Elements of Law relating to Partnership and Limited Liability Partnership: formula sheet

Key formulas

Definition of partnership (Section 4)

Partnership = relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all

Learn this wording. Questions often ask you to pick out its elements.

Five essentials

Two or more persons + Agreement + Business + Profit sharing + Mutual agency

If any one is missing, there is no partnership.

Test of existence (Section 6)

Regard to the real relation between the parties, as shown by all relevant facts taken together

Profit sharing is a relevant fact but not conclusive proof.

Section 6, Explanation 2

Share of profits alone ≠ partner (lender, servant or agent, widow or child of deceased partner, seller of goodwill)

The list is introduced by 'in particular', so it gives examples.

Section 6, Explanation 1

Joint or common interest in property + sharing of profits or gross returns ≠ partners of itself

Co-ownership is not partnership.

Terms (Section 4)

Partners = individually; Firm = collectively; Firm name = name of the business

Do not mix these up in definition-type MCQs.

Definition of partnership (Section 4)

Partnership = agreement + to share profits of a business + carried on by all or any acting for all

All three elements must be present. The persons are called partners and collectively a firm.

Partnership at will (Section 7)

No contract on duration AND no contract on determination ⇒ partnership at will

Both gaps must exist. If either duration or mode of ending is provided for, it is not at will.

Dissolution of a partnership at will (Section 43)

Any partner gives written notice to all other partners ⇒ firm dissolves on the date in the notice, or on the date of communication if no date is given

Notice must be in writing and addressed to all the other partners.

Particular partnership (Section 8)

Partnership formed for particular adventures or undertakings

Under Section 17(c), if such a firm carries out other undertakings, the mutual rights and duties stay the same as for the original ones, subject to contract.

Holding out (Section 28)

Represents himself or knowingly permits representation as partner + outsider gave credit on the faith of it ⇒ liable as a partner to that outsider

Liability is towards the person who gave credit relying on the representation, not towards everyone.

Profit share is not conclusive (Section 6)

Share of profits ≠ partner by itself

Regard the real relation between the parties from all relevant facts. Lender, servant, agent, widow or child annuitant and seller of goodwill are examples.

Implied authority (Section 19(1))

Act done in the usual way, for business of the kind the firm carries on ⇒ binds the firm

Subject to Section 22. Both parts must be met: usual way and usual kind of business.

Acts outside implied authority (Section 19(2))

No power, unless trade usage says otherwise, to: arbitrate, open own-name bank account, compromise a claim, withdraw a suit, admit liability in a suit, acquire immovable property, transfer immovable property, enter into partnership for the firm

Learn it as a plain list of eight acts: (1) submit a dispute to arbitration, (2) open a bank account in his own name, (3) compromise or relinquish a claim, (4) withdraw a suit or proceeding, (5) admit liability in a suit or proceeding, (6) acquire immovable property, (7) transfer immovable property, (8) enter into partnership on behalf of the firm.

Change of authority (Section 20)

Partners may extend or restrict implied authority by contract; an act within implied authority still binds the firm, unless the outsider knows of the restriction OR does not know or believe the person to be a partner

Two things take the outsider out of protection: he knew of the restriction, or he did not know or believe the person was a partner. Either one is enough.

Liability for firm's acts (Section 25)

Every partner is liable jointly and severally for all acts of the firm done while he is a partner

Liability is unlimited and covers only acts done during his time as partner.

Wrongful acts (Section 26)

Wrongful act in the ordinary course of business or with partners' authority ⇒ firm liable to the same extent as the partner

Applies to loss or injury to a third party and to penalties.

After dissolution (Section 47)

Authority continues only to wind up and complete unfinished transactions

Firm is never bound by an insolvent partner's acts after adjudication.

Outgoing partner (Section 36)

May compete; may not use firm name, claim to run the firm's business, or solicit its old customers (subject to contract)

A reasonable agreement limiting time or place of competition is valid.

Who can register and when

Registration may be effected at any time (Section 58)

It is optional. The statement goes to the Registrar of the area where any place of business is situated or proposed to be situated.

Contents of the registration statement

Firm name + principal place + other places + date each partner joined + names and permanent addresses + duration

Signed by all partners or their specially authorised agents. Each signer verifies it.

Effect of non-registration (partner v. firm)

No suit by a person suing as a partner against the firm or any person alleged to be or to have been a partner, unless the firm is registered and the plaintiff is shown in the Register of Firms as a partner (Section 69(1))

Covers rights from a contract or conferred by the Act. The bar applies if the firm is unregistered or the plaintiff is not shown in the Register.

Effect of non-registration (firm v. third party)

No suit by the firm against a third party on a contract unless registered and the persons suing are shown as partners (Section 69(2))

Applies also to set-off claims. Section 69 has no bar on a third party suing the firm.

What non-registration does not bar

Suit for dissolution, suit for accounts of a dissolved firm, realisation of property of a dissolved firm (Section 69(3))

Also, Section 69 does not apply to the cases in Section 69(4), such as small claims not exceeding one hundred rupees of the kind described there.

Recording changes

Notice to Registrar of change in constitution or dissolution, stating the date (Section 63)

Given by an incoming, continuing or outgoing partner, or a person who was a partner just before dissolution.

Modes of retirement

Consent of all other partners OR express agreement OR written notice (if partnership at will) (Section 32(1))

Three modes only.

Liability after retirement

Liable to third parties until public notice is given (Section 32(3))

No liability to a third party who dealt without knowing he was a partner.

Dissolution of the firm

Dissolution of partnership between all the partners (Section 39)

Section 39 covers all the partners. When one partner retires, Section 32 refers to the reconstituted firm.

Definition of LLP (Section 2(1)(n))

LLP = partnership formed and registered under the LLP Act, 2008

It is a body corporate, a separate legal entity from its partners.

Designated partners (Section 7(1))

Minimum 2 designated partners, individuals; at least 1 resident in India

If all partners are bodies corporate, at least two individuals (partners or nominees) must act as designated partners.

Resident in India (Section 7 Explanation)

Stay in India ≥ 120 days during the financial year

Earlier text said 82 days in the preceding year; this was changed w.e.f. 1-4-2022.

Filing designated partner particulars (Section 7(4))

Within 30 days of appointment

Prior consent of the individual is needed first (Section 7(3)).

DPIN (Section 7(6))

Every designated partner must obtain a DPIN

Obtained from the Central Government.

Governing document (Section 23)

LLP agreement first; First Schedule if agreement is silent

Agreement and changes are filed with the Registrar.

Penalty for misuse of name (Section 20)

Fine: minimum ₹50,000, maximum ₹5,00,000

Applies to a person carrying on business with LLP as the last word without being incorporated as an LLP.

Conversion of firm (Section 55)

A firm may convert into an LLP under the Act and the Second Schedule

Conversion is permitted, not compulsory.

Governing document (LLP Act, Section 23)

Mutual rights and duties = LLP agreement; if agreement is silent → First Schedule

Agreement and its changes must be filed with the Registrar. A pre-incorporation agreement binds the LLP only if all partners ratify it after incorporation.

Transfer of partner's interest (Section 42)

Transfer of profit share ≠ dissolution, ≠ disassociation, ≠ right to manage or access information

The transferee gets only the economic rights that were transferred.

Conversion of firm (Sections 55 and 58)

Firm + Second Schedule compliance → Registrar's certificate → LLP exists; property vests; firm deemed dissolved

The LLP must inform the Registrar of Firms within 15 days of registration. Vesting happens without further assurance, act or deed.

Winding up of LLP (Section 63)

Winding up = voluntary or by Tribunal; then dissolution

Only two modes are named in this section.

Application for winding up (Section 51)

Central Government + report under Section 49 + expedient → petition to Tribunal on just and equitable ground

Not available if the LLP is already being wound up by the Tribunal.

Rule-making power (Section 65)

Central Government may make rules on winding up and dissolution

Do not confuse with Section 63, which names the modes of winding up.

Misuse of the name (Section 20)

Fine of ₹50,000 to ₹5 lakh for using 'LLP' as last word of name without incorporation

Applies to each person carrying on business under such a name.

Savings (Indian Partnership Act, Section 74)

Pre-commencement rights, liabilities, proceedings and acts are saved

This is a Partnership Act provision, not an LLP Act provision.

Quick revision

• A partnership firm is not a separate legal entity from its partners; an LLP is a body corporate and a separate legal entity.
• An LLP has perpetual succession, and a change in its partners does not affect its existence, rights or liabilities.
• A partner may retire with the consent of all other partners, under an express agreement, or by written notice if the partnership is at will.
• A retired partner stays liable to third parties for acts of the firm until public notice of retirement is given, but is not liable to a third party who dealt with the firm without knowing he was a partner.
• Public notice of retirement can be given by the retired partner or by any partner of the reconstituted firm.
• After a change in a firm's constitution, partners' mutual rights and duties stay the same as far as may be, subject to contract.
• If a fixed-term firm carries on after its term, it becomes partnership at will, and mutual rights and duties continue as far as consistent with that.
• After dissolution, each partner's authority to bind the firm continues only so far as needed to wind up affairs and complete unfinished transactions.
• A firm is not bound by the acts of a partner adjudicated insolvent.
• In an LLP, mutual rights and duties are governed by the LLP agreement; where the agreement is silent, the First Schedule applies.
• The LLP agreement and any changes must be filed with the Registrar.
• On conversion of a firm into an LLP, its property and liabilities vest in the LLP, and the firm is deemed dissolved and removed from the Registrar of Firms' records.

Common mistakes

• Treating every profit sharer as a partner. Fix: Remember Section 6, Explanation 2. A lender, servant, agent, annuitant or goodwill seller who gets a profit share is not a partner of itself. Check the real relation.
• Saying partnership arises from status, such as being in a joint family. Fix: Partnership arises from agreement. Co-owners sharing income from property are not partners of themselves (Explanation 1).
• Treating every person who receives a share of profits as a partner. Fix: Remember Section 6: profit share alone does not make a partner. Check for lender, servant, agent, annuitant or goodwill seller, and look at the real relation.
• Thinking a sleeping partner is not liable to outsiders. Fix: A sleeping partner is a real partner. Only his role in management differs, not his status under the Act.
• Saying any act by a partner binds the firm. Fix: Always test both conditions of Section 19(1) before concluding.
• Treating the Section 19(2) exclusions as absolute. Fix: Remember the opening words: 'in the absence of any usage or custom of trade to the contrary'.
• Saying an unregistered firm is illegal or void. Fix: Registration is optional. The firm exists and works. Only certain suits are barred under Section 69.
• Thinking a third party cannot sue an unregistered firm. Fix: Section 69 bars suits by a person suing as a partner against the firm or partners, and suits by the firm against third parties. It places no bar on a third party suing the firm.
• Saying an LLP is not a separate legal entity, like a firm. Fix: Remember an LLP is a body corporate with its own legal existence. Only the ordinary firm lacks separate personality.
• Thinking an LLP needs only one designated partner or that none need be resident. Fix: Fix the rule: at least two individual designated partners, at least one resident in India.

Exam tips

• In MCQs, look for trap options that treat lenders, servants or co-owners as partners just because they get a profit share.
• Learn the Section 4 definition word for word; many questions test its phrases.
• For written answers, list the essentials and then apply them to the facts in a short conclusion.
• Remember that Section 6 says all relevant facts taken together; avoid answers based on a single fact.
• For partnership vs company, remember that a firm has no separate legal personality under this Act.
• In Paper 4 the options often differ only in the type name, so learn the one-line cue for each type.
• Expect a Section 6 style question where a lender, servant or annuitant gets a profit share. The answer is usually that the person is not a partner by that fact alone.
• For holding out, always check for credit given on the faith of the representation before answering.