
3.5 Partnership Becoming Illegal
A partnership becomes illegal if:
- It
engages in unlawful business.
- It
exceeds the maximum number of partners allowed (20 for business, 10 for
banking in Pakistan).
Example:
A partnership selling smuggled goods is illegal.
3.6 Partnership Distinguished from Company
|
Partnership |
Company |
|
No separate legal entity |
Separate legal entity |
|
Unlimited liability |
Limited liability |
|
Formed by agreement |
Formed by registration |
|
Easy to form and dissolve |
Complex legal process |
3.7 Partnership Distinguished from Private Company
|
Partnership |
Private Company |
|
Not a separate legal entity |
Separate entity |
|
No perpetual succession |
Perpetual succession |
|
Max 20 partners |
Max 200 members |
|
No shares issued |
Shares issued privately |
3.8 Partnership Distinguished from Co-Ownership
|
Partnership |
Co-Ownership |
|
Formed by agreement |
Can arise by operation of law |
|
Exists for business |
Not necessarily for business |
|
Mutual agency |
No mutual agency |
Example:
Two brothers inheriting land are co-owners, not partners.
3.9 Partnership Agreement
Also called Partnership Deed.
Key Contents:
- Name,
address, nature of business
- Capital
contribution
- Profit/loss
sharing ratio
- Duties
of partners
- Procedure
for disputes and dissolution
Importance for Students:
- Helps
avoid future disputes.
- Encourages
clarity and legality in business dealings.
3.10 Rights and Liabilities of Members of a Partnership
Firm
Rights:
- Participate
in business
- Share
in profits
- Access
to books
- Interest
on capital
Liabilities:
- Unlimited
liability
- Joint
and several liability for firm debts
Example:
If the firm takes a loan, all partners are liable even if one partner took it.
3.11 Personal Profits Earned by Partners
Partners must not:
- Make
secret profits.
- Compete
with the firm.
If they do, they must account for such profits to the firm
(Section 16).
Example:
If A, a partner in a logistics firm, earns separate commissions from customers
secretly, he must return them to the firm.
3.12 The Property of the Firm
- Includes
assets brought in or acquired for business purposes.
- Must
be used only for firm activities.
Example:
If a car is bought with firm money, it belongs to the firm, not any individual
partner.
3.13 Implied Authority of a Partnership
Each partner is an agent of the firm. Acts done in the usual
course of business bind the firm unless restricted by agreement.
Example:
A partner signing contracts or issuing cheques on behalf of the firm has
implied authority.
3.14 Principle of Holding Out
A person who represents (or allows himself to be
represented) as a partner is liable as a partner to third parties, even if not
actually a partner.
Example:
If C lets others think he is a partner and a creditor gives credit based on
that, C is liable.
3.15 Minor as a Partner
A minor cannot be a full partner but can be admitted
to the benefits of partnership with consent of all partners (Section 30).
On attaining majority:
- Must
choose to become full partner or not.
- Must
declare within 6 months.
3.16 Reconstitution of a Firm
Occurs when:
- A new
partner is admitted.
- A
partner retires or dies.
- Change
in profit-sharing ratio.
Note: This is not dissolution, just a change
in structure.
3.17 Dissolution of Partnership and Settlement of
Accounts
Dissolution:
- By
agreement
- On
expiry of term
- On
death or insolvency
- By
court order (misconduct, incapacity, etc.)
Settlement of Accounts:
- Pay
firm debts
- Return
capital
- Distribute
remaining profits/losses
3.18 Rights and Obligations after Dissolution
Rights:
- Right
to share surplus
- Right
to indemnity for firm liabilities paid after dissolution
Obligations:
- Complete
unfinished business
- Inform
public and clients about dissolution
Example:
Partners must advertise dissolution to avoid future liability.
✅ Benefits of Studying
Partnership Law for Business Students
- Builds
understanding of how businesses are structured legally.
- Clarifies
rights, duties, and risks in joint ventures.
- Prepares
for entrepreneurship, partnerships, and startups.
- Equips
with legal knowledge for real-world business decision-making.
