Partnership Laws in the 21st

Century

A comparison between US, British and Indian

situation.
Objective of Study
To find the position of partnership laws in
US, UK and India.
To discuss the recent developments in
partnership laws in US, UK and India.
To do a comparative study of partnership
laws amongst the three counties.
Research Methodology
We have adopted the comparative method
of research.
We have done a comparative analysis of
the partnership laws in US, UK and India.
Chapters
1. The need for partnership laws.
2. History and origin of partnership laws.
3. Partnerships and its types.
4. Partnership laws in India.
5. Partnership laws in UK.
6. Partnership laws in US.
7. Recent developments in partnership laws.
8. Similarities and differences between-
Partnerships and LLP.
Company and LLP.
9. Taxation of partnership firms
 Chapter 1
Need For Partnership Laws
Need For Partnership Laws
 Development of trade and commerce around the
world necessitated a separate and an exhaustive
law.
 A more exhaustive statute was required to help
the members of the business community who
intended to form partnerships.
 To set out clearly the terms and conditions of a
any partnership firm.
 To set out the duties and liabilities of the
partners.
 Resolving conflict between partners.
 Smooth running of the partnership firm.
 Chapter 2
History And Origin of Partnership
Laws
History And Origin Of Partnership
Laws.
Partnership Bill, 1879.(UK).
Partnership Act, 1890.(UK).
The Indian Contract Act, 1872.(Sec.239-266).
Limited Partnership Act, 1907.(UK).
Indian Partnership Act, 1932.
Limited Liability Partnership Bill,
2008.(India)
Uniform Partnership Act, 1914.(US)
Revised uniform Partnership Act, 1996.(US)
 Chapter 3
Partnerships And Its Types
Types of Partnerships
Partnerships-
 General partnerships
 Limited partnerships
 Limited liability partnerships
Types of Partners-
 Active partners
 Dormant partners
 Nominal partners
 Minor as a partner
Types of liabilities-
 Joint liability
 Several liability
 Joint and several liability
General Partnerships
 A general partnership or simply a partnership, refers to
an association of persons or an unincorporated company
with the following major features:

 Created by agreement, proof of existence and estoppel.

 Formed by two or more persons
 The owners are all personally liable for any legal actions
and debts the company may face
 It is a partnership in which partners share equally in both
responsibility and liability.
 General partnerships are not legal entities.
Advantages And Disadvantages of
General Partnerships
Advantages-
 Spreading of business risk.
 Different partners can develop special skills
because each partner can focus on one skill.
 Some partners have more ability to invest capital
resources than other partners
Disadvantages-
 Disputes between partners on business matters
 All are ‘jointly and severally liable’ for his
partners. If one partner incurs a liability, then the
others will also share it.
Limited Partnerships
Limited liability Act 1907.
A limited partnership is a form of
partnership similar to a general partnership,
except that in addition to one or more
general partners (GPs), there are one or
more limited partners (LPs).
It is a partnership in which only one
partner is required to be a general partner.
Limited Liability Partnerships
 The word “partnership” in LLPs is a misnomer,
as the entity is not merely a collective coming
together of two persons:
◦ Results into creation of a new entity with its
own existence
 LLPs are a hybrid between a company and a
partnership:
◦ Externally, they have all features of a company
◦ Internally, they are run and managed by the
members, hence they are like partnerships
◦ The idea is to clothe a partnership with
Limited liability
personality of its own.
Types of Partners
 Active partners:
The partners who actively participate in the day-to-
day operations of the business are known as active
partners. They contribute capital and are also
entitled to share the profits of the business. They
also share the losses that the business faces.
 Dormant partners:
Those partners who do not participate in the day-to-
day activities of the partnership firm are known as
dormant or “sleeping partners”. They only
contribute capital and share the profits or bear the
losses, if any.
Types of Partners
 Nominal partners:
These partners “only” allow the firm to use their
“name” as a partner. They “do not” have any real
interest in the business of the firm. They do not invest
any capital, or share profits and also do not take part
in the business of the firm. However, they do remain
liable to third parties for the acts of the firm.

 Minor as a partner:
In special cases a minor can be admitted as partner
with certain conditions. A minor can only share the
profit of the business. In case of loss his liability is
limited to the extent of his capital contribution for the
business.
Liability of Partners
Joint liability.
Several liability.
Joint and several liability.
Joint Liability
If parties have joint liability, then they are
each liable up to the full amount of the
relevant obligation.
If one party dies, disappears or is declared
bankrupt, the other remains fully liable.
Accordingly, the creditor can sue one, or
other, or both, for the full amount.
However, in suing, the creditor only has
one course of action, i.e., the creditor can
only sue for each debt once.
Example of Joint Liability
If there are three partners, and the creditor
only sues two of them for the outstanding
loan amount and cannot recover the full
amount, he cannot recover the remaining
amount from the partner who is left out of
the lawsuit.
Several Liability
The parties are liable for only their respective
individual obligations.
A common example of several liability is in
syndicated loan agreements, which will
normally provide that each bank is severally
liable for its own part of the loan. If one bank
fails to advance its agreed part of the loan to
the borrower, then the borrower can only sue
that bank, and the other banks in the syndicate
have no liability.
Joint And Several Liability
Under joint and several liability, a claimant
may pursue an obligation against any one
party as if they were jointly liable and it
becomes the responsibility of the
defendants to sort out their respective
proportions of liability and payment.
Disadvantages of Joint And Several
Liabilities.
Its use (instead of proportionate
responsibility) has led to cases in which a
party with a very minor part of the
responsibility unfairly shoulders the
burden of damages.
One of the plaintiff's lawyer's statements
that, “I only need to establish that the state
is 1 % at fault and I can recover all of my
economic damages.”
 Chapter 4
Partnership Laws In India
Partnership Laws In India

Indian Partnership Act, 1932.

Definition and Purpose.
Legislative competence.
 Indian Partnership Act, 1932
(Act 9 of 1932)
Received the assent of the Governor-
General on 8th April 1932.

Came into force on the 1st day of October,

1932, except section 69, which case came
into force on the 1st day of October 1933.
Definition of Partnership
According to sec. 4 of the Indian 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
acting for all.
Persons who have entered into partnership with
one another are called “partners” and
collectively “a firm”, and the name under
which their business is carried out is called the
“firm name”.
Legislative competence
The subject of partnership is included in
item 7 of the Concurrent List in the
Seventh Schedule to the Constitution.
The Parliament and the State legislature
has the power to make laws in this respect
as provided in Art. 246 of the Constitution.
The Deed of Partnership
 Partners in a partnership are largely free to
make whatever agreements between
themselves that they wish to cover their
mutual relationships.
 The powers and rights of the partners
between themselves are governed by any
written agreement they may make.
 This is referred to as the articles or deed of
partnership.
 The deed of partnership is prepared to avoid
misunderstanding between partners.
The Deed of Partnership States The
Following.
 The capital to be contributed by each partner
 The ratio in which profits or losses are to be shared
 The rate of interest, if any, to be paid on capital
before the profits are shared
 The rate of interest, if any, to be charged on
partners’ drawing
 Salaries to be paid to partners
 Arrangements for the admission of new partners
 Procedures to be carried out when a partner retires
or dies.
The 7 Items In The Partnership Act
Regarding Partnership
 Each partner has unlimited liability.
 Every partner is entitled to take part in the management of
the business
 Every partner is entitled to access to the books and
accounts of the partnership
 Voting powers, each partner has one vote.
 Each partner is an agent of the other.
 A new partner can only be admitted to the partnership if
all existing partners give their consent.
 A partnership will be dissolved by:
8. any partner giving notice to the other partner(s) of his
or her intention to leave the partnership
9. the death, insanity or bankruptcy of a partner.
 Chapter 5
Partnership Laws in the UK
Partnership Laws in the UK
 Partnership bill was passed in 1879.
 It became the Partnership Act, 1890.
 Sec 1 clause 1of the UK Partnership Act, 1890
defines partnership as “partnership is the relation
which subsists between persons carrying on
business in common with a view of profit.”
 Under English law partners are agents of each
other, but the partnership does not exist as a legal
entity.
 The partners share unlimited liability.
 Firm is dissolved whenever there is a change of
partner.
 Chapter 6
Partnership Laws In The US
Partnership Laws In The US
The federal government of the United States
does not have specific statutory law
governing the establishment of partnerships.
In the absence of applicable federal law, the
National Conference of Commissioners on
Uniform State Laws has issued non-binding
models laws (called uniform act) to encourage
the adoption of uniformity of partnership law
into the states by their respective legislatures.
This includes the Uniform Partnership Act
and the Uniform Limited Partnership Act.
Uniform Partnership Act
 The Uniform Partnership Act (UPA), is a uniform
act (similar to a model statute), proposed by the
National Conference of Commissioners on
Uniform State Laws (NCCUSL) for the governance
of business partnerships by U.S. States.
 Several versions of UPA have been promulgated
by the NCCUSL, the earliest having been put forth
in 1914, and the most recent in 1997.
 Uniform Limited Liability Partnerships were
added to the UPA in 1996 under the revised RUPA.
Revised Uniform Partnership
Act(RUPA)
The NCCUSL's first revision of UPA was
promulgated in 1992 and amended in 1993
and 1994.
The 1994 revision was often referred to
as the Revised Uniform Partnership Act
(RUPA).
 Chapter 7
Recent Developments In Partnership
Laws
Concept Paper On LLPs In India
Based on the recommendations of the NC
Gupta committee, and the Irani committee, the
Govt had come out with a concept paper and a
draft of the LLP bill in late 2005.
LLP Bill has been placed before
◦ Lok Sabha on 7th Dec 2006
◦ Rajya Sabha on 15th Dec 2006.
The Constitution (entry 44, List 1 of Seventh
Schedule) has put “corporations law” in the
Union List:
◦ As LLPs are to be given an incorporated status, they
will fall under this list.
Need for LLPs
Itcombines the flexibility of a partnership
and the advantages of limited liability of a
company.
This format would be quite useful for small
and medium enterprises in general and for
the enterprises in services sector in particular.
An LLP is similar in some ways to a general
Partnership, except that the individual
members have lower liabilities to any debts
which may arise from running the business.
Key Features of LLP
 An LLP is a corporate body which exists as a legal
‘person’ independently from its members. In this
respect it is just like a LLC.
 LLP membership combines both ownership and the
right to manage the business.
 Members have considerable freedom to agree whatever
terms they wish
 Members of an LLP are taxed in the same way as
partners in a partnership
 It has perpetual succession
 An LLP is fully liable for its own debts and
obligations but the liability of the members is limited
to the capital they have contributed or committed.
Salient Features of The LLP Bill -
Constitution
 Indian law seems based on the Singapore law
 LLP is a body corporate, separate entity, perpetual
succession:
◦ To ensure perpetuality, transferability of
membership is a must
 Members constituting it are members:
◦ Individuals and corporates may be members:
Since body corporate will include an LLP, an LLP
may also be a member
◦ At least 2, maximum unlimited
 Existing firms and Companies may convert themselves
in LLPs – Schedule 2 and 3 provide for the same:
◦ Eligibility in case of a company – no security interest
on the assets of the company
◦ No such eligibility condition in case of firms
LLP Legislation In Other Countries
In UK, LLP law was passed in 2000
The argument was first rejected by the Law
Commission
After a series of consultations, the Bill was
passed in 2000; with tax clarity, the structure
got into offing in April 2001
The UK move set the ball rolling in other
countries too:
◦ Canada (Ontario) introduced LLP law in 1998
◦ Singapore issued consultation paper in 2002,
enacted the law in 2005
In UK, the LLP model is available for all
businesses; in New York, it is open only for
selected professions.
Overview of the UK LLP law
 The law is very short, very simple:
◦ Just 19 sections, no schedules
 The law could afford to be simple, as chunk of the corporate
law provisions arise from separation of ownership and
management
 Owners and managers are the same: one member designated
as “designated member”
◦ May be a founding member or may change
 Unlimited business capacity
 Principle of agency/principalcy applicable:
◦ Every member is an agent of the LLP
 Limited liability must always come with protected capital:
◦ The law provides for capital of each partner, but does not
restrict drawing
 Capital or liability not mentioned in incorporation documents
Distinguishing Features of LLP
 Every partner of the LLP shall be agent of the LLP for
the purpose of the business of the LLP but he shall not
be an agent of other partners like traditional
partnerships.
 A LLP is not liable to third person for the act of a
partner who has no authority to do a particular act and
the person dealing with such partner has knowledge
about it.
 An obligation of the LLP arising out of any contract or
otherwise shall be the sole liability of the LLP.
 The Partners of the LLP shall not be personally
liable for the obligations arising out any contract, but
only for their wrongful acts.
Advantages of LLPs
• Very cheap to incorporate

• Lot of flexibility, very little

accountability

• All benefits of a partnership business,

though with a new entity

• Taxation as general partnerships

 Chapter 8
Similarities and Differences
Partnerships And LLPs-similarities
Partnership V LLP
Cont…………
Company and LLP-Similarities
Company V LLP
 Chapter 9
Partnership Taxation
Partnership Taxation
US-
The entity does not pay taxes on its income. Instead, the
owners of the entity pay tax on their "distributive
share" of the entity's taxable income.
UK-
A partnership is not a legal entity, the partners are
assessed to either UK corporation tax or UK income tax
on their share of the profits and losses of the
partnership.
India-
For taxation purposes a partnership is considered as a
separate legal entity. Hence the entity pays the taxes.
The End….Thank you for your
endless patience.