Partnership Firm: Partnership Deed, Types of Partners and Dissolution (Basics) Questions

Question 1

Define partnership.

Accepted Answer

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

Question 2

What is mutual agency?

Accepted Answer

Mutual agency means each partner is an agent and principal—any partner can act on behalf of the firm and bind the other partners.

Question 3

What is partnership deed?

Accepted Answer

Partnership deed is a written agreement stating the terms and conditions of partnership among partners.

Question 4

Who is a sleeping partner?

Accepted Answer

A sleeping (dormant) partner contributes capital and shares profits but does not take part in day-to-day management.

Question 5

Is registration of a partnership firm compulsory?

Accepted Answer

Registration of a partnership firm is generally optional, but it is advisable because non-registration creates legal disabilities.

Question 6

What is dissolution of firm?

Accepted Answer

Dissolution of firm means termination of partnership among all partners and closure of the business of the firm.

Question 7

Explain essential elements of partnership.

Accepted Answer

Partnership requires **two or more persons** who enter into an **agreement** to carry on a **lawful business**. There must be an intention of **sharing profits** (losses generally follow profit sharing unless agreed otherwise). The most important element is **mutual agency**, meaning the business is carried on by all or any one acting for all and each partner can bind the firm.

Question 8

Explain the importance/contents of partnership deed.

Accepted Answer

Partnership deed is important because it clearly defines rights and duties and helps avoid disputes. It generally includes clauses about **name and nature of business**, **capital contribution**, **profit and loss ratio**, **interest on capital/drawings**, **salary/commission**, **duties and powers of partners**, **admission/retirement/expulsion**, **goodwill valuation**, **accounts and audit**, and **dissolution and dispute settlement** (arbitration clause).

Question 9

Explain types of partners (any three).

Accepted Answer

Types of partners include **active/working partner** who participates in management, **sleeping/dormant partner** who invests and shares profit but does not manage daily work, and **nominal partner** who lends name to the firm without capital contribution. Other types are **partner by estoppel/holding out** (liable to outsiders due to representation) and **minor admitted to benefits** of partnership.

Question 10

Explain effects of non-registration of partnership firm.

Accepted Answer

Non-registration does not make the firm illegal, but it creates disabilities. An unregistered firm **cannot sue** a third party to enforce contractual rights. A partner **cannot sue** the firm or other partners to enforce partnership rights. However, **third parties can sue** the firm and partners. Hence, registration is advisable to avoid such legal restrictions.

Question 11

Differentiate between dissolution of partnership and dissolution of firm.

Accepted Answer

**Dissolution of partnership** means a change in relationship among partners due to admission, retirement, death, or change in profit-sharing; the business may continue. **Dissolution of firm** means termination of partnership among all partners and **closure of business**; all relationships come to an end and accounts are settled.

Question 12

Explain modes of dissolution of partnership firm (brief).

Accepted Answer

A partnership firm may be dissolved **by agreement** among partners or **by notice** in partnership at will. It may also dissolve on **contingencies** like expiry of term, completion of venture, death/insolvency (subject to agreement). **Compulsory dissolution** occurs due to illegality of business or insolvency of all partners. The **court** may order dissolution on grounds like misconduct, incapacity or persistent breach of agreement.

Question 13

Define partnership and explain essential elements/features of partnership in detail.

Accepted Answer

Partnership is the relation between persons who have agreed to share profits of a business carried on by all or any one of them acting for all. It is a popular form of organisation for small and medium businesses.

**Essential elements/features of partnership:**
1. **Two or more persons:** There must be at least two persons to form a partnership.
2. **Agreement:** Partnership arises from a contract (written or oral). It cannot be created by status.
3. **Lawful business:** The agreement must be to carry on a lawful business activity.
4. **Sharing of profits:** Partners agree to share profits of the business. Loss sharing generally follows profit-sharing ratio unless otherwise agreed.
5. **Mutual agency (most important):** The business must be carried on by all partners or by any one acting for all. Each partner is an agent of the firm and can bind the firm and other partners through his acts done in the ordinary course of business.
6. **Relation based on trust and good faith:** Partnership requires mutual confidence, cooperation and honesty among partners.

Thus, partnership is created by agreement, involves profit-sharing and is distinguished by the principle of mutual agency.

Question 14

Explain partnership deed and write the important clauses of a partnership deed. Why is it necessary?

Accepted Answer

A partnership deed is a written agreement that contains the terms and conditions on which a partnership business is carried on. Although partnership can be formed orally, a written deed is highly advisable.

**Important clauses of partnership deed:**
1. Name of the firm and nature/place of business
2. Names and addresses of partners
3. Capital contribution of each partner
4. Profit and loss sharing ratio
5. Drawings and interest on drawings
6. Interest on capital and interest on partners’ loans/advances
7. Salary, commission or remuneration to partners
8. Duties, powers and responsibilities of partners; division of work
9. Accounting system, books of accounts, audit (if any) and closing of accounts
10. Bank operation and authority to sign cheques
11. Rules for admission, retirement, expulsion and death of partners
12. Valuation and treatment of goodwill
13. Settlement of disputes and arbitration clause
14. Duration of partnership and method of dissolution

**Necessity/importance:** The deed provides clarity and prevents misunderstandings by defining rights and duties. It serves as evidence in case of disputes, ensures smooth functioning of the firm and helps in fair settlement of accounts at retirement or dissolution.

Question 15

Explain registration of partnership and effects of non-registration. Also distinguish dissolution of partnership and dissolution of firm.

Accepted Answer

**Registration of partnership:** Registration means recording the firm with the Registrar of Firms by submitting prescribed forms and fees along with required particulars. Registration is generally optional, but it is recommended because it strengthens the legal position of the firm.

**Effects of non-registration:** Non-registration does not make the firm illegal, and the firm can carry on business. However, an unregistered firm faces important disabilities: (i) the firm cannot sue a third party to enforce rights arising from contract, (ii) a partner cannot sue the firm or other partners to enforce partnership rights, and (iii) the firm cannot claim set-off in certain cases. At the same time, third parties can sue the firm.

**Dissolution of partnership vs dissolution of firm:** Dissolution of partnership means a change in the relationship among partners due to events like admission, retirement, death or change in profit-sharing; the business may continue with remaining partners. Dissolution of firm means complete termination of partnership among all partners and closure of business; accounts are settled and the firm ceases to exist.

Thus, registration is advisable to avoid legal disabilities, and dissolution of firm is broader than dissolution of partnership.

Partnership Firm: Partnership Deed, Types of Partners and Dissolution (Basics)

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