SUBJECT: COMMERCE Class: 11 (ISC) Chapter 6: Partnership Date: 30 th July, 2018

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SUBJECT: COMMERCE Class: 11 (ISC) Chapter 6: Date: 30 th July, 2018 A partnership is a voluntary association of two or more persons who agree to carry on some business jointly and share profits and

The number of persons in a partnership must not exceed 10 in a normal business and 20 in banking business otherwise it will become an illegal association of persons.

1 SUBJECT: COMMERCE Class: 11 (ISC) Chapter 6: Date: 30 th July, 2018 A partnership is a voluntary association of two or more persons who agree to carry on some business jointly and share profits and losses. They combine their funds and skills to carry on lawful business. Features of 1. Two or more persons There must be atleast two or more persons. The number of persons in a partnership must not exceed 10 in a normal business and 20 in banking business otherwise it will become an illegal association of persons. The members of the firm may become partners in another firm but a firm cannot become a partner of another firm. 2. Agreement The relation of partnership arises from the formation of a contract or agreement and not by virtue of birth or status. The agreement may be oral or written but it must satisfy all the essentials of a valid contract. 3. Lawful Business A partnership must be carried on only with the purpose of carrying on some lawful business. Illegal acts such as theft, dacoity, smuggling, etc cannot be termed as partnership. 4. Sharing of Profits There is no partnership without the intention of mutual gain. The partners should share profits and losses in an agreed ratio. 5. Mutual Agreement A partnership is an implied agency. Every partner is acting on behalf of the other. They are implied agents of each other and the firm. Each partner is liable for the acts performed by the other partners on behalf of the firm. 6. Utmost Good Faith There must be mutual trust and confidence amongst all the partners. Each one must work in the best interest of the firm and the co-partners. They must show true accounts and must not make secret profits out of the business. 7. Unlimited Liabilities The liability of the partners is joint and several. In case the assets of the firm aren t sufficient to pay the debts of the firm, the personal property of each partner can be attached to pay the creditors. 8. Restriction on transfer of interest A partner cannot transfer his share in the business without prior consent of all the partners. 9. Joint ownership and control A partnership is owned and controlled by all the partners together. Formation of Firm Deed A can be formed only through an agreement between two or more persons. This agreement may be oral or in writing. The Law does not prescribe a mode of formation. It is not even compulsory to register a partnership firm. To avoid disputes it is advisable to have a written ( 1 )

2 agreement. However, in the absence of such an agreement the rights and duties of partners are determined by the Act, A partnership deed is a written agreement among the partners. It contains the terms and conditions of partnership. It is not a Public Document. A deed may usually contain the following details: 1. Name of the firm 2. Nature of the firm s business 3. The principal place of business 4. Duration of, if any 5. Name and addresses of partners 6. Amount of capital to be contributed by each partner 7. Amount that can be withdrawn by the partner 8. The profit- sharing ratio 9. Rate of interest (if any) on capital and drawings 10. Amount of salary or commission payable to partners 11. Allocation of work among partners 12. Mode of valuation of goodwill 13. Procedure of admission, retirement, etc. of a partner 14. Procedure for maintain accounts and getting them audited 15. Procedure to be followed in event of dissolution of the firm and settlement of the accounts 16. Loans and advances by partners and rate of interest payable to them 17. Arbitration clause in case of disputes among partners. Procedure for the Registration The Registration of a firm is not compulsory under the law. A firm may be registered at the time of the formation or at any other time thereafter. A prescribed registration form must be filed with the Registrar of Firms. The application should contain the following information: i. The name of the firm ii. The principal place of business iii. Names of other places where the firms business is carried on. iv. Names in full and permanent address of the partners. v. The date on which the partners joined the firm. vi. The duration of partnership if any. The application must be duly signed and verified by all the partners. It is then submitted to the Registrar of Firms of the area in which the principal place of the firm s business is situated or proposed to be situated. A registration fee is to be deposited. The application is then examined by the Registrar. If found satisfactory, the registrar makes an entry in the register of firms and issues a certificate of registration. Registration doesn t make the firm a legal entity. ( 2 )

3 Types of General Limited Liability at Will Particular 1. General In general partnership each partner has unlimited liability. It means creditors can recover their payments from the personal property of any of the partners if the assets of firms are not sufficient. An exception is made in case of a minor partner whose liability is limited to the extent of his share in capital and profits of the firm. Each partner in general partnership is entitled to take active in the management of the firm unless otherwise decided by other partners. 2. Limited Liability (LLP) Limited Liability is now allowed in India Under Limited Act, Its main features are:- i. A Limited liability partnership must be registered under the Act. ii. Minimum number required to form such a partnership is two and there is no maximum limit. iii. iv. An LLP is a corporate body having separate legal status and perpetual succession. The liabilities of the partners is limited to their share capital in the firm. No partner is liable for any unauthorised or independent action of the other. v. True and fair picture of the state of affairs must be maintained annually. vi. vii. If the firm or its partners carry out business with the intention of fraud, then the limited liability of the partners would become unlimited. LLP is a hybrid form of business combining the features of both a partnership firm and a joint stock company. Advantages of an LLP: i. Since an LLP has a separate legal status, it is capable of owning and holding property in its own name. ii. It does not dissolve by retirement, insolvency or death of a partner and therefore enjoys perpetual succession. iii. As the liability of the partners is limited, they do not have to bear unlimited risk. iv. There is no maximum limit on the number of partners in an LLP and therefore they can raise huge funds for the growth and expansion of the business. v. A body corporate can be a partner in an LLP. Disadvantages of an LLP: i. As an LLP has to be registered, it has to spend a lot of time and money on the documentation and formalities of registration. ii. Secrecy of affairs cannot be maintained as it has to fulfil legal requirements. iii. Limited liability of the partners reduced the credit standing on the business. iv. Due to legal formalities, flexibility is reduced. v. If the business is carried out with the intension of fraud then the limited liability is converted into unlimited liability. ( 3 )

4 3. at will The duration and purpose of the firm is not mentioned. It is formed for an indefinite time depending upon the will of the partners. It dissolves when any partner gives a notice to the other partners expressing the desire to quit the firm. 4. Particular It formed for a particular period of time and for a specific purpose. Once the time period and the objective for which the firm was formed is achieved, the partnership dissolves automatically. Types of s Type of s 1. Active/ Working 2. Sleeping/ Dormant 3. Secret 4. Limited 5. s in profits only Capital Yes Yes Yes Yes Yes contribution Participation in the Active Participation No Active No active No active management Liability Unlimited Unlimited Unlimited Limited Unlimited Loss Sharing Known to the outside world Yes May or May not No Yes Yes Shares only profits and NO 6. Nominal or Ostensible or Quasi Such a partner neither contributes capital nor takes part in the management of the firm. He does not share profits or losses but only lends his name and reputation for the benefit of the firm. He allows himself to be a partner to the firm either knowingly or unknowingly. He is liable to the outsiders for the debts of the firm. There are two types if nominal/ostensible/quasi partner: a. by Estopple He is a person who by his words (spoken or written) or by his conduct represents himself as a partner of the firm. He therefore becomes liable to the creditors of the firm who have advanced money to the firm on the basis of such representation. For example: A rich man, Mohan, is not a partner to ABC Enterprise but tells Rohan that he is a partner to that firm. Knowing that Mohan is a partner in ABC Enterprise, Rohan sells goods worth Rs. 50,000 to ABC enterprise. Later on the firm is unable to pay the amount. Rohan can now recover this amount from Mohan who claimed to be a partner in ABC enterprise. Thus, Mohan is a by Estopple in ABC Enterprise. b. by Holding Out When a person is declared a partner but he does not deny this even after being aware of the same, he becomes liable to third parties who have lent the firm money or credit to the basis of such declaration. For Example: Seema tells Rohan in the presence of Mohan that Mohan is a partner in ABC Enterprise. Mohan does not deny the same. Later on Rohan lends an amount of Rs. 40,000 to ABC Enterprise on the basis of the impression that Mohan is a partner to the firm. The firm fails to repay the amount to Rohan. Mohan is now liable to pay Rs. 40,000 to Rohan. In this case, Mohan is a partner by holding out. 7. Minor as a A person who is not completed 18 yrs of age is known as a minor. A minor cannot enter into a contract and therefore cannot be a partner. He may however be admitted as a ( 4 )

5 partner with the mutual consent of all the other partners. On being admitted he is entitled to share profits of the firm but his liability remains limited to the extent of share capital and profits in the firm. He cannot take active part in the management of the business but can inspect the books of accounts. He cannot file a case against the firm or his partners to get his share in the firm except with he wishes to disassociate himself from the firm. On attaining majority, the minor must give a public notice within six months if he wants to disassociate himself from the firm. If he does not give such a notice or does not wish to disassociate himself from the firm then, his liability becomes unlimited from the date he was admitted to the benefits of partnership. He s also allowed to take actively participate in the management of the firm. 8. Sub- He is an outsider / third person with whom the partner of the firm agrees to share his profits. The sub partner cannot take part in the management and he s not liable for the debts of the firm. Extra Questions: 1. Explain the merits of a partnership firm. 2. Explain the demerits of a partnership firm. 3. What are the consequences of non-registration of a firm? 4. Distinguish between Firm and Sole Proprietorship. INSTRUCTIONS TO STUDY THIS CHAPTER: Please read your book for detailed information of the above topics. The length of the answer depends on the marks in the question paper and may not only be substituted with what is mentioned in the notes. Examples can be used to elaborate your points for this chapter. ( 5 )

Chapter # 11. Partnership Formation. Principles of Accounting B.Com Part I. Sameer Hussain

Chapter # 11. Partnership Formation. Principles of Accounting B.Com Part I. Sameer Hussain Partnership Formation Principles of Accounting B.Com Part I www.facebook.com/a4accounting.net WHAT THE EXAMINER USUALLY ASK? General Journal entries. Initial Balance Sheet. Page 164 PARTNERSHIP FORMATION