Chapter 5 Partnership Firm Class 11 (HSEB/NEB)

 Chapter 5
PARTNERSHIP FIRM

The business firm is established, owned, and managed by two or more persons to share profit, losses, and risk. The following are the characteristics of a partnership business.

 

Feature of partnership Business

1. formation
2. Mutual agreement
3. Transfer of ownership
4. Profit and Losses Sharing
5. unlimited liabilities
6. lack of separate entity
7. management and control
8. agency relationship
9. utmost and good faith
10. individuality of partner

1. Formation: A partnership business is formed when two or more individuals come together and agree to establish and operate a business for a common purpose.

 

2. Mutual agreement: A partnership is based on a mutual agreement between the partners. They must agree on the terms and conditions of the partnership, including capital contributions, profit-sharing ratios, decision-making processes, and other important aspects of the business.

 

3. Transfer of ownership: Partnerships allow for the transfer of ownership among partners. If a partner wishes to leave the partnership or a new partner wants to join, the consent of all existing partners is typically required.

 

4. Profit and losses sharing: One of the key features of a partnership is the sharing of profits and losses among partners. The agreed-upon profit-sharing ratio determines how the profits will be distributed among the partners. Similarly, losses are also shared according to the partners' respective contributions.

 

5. Unlimited liabilities: Partnerships typically have unlimited liability, which means that each partner is personally liable for the debts and obligations of the business. This means that partners' personal assets can be used to settle the partnership's debts.

 

6. Lack of separate entity: A partnership does not have a separate legal entity from its partners. It is not considered a distinct legal entity like a corporation. Instead, the partners themselves are personally liable for the partnership's obligations.

 

7. Management and control: Partnerships allow for shared management and control of the business. The partners collectively make important decisions and manage the operations of the business. The extent of each partner's authority and responsibilities is typically outlined in the partnership agreement.

 

8. Agency relationship: In a partnership, an agency relationship exists between the partners. Each partner is considered an agent of the partnership and has the authority to bind the partnership in contracts and business transactions, as long as it falls within the scope of the partnership's business.

 

9. Utmost good faith: Partners are expected to act with utmost good faith towards each other and the partnership. They should conduct business honestly, transparently, and in the best interest of the partnership. Any breach of good faith may lead to legal consequences.

 

10. The individuality of partners: Each partner in a partnership retains their individual identity and legal status. They can enter into contracts, own assets, and incur personal liabilities outside of the partnership. However, their actions may still impact the partnership and can have consequences for the business.

 

Difference between soul trading concern and partnership firm

1. Ownership
2. formation
3. distribution of profit and loss
4. management
5. transfer of ownership
6. secrecy
7. possibility of expansion
8. incentive to work

Ownership:

- Sole Trading Concern: In a sole trading concern, the business is owned and managed by a single individual who is solely responsible for all the business's profits, losses, and liabilities.

- Partnership Firm: In a partnership firm, the business is owned and managed by two or more individuals who share the profits, losses, and liabilities according to the agreed-upon terms.

 

Formation:

- Sole Trading Concern: A sole trading concern can be established by a single individual without any formal legal requirements.

- Partnership Firm: A partnership firm is formed through a mutual agreement between two or more individuals, and it often requires formal documentation such as a partnership deed or agreement.

 

Distribution of Profit and Loss:

- Sole Trading Concern: In a sole trading concern, all the profits and losses of the business are solely borne by the individual owner.

- Partnership Firm: In a partnership firm, the profits and losses are shared among the partners based on the agreed-upon profit-sharing ratio mentioned in the partnership agreement.

 

Management:

- Sole Trading Concern: The individual owner has complete control and authority over the management and decision-making of the business.

- Partnership Firm: In a partnership firm, the partners collectively participate in the management and decision-making of the business, and the extent of their authority and responsibilities is defined in the partnership agreement.

 

Transfer of Ownership:

- Sole Trading Concern: The ownership of a sole trading concern cannot be easily transferred, as it is closely tied to the individual owner.

- Partnership Firm: The transfer of ownership in a partnership firm requires the consent of all the partners, as it involves a change in the partnership agreement and the rights and liabilities associated with the business.

 

Secrecy:

- Sole Trading Concern: The business operations and financial information of a sole trading concern can be kept confidential, as the sole owner has complete control over the business.

- Partnership Firm: In a partnership firm, maintaining complete secrecy may be challenging, as partners are required to share information and make joint decisions.

 

Possibility of Expansion:

- Sole Trading Concern: The scope for expansion in a sole trading concern is limited to the resources and capabilities of the individual owner.

- Partnership Firm: A partnership firm has a greater potential for expansion, as additional partners can be brought in, more resources can be pooled, and diverse skills and expertise can be leveraged.

 

Incentive to Work:

- Sole Trading Concern: The sole owner of a sole trading concern has a direct and personal incentive to work hard and earn profits, as they directly benefit from the business's success.

- Partnership Firm: In a partnership firm, partners are motivated to work hard and contribute to the business's success to maximize their share of the profits and secure their financial interests.

 

Reason for starting (advantages)of partnership business

1. Easy to form
2. large financial resources
3. flexibility
4. Fusion of business ability and skill
5. secrecy
6. possibility of growth
7. prompt decision
8. continuity of business
9. the incentive to work hard
10. effective management and control

 

1. Easy to form: Partnership businesses can be established quickly and with minimal legal requirements, making it a straightforward option for entrepreneurs looking to start a business together.

 

2. Large financial resources: Partnerships allow for the pooling of financial resources from multiple individuals, increasing the capital available for the business's operations, investments, and growth.

 

3. Flexibility: Partnerships offer flexibility in decision-making and operations, as partners can adapt and make changes quickly without being bound by complex corporate governance structures.

 

4. Fusion of business ability and skill: Partnerships bring together individuals with diverse expertise, skills, and knowledge, enabling the business to benefit from a variety of perspectives and capabilities.

 

5. Secrecy: Partnership businesses can maintain a higher level of confidentiality compared to publicly traded companies, as partners have more control over the sharing of business information.

 

6. Possibility of growth: Partnerships have the potential for expansion and growth by adding new partners, attracting more resources, and leveraging the combined abilities and networks of the partners.

 

7. Prompt decision: With fewer decision-making layers, partnerships can make decisions more quickly, allowing for timely responses to market changes, customer needs, and business opportunities.

 

8. Continuity of business: Partnerships can ensure the continuity of the business even if one partner exits or passes away, as the remaining partners can carry on the operations without disrupting the business.

 

9. The incentive to work hard: Partners have a direct stake in the success of the business, which serves as a strong incentive for them to work hard, contribute their best efforts, and actively participate in the business's growth.

 

10. Effective management and control: Partnerships offer shared management and control, allowing partners to combine their skills and expertise to effectively manage the business's operations, make collective decisions, and ensure efficient governance.

 

Challenges (disadvantages) of partnership business

1. Unlimited liabilities
2. possibility of conflict
3. difficult in transferring ownership
4. uncertain existence
5. unsuitable for large-scale business
6. less public confidence
7. delay in work
8. risks from dishonest partner
9. abuse of authority
10.  

1. Unlimited liabilities: Partnerships have unlimited liability, meaning that partners are personally responsible for the business's debts and obligations. This puts their personal assets at risk.

 

2. Possibility of conflict: Differences in opinion, decision-making, or profit-sharing can lead to conflicts among partners, potentially affecting the overall functioning and success of the business.

 

3. Difficulty in transferring ownership: Transferring ownership in a partnership can be complex, requiring the consent of all partners and potentially disrupting the business's continuity.

 

4. Uncertain existence: A partnership relies on the continued presence and cooperation of all partners. If a partner decides to leave or is unable to participate, it can lead to uncertainty regarding the partnership's future.

 

5. Unsuitable for large-scale business: Partnerships may face limitations when it comes to raising substantial capital or expanding the business to a large scale due to the restrictions on the number of partners and available resources.

 

6. Less public confidence: Compared to corporations, partnerships may have less public confidence and credibility due to their structure, which can impact relationships with customers, investors, and suppliers.

 

7. Delay in work: Decision-making and actions may be delayed in partnerships as partners need to consult and reach a consensus, which can slow down the business's operations and responsiveness.

 

8. Risks from a dishonest partner: A dishonest or untrustworthy partner can pose risks to the business, such as financial mismanagement, fraud, or unethical practices, potentially causing harm to the partnership's reputation and stability.

 

9. Abuse of authority: In some cases, partners may abuse their authority or act in a manner that is detrimental to the partnership's interests, leading to conflicts and negative outcomes.

 

Contents of partnership deed

1. partners' salary and commission
2. operation of bank account
3. valuation of Goodwill
4. method of keeping account and audit
5. rights and duties of a partner
6. admission and retirement of partners
7. the effect of the dead partner
8. revolution of assets and liabilities
9. name and address of the partnership firm
10. capital contribution
11. the proportion of division of profit and loss
12. drawing of partners and interest theorem
13. nature of business
14. duration of partnership
15. division of work among partners

1. Partners' salary and commission: Specifies the amount or percentage of money each partner will receive as a salary or commission from the partnership.

 

2. Operation of bank account: Describes how the partnership's bank account will be managed, including who can sign checks and any specific rules for using the account.

 

3. Valuation of Goodwill: Explains how the partnership will determine the value of its reputation or brand if a partner joins, leaves, or the partnership dissolves.

 

4. Method of keeping accounts and audit: Describes how the partnership will maintain its financial records and if there will be regular audits to ensure accuracy.

 

5. Rights and duties of partners: Clarifies what each partner can do and what they are responsible for within the partnership, including decision-making and specific roles.

 

6. Admission and retirement of partners: Explain how new partners can join the partnership and how existing partners can leave or retire from the business.

 

7. Effect of death of a partner: Outlines what happens to the partnership if a partner passes away, such as how their share is transferred to their heirs or how the business will continue.

 

8. Resolution of assets and liabilities: Describes how the partnership's assets (like property or money) and debts will be handled if the partnership ends or a partner leaves.

 

9. Name and address of the partnership firm: Specify the official name and registered address of the partnership.

 

10. Capital contribution: States how much money or assets each partner initially invests in the partnership and if additional contributions are required later.

 

11. Proportion of division of profit and loss: Determines the percentage or ratio in which the partnership's profits and losses will be shared among the partners.

 

12. Drawing of partners and interest theorem: Explains how much money partners can withdraw from the partnership's profits and whether interest is payable on their contributions or loans.

 

13. Nature of business: Describes the type of business the partnership will engage in and what products or services it will provide.

 

14. Duration of partnership: States how long the partnership will exist, whether it's for a fixed period or until a specific event occurs.

 

15. Division of work among partners: Allocates specific tasks and responsibilities to each partner based on their skills and abilities.

 

 

Types of Partners

1. General Partners
2. limited partner
3. active partner
4. sleeping Partner
5. nominal partner
6. minor partner
7. incoming partner
8. outgoing partner
9. secret partner
10. partner in profit only
11. quasi partner

 

1. General Partners: General partners actively participate in the management of the partnership, share in its profits and losses, and have unlimited liability for the partnership's debts.

 

2. Limited Partner: A limited partner contributes capital to the partnership but does not participate in its day-to-day management. They have limited liability, meaning their personal assets are protected from the partnership's debts.

 

3. Active Partner: An active partner is actively involved in the operations and decision-making of the partnership, taking on managerial responsibilities and sharing in the profits and losses.

 

4. Sleeping Partner: A sleeping partner, also known as a silent partner, invests capital in the partnership but is not actively involved in its management or decision-making. They only share in the profits and losses.

 

5. Nominal Partner: A nominal partner is someone whose name is included as a partner in the partnership but does not actually contribute capital or participate in the management or financial aspects of the business.

 

6. Minor Partner: A minor partner is someone who is below the legal age of majority. They can be admitted to the partnership with the consent of their guardian, but their involvement in decision-making may be limited.

 

7. Incoming Partner: An incoming partner refers to someone who joins an existing partnership, bringing in capital, skills, or expertise, and becomes a new member of the partnership.

 

8. Outgoing Partner: An outgoing partner is someone who leaves the partnership voluntarily or due to retirement, the sale of their share, or other reasons, resulting in a change in the partnership's composition.

 

9. Secret Partner: A secret partner, also known as a silent partner, is someone who actively participates in the partnership's operations and decision-making but is not publicly disclosed as a partner.

 

10. Partner in Profit Only: A partner in profit only is someone who shares in the profits of the partnership but does not bear any losses or liabilities.

 

11. Quasi Partner: A quasi-partner is someone who, although not formally a partner, is treated as such due to their significant involvement and contribution to the partnership's affairs.

 

Rights and duties of the partners

• Right to participate in management
• right to share in the profit
• right to inspect and take a copy of the Book of accounts
• right to get interested on additional capital
• right to separate from the form
• right to change the rules
• right to express an opinion
• right to dissolve the partnership
• right to appeal
• right to use partnership property
• right to indemnified
• right to get remuneration

Duties

• use the firm's property for business purposes
• To work within the authority
• mutual faith and honesty
• to share in the loss
• permission to transfer interest
• to render an accurate account
• to work for common interest
• not to disclose secrecy

 

Rights of Partners:

1. Right to participate in management: Partners have the right to be involved in the decision-making and management of the partnership.
   
   
2. Right to share in profit: Partners are entitled to receive a portion of the profits based on the agreed-upon sharing ratio.
   
   
3. Right to inspect and take copies of the Book of Accounts: Partners can review and request copies of the partnership's financial records for transparency and accountability.
   
   
4. Right to get interested on additional capital: Partners may receive interest on any additional capital they contribute to the partnership.
   
   
5. Right to separate from the firm: Partners have the option to leave the partnership voluntarily, subject to the terms and conditions specified in the partnership agreement.
   
   
6. Right to change the rules: Partners can collectively modify or amend the partnership agreement and internal rules by mutual agreement.
   
   
7. Right to express an opinion: Partners have the right to voice their opinions, concerns, and ideas regarding the partnership's affairs and decision-making.
   
   
8. Right to dissolve the partnership: Partners, in certain circumstances, may have the right to dissolve the partnership and bring it to an end.
   
   
9. Right to appeal: Partners have the right to challenge or seek redress through appropriate legal channels in case of disputes or disagreements.
   
   
10. Right to use partnership property: Partners can utilize the partnership's assets and property for the business's purposes, as outlined in the partnership agreement.
    
    
11. Right to be indemnified: Partners are entitled to be reimbursed or protected from any losses or liabilities incurred in the normal course of partnership activities.
    
    
12. Right to get remuneration: Partners may receive remuneration or a salary as specified in the partnership agreement for their services or efforts.

 

Duties of Partners:

1. Use the firm's property for business purposes: Partners must utilize the partnership's assets and property solely for the benefit and operations of the business.
   
   
2. Work within the authority: Partners should exercise their powers and perform their duties within the boundaries of the authority granted to them by the partnership agreement.
   
   
3. Mutual faith and honesty: Partners are expected to act in good faith, honesty, and loyalty towards each other and the partnership.
   
   
4. Share in the loss: Partners are obligated to bear their share of any losses incurred by the partnership, as specified in the agreed-upon profit-sharing ratio.
   
   
5. Permission to transfer interest: Partners usually need the consent of other partners to transfer or sell their ownership interest in the partnership.
   
   
6. Render accurate accounts: Partners are responsible for providing accurate and complete financial records and reports related to their activities within the partnership.
   
   
7. Work for common interest: Partners should prioritize the collective interest and success of the partnership over individual interests or personal gain.
   
   
8. Not to disclose secrecy: Partners are required to maintain confidentiality and not disclose sensitive information about the partnership, its operations, or its clients/customers.

 

 

 

 

Types of partnership

1. Limited Partnership
2. general or unlimited partnership
3. Partnership at will
4. Particular partnership
5. Partnership for a fixed period
6. Partnership for a fixed work
7. legal partnership
8. illegal partnership

 

1. Limited Partnership: A partnership that consists of at least one general partner, who has unlimited liability, and one or more limited partners, who have limited liability and are not involved in the management of the business.

 

2. General or Unlimited Partnership: A partnership where all partners have unlimited liability for the partnership's debts and actively participate in the management and operations of the business.

 

3. Partnership at Will: A partnership that doesn't have a fixed duration and can be dissolved by any partner at any time, without prior notice.

 

4. Particular Partnership: A partnership formed for a specific purpose or project, where partners join together to collaborate on a particular endeavor.

 

5. Partnership for a Fixed Period: A partnership that has a predetermined duration or time frame specified in the partnership agreement, after which it may be dissolved or renewed.

 

6. Partnership for a Fixed Work: A partnership formed to complete a specific task or project, which terminates upon the completion of that work.

 

7. Legal Partnership: A partnership that operates within the legal framework, complying with all relevant laws and regulations governing partnerships.

 

8. Illegal Partnership: A partnership that engages in activities that are prohibited by law or operate without fulfilling legal requirements, making it unlawful.

 

The registration of Partnership Firm

1. Submission of the application form
2. Deposit of fee for registration alternation
3. Alternation in any statement
4. obtained registration certificate
5. registration in the tax office

 

1. Submission of the application form: The partners need to complete the prescribed application form provided by the concerned authority or office responsible for partnership registrations. The form will require information such as the name of the partnership, partners' details, business address, nature of business, and other relevant information.

 

2. Deposit of fee for registration: Along with the application form, a registration fee must be paid. The fee amount may vary depending on the jurisdiction and local regulations. The partners need to submit the required fee to the designated office or authority.

 

3. Alteration in any statement: If there are any changes or alterations to the initial application, such as a modification in partners' details or business address, it is necessary to inform the registration authority promptly. This ensures that the registration records are accurate and up to date.

 

4. Obtained registration certificate: After reviewing the application and ensuring that all necessary requirements are met, the registration authority will issue a registration certificate. This certificate serves as proof that the partnership firm is officially registered and recognized by the government.

 

5. Registration in the tax office: Once the partnership is registered, it is essential to register with the relevant tax office. This registration ensures compliance with tax obligations and allows the partnership to obtain a tax identification number (TIN) or other tax-related documentation necessary for business operations.

 

Just for your information don't include this in your notes
(It is important to note that specific laws, procedures, and requirements for partnership registration can be subject to change or vary based on local regulations. Therefore, it is advisable to consult with legal professionals or relevant government authorities in Nepal to obtain accurate and up-to-date information on partnership registration procedures in the country.)

 

Procedure of Partnership Firm Renewal in Nepal

1. Preparation of renewal documents: Gather all the necessary documents required for the renewal process. This may include the original partnership registration certificate, previous renewal certificates, partnership agreement, and other relevant documents.

 

2. Submission of renewal application: Prepare a renewal application form provided by the concerned authority or office responsible for partnership renewals. Fill out the form with updated information about the partnership, such as any changes in partners, business addresses, or other relevant details.

 

3. Payment of renewal fee: Calculate the renewal fee based on the applicable rates set by the concerned authority. Make the necessary payment and obtain the receipt as proof of payment.

 

4. Submission of documents: Compile the renewal application form, payment receipt, and other required documents. Submit these documents to the appropriate office or authority responsible for partnership renewals. Ensure that all the necessary information is accurately provided and the documents are complete.

 

5. Verification and processing: The renewal application and documents will be reviewed by the registration authority to verify the accuracy and completeness of the information. The authority may conduct any necessary checks or inspections to ensure compliance with the partnership laws and regulations.

 

6. Issuance of renewal certificate: If the renewal application is approved, the registration authority will issue a renewal certificate. This certificate serves as proof that the partnership firm has been successfully renewed and is valid for the specified period.

 

7. Update tax records: Once the partnership renewal is complete, it is important to update the partnership's tax records with the relevant tax office. This ensures compliance with tax obligations and allows for the smooth continuation of business operations.

 

Method of Dissolution of Partnerships Firm in Nepal

1. Dissolution by agreement
2. dissolution by notice
3. dissolution at any time
4. dissolution by the end of the Fixed period.
5. Dissolution on the completion of fixed work
6. immediate dissolution
7. dissolution by the concerned Department

 

1. Dissolution by Agreement: The partners mutually agree to dissolve the partnership by entering into a written agreement. This can happen at any time, regardless of the duration or completion of work.

 

2. Dissolution by Notice: A partner can initiate dissolution by giving notice to the other partners. The notice period may be specified in the partnership agreement or determined by local laws.

 

3. Dissolution at Any Time: The partnership can be dissolved at any time if one or more partners express their intention to dissolve the firm. This dissolution may be initiated even if there is no specific cause or reason stated.

 

4. Dissolution by the End of Fixed Period: If the partnership was formed for a fixed period, the firm automatically dissolves upon the completion of that specified period.

 

5. Dissolution on the Completion of Fixed Work: If the partnership was formed for a specific project or work, the firm dissolves upon the successful completion of that work.

 

6. Immediate Dissolution: In certain circumstances, such as the death or bankruptcy of a partner, the partnership may be dissolved immediately without prior notice or waiting for a specific period.

 

7. Dissolution by the Concerned Department: The concerned government department or authority may order the dissolution of a partnership firm if it is found to be engaged in illegal activities, operating against the public interest, or violating applicable laws and regulations.