TS Inter 1st Year Commerce Study Material Chapter 4 Partnership Firm

Telangana TSBIE TS Inter 1st Year Commerce Study Material 4th Lesson Partnership Firm Textbook Questions and Answers.

TS Inter 1st Year Commerce Study Material 4th Lesson Partnership Firm

Long Answer Questions

Question 1.
Define Partnership. Discuss its advantages and disadvantages.
Answer:
Meaning of partnership: ‘Partnership’ is an association of two or more persons who pool their financial and managerial resources and agree to carry on a business, and share its profits or losses. The person who form a partnership are individually known as ‘partners’ and collectively known as a firm or ‘partnership firm’.

Definition:

• Section 4 of the Partnership Act, 1932 defines partnership as “the relationship between persons who have agreed to share the profits of a business carried on by all or anyone acting for all”.
• According to L.H. Haney, “Partnership is the relationship existing between persons competent to make contract, who agree to carry on a lawful business in common with a view to private gain.

Advantages of Partnership firm:
a) Easy to Form: A partnership can be formed easily without many legal formalities. Since it is not compulsory to get the firm registered, a simple agreement, either in oral, writing or implied is sufficient to create a partnership firm.

b) Larger Resources: Since two or more partners join hands to start partnership firm, it may be possible to pool more resources as compared to sole proprietorship form of business organisation.

c) Better Decisions: In partnership firm each partner has a right to take part in the management of the business. All major decisions are taken in consultation with the consent of all partners. Thus, collective wisdom prevails and there is less scope for reckless and hasty decisions.

d) Benefits of specialisation: All partners actively participate in the business as per their specialisation and knowledge. In a partnership firm providing legal consultancy to people, one partner may deal with civil cases, one in criminal cases and other in labour cases and so on as per their area of specialisation.

e) Flexibility in operations: The partnership firm is a flexible organisation. At any time the partners can decide to change the size or nature of business or area of its operation after taking the necessary consent of all the partners.

f) Sharing of Risks: The losses of the firm are shared by all the partners equally or as per the agreed ratio. The burden of every partner will be much less as compared to the burden of sole-trade. The business expansion will not be hampered for fear of risk.

g) Secrecy: Business secrets of the firm are known to the partners only. It is not required to disclose any information to the outsiders. It is also not mandatory to publish the annual accounts of the partnership firm.

Disadvantages of Partnership Firm:
a) Unlimited liability: The most important drawback of partnership firm is that the liability of the partners is unlimited i.e., the partners are personally liable for the debts and obligations of the firm. Their personal property can also be utilised for payment of firm’s liabilities.

b) Instability: Every partnership firm has uncertain life. The death, insolvency, incapacity or the retirement of any partner brings the partnership to an end.

c) Limited capital: Since the total number of partners cannot exceed 20, the capacity to raise funds remains unlimited as compared to a joint stock company where there is no limit on the number of share holders.

d) Nob-transferability of share: The share of interest of any partner cannot be transferred to other partners or to the outsiders. So, it creates inconvenience for the partner who wants to transfer his share to others fully & partly.

e) Possibility of conflicts: Every partner in the firm has a equal right to participate in the management. Every partner can place his or her opinion or view point before the management regarding any matter at any time. Difference of opinion may give rise to quarrels and lead to dissolution of the firm.

f) Delay in Decision making: All important decisions are taken by the consent of partners, so decision making process becomes time consuming. There may be a possibility of losing business opportunities because of slow decision making.

Question 2.
Is registration of Partnership compulsory under the partnership Act, 1932? Explain the procedure required as registration of a firm.
Answer:
The registration of partnership is not compulsory under Indian Partnership Act, 1932. In England, registration is however, compulsory. In India, there are certain previlages which are allowed to those firms which are registered. Un-registered firms are prejudiced in certain matters in comparison to registered firms. Though directly the registration of firms is not compulsory but indirectly it is so. To avail certain advantages under law, the firm must be registered with the Registrar of firms of the state procedure for registration. For getting the firm registered the partners must file an application with the registrar of firms on a prescribed form. A small amount of registration fees is also deposited along with application form.

The application should contain the following information –

• Name of the firm.
• Location of the firm.
• Names of other places where the firm carries on business.
• The names and addresses of partners.
• The dates on which various partners persons joined the firm.
• If the firm is started for a particular period then that period should be mentioned.
• If the firm is started to achieve specific objective then it should also be given.

The application form should be signed and verified by each partner or his agent.
The particulars submitted to the Registrar are examined. It is also seen whether all legal formalities required have been observed or not. If everything is in order, then the Registrar shall record an entry in the Register of firms and issue the certificate of Registration. The firm is considered registered there on.

Question 3.
Discuss different types of partners.
Answer:
There are different types of partners in a partnership firm. They are:
I. On the base of participation:
1) Active Partner: An active partner is the one who takes active part in the day-to-day working of the business. He may act in various capacities as manager, advisor or organisor. He is also known as working partner or managing partner.

2) Sleeping Partner: A sleeping partner or dormant partner is the one who contribute capital, share profits and losses but does not take part in the working of the concern. He is not known to the public. So, he is also called as secret partner.

II. On the base of sharing profits:
1) Nominal Partner: A nominal partner is who lends his to the firm. He does neither contribute any capital nor does he shares profits of the business. They do not participate in the management of the business. But they are liable to third parties for all acts of the firm.

2) Partners in Profits: He is a partner who shares in the profits of the firm but not losses. But he is liable to third parties like any other partner. He is not allowed to take part in the management of the business.

III. On the base of Behaviour / Conduct:
1) Partner by Estoppel: When a person is not a partner, but posses himself as partner, either by words or in writing or by his acts, he is called partner by estoppel. He neither contributes the capital nor participate in profits and losses. But he is liable to any creditor like any other partner.

2) Partner by Holding out: If a person is considered by outsider as partner in the firm and he does not disclaim it, he is called partner by holding out. He neither contributes the capital to the firm nor participate in profits and losses. But he is liable to third parties for the debts of the firm.

IV. On the base of Liability:
1) Limited Partner: The liability of limited partners is limited to the extent of their capital contribution. This type of partners found in limited partnership.
2) General Partners: The partners having unlimited liability are called general partners.

V. Other partners:
1) Minor Partner: A minor is a person who has not yet attained the age of majority i.e., 18 years. According to Indian contract Act, a minor cannot enter into a contract. A minor may be admitted to the benefits of existing partnership with the consent of all partners. The minor is not personally liable for liabilities of the firm.

Question 4.
What is Partnership Deed? Explain its contents in detail.
Answer:

• It is a document which containing the terms and conditions of a partnership.
• Partnership deed forms the basis of partnership.
• “Partnership deed is a document containing all the matters according to which mutual rights, duties and liabilities of the partners in the conduct of management of the affairs of the firm are determined”.
• The partnership deed can he both oral or in writing. A written agreement, however, should be preferred because nobody can dispute the contents.
• The partnership deed should not contain any term which is contrary to the provisions of the partnership Act. The deed has to be stamped according to Indian stamps Act, 1899. It should be signed by all partners and every partner should have a copy of the deed. The following clauses are generally included in the deed.
  • The name of the firm.
  • Names and addresses of partners.
  • Nature of the business.
  • Location of the business.
  • Duration of the period, if decided. ,
  • The amount of capital to be contributed by each partner.
  • The profit sharing ratio.
  • Rights, duties and liabilities of partners.
  • Salaries, commission pay able to any partner.
  • Amount of withdrawals allowed to each partner.
  • Rate of interest to be allowed on capital as well as rate of interest to be charged on drawings.
  • The method of evaluating good will at the time of admission, retirement or death of partner.
  • Procedure for dissolution of the firm.
  • Maintenance of books of accounts and audit of accounts.
  • Procedure for settlement disputes among the partners.

Question 5.
State rights and duties of partners.
Answer:
The rights and duties of the partners of a firm usually are governed by the partnership agreement (Agreement Deed) among the partners. In case, the partnership deed does not specify them, then the partners will have rights and duties as laid down in the Indian Partnership Act, 1932.

Rights of a partner:

• Right to take part in the conduct and management of the firm’s business.
• Right to be consulted and expressed his opinion on any matter related to the firm.
• Right to have access to inspect and copy any books of accounts and records of the firm.
• Right to have an equal share in the profits of the firm, unless and otherwise agreed by the partners.
• Right to receive 6% interest on loan and advances made by partner to the firm.
• Right to be indemnified for the expenses incurred and losses sustained by partner to the firm.
• Right to the partnership property unless and otherwise mentioned in the partnership deed.
• Every partner has power of authority in an emergency, to do any such acts, for the purpose of protecting the firm from losses.
• Right to act an agent of the partnership firm in the ordinary course of business.

Duties of a partner:

• Should act honestly in the discharge of his duties to the maximum advantage of all the partners.
• Should act in a just and faithful manner towards other partner and partners.
• Should bound to share the losses of the firm equally unless and otherwise agreed upon by all partners.
• Should indemnify the firm against losses sustained due to his wilful negligence in the business.
• Must maintain true and correct accounts relating to the firm’s business.
• No partner should make secret profits by way of commission or otherwise from the firm’s business.
• No partner is allowed to assign or transfer his rights and interest in the firm to an outsider without the consent of other partners.
• A partner must not carry on any business which is similar to or likely to compete with the business of his current partnership firm.

Question 6.
Define Limited Liability Partnership and state its features.
Answer:
Meaning: Government of India passed limited liability partnership Act, 2008 and it was notified on 31st March, 2009. According to this act the LLP shall be a body corporate and a legal entity. Separate from its members. Any two or more persons associated for carrying on a lawful business with a view to earn profit, may be subscribing their names to an incorporation document and filing the same with the Registrar, for forming limited liability partnership.

Definition: According to Section 3 of the Limited Liability Partnership Act, 2008, “an LLP is a body corporate formed and incorporated under the Act. It is a legal entity separate from its partners”.

Features of Limited Liability Partnership:
1) Limited Liability: The important feature of LLP is the liability of partners is limited to extent of their share. The private property of the partners may not be utilized to meet liabilities of the business.

2) Separate legal entity: Limited liability partnership is a separate legal entity as like as a company. The partners and firm are not one and the same, they are separate.

3) Number of members: Every LLP shall have atleast two persons to form the business and atleast one designated partner should be residents of India. There is no limit on the max no. of partners in the LLP.

4) Perpetual succession: Unlike a partnership firm, an LLP can confine its existance even after the death, retirement, insanity or insolvency of one or more partners.

5) Mutual Rights and duties: Mutual rights and duties of the partners within the LLP and governed by an agreement between the partners or between the partners and LLP as the case may be the case.

6) Not liable for un-authorized acts: No partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded form joint liability created by another partner’s wrongful business decisions and misconduct.

Question 7.
What is Dissolution of Partnership Firm? Discuss different types of dissolution of firms.
Answer:
A distinction should be made between the ‘Dissolution of partnership’ and ‘Dissolution of firm’.

Dissolution of partnership: Dissolution of partnership implies the termination of the original partnership agreement or change in contractual relationship among partners. A partnership is dissolved by the insolvency, retirement, incapacity, death, expulsion etc., of a partner or on the expiry / completion of the term / venture of partnership.

A partnership can be dissolved without dissolving the firm. In dissolution of partner-ship, the business of the firm does not come to an end. The remaining partners continue the business by entering into a new agreement.

Dissolution of firm: Dissolution of firm implies dissolution between all the partners. The business of the partnership firm comes to an end. Its assets are realised and the creditors are paid off. Thus, dissolution of firm always involves dissolution of partnership but the dissolution of partnership does not necessarily mean dissolution of the firm.

Partnership firm may be dissolved in any one of the following ways:

1) Dissolution by Agreement: A partnership firm may be dissolved with the mutual consent of all the partners or in accordance with the terms of the agreement.

2) Dissolution by Notice: In case of partnership-at-will, a firm may be dissolved, if any partner gives a notice in writing to other partners indicating his intention to dissolve the firm.

3) Contingent Dissolution: A firm may be dissolved on the expiry of the term, completion of the venture, death of a partner, adjudication of a partner as insolvent.

4) Compulsory Dissolution: A firm stands automatically dissolved if all partners or all but one partner are declared insolvent, or business becomes unlawful.

5) Dissolution through court: Court may order the dissolution of a firm, when any partner becomes member unsound, permanently incapable of performing his duties, guilty of misconduct, wilfully and persistently commits breach of the partnership agreement, unauthorised transfers the whole of his interest or share in the firm to a third person.

Short Answer Questions

Question 1.
Define partnership and state its important features.
Answer:
Meaning: ‘Partnership’ is an association of two or more persons who pool their financial and managerial resource and agree to carry on a business, and share its profit or losses. The persons who form a ‘partnership firm’.

Definition: Section 4 of the partnership Act, 1932 defines partnership as “the relationship between persons who have agreed to share the profits of a business carried on by all or any one acting for all”.

The features of partnership:
1) Formation: The partnership form of business organisation is governed by the provisions of the Indian partnership Act, 1932. It comes into existance through a legal agreement where in the terms and conditions governing the relationship among the partners, sharing of profits and losses and the manner of conducting the business are specified must be lawful and run with the profit motive.

2) Association of two or more persons: In partnership, there must be at least two persons. Maximum number of members in case of Banking business is 10 and for other business is not more than 20.
Minor cannot form a partnership firm as they are in competent to enter into a contract.

3) Unlimited liability: The partners of a firm have unlimited liability. Personal assets may be used for repaying debts in case the business assets are insufficient. The partners are jointly and individually liable for payment of debts.

4) Implied authority: There is an implied authority that any partner can act on behalf of the firm. The business will be bound by the acts of partners.

5) Existence of lawful business: The business of which the persons have agreed to share the profit, must be lawful. Any agreement to indulge in smuggling, back marketing etc., cannot be called partnership business in the eyes of law.

6) Utmost good faith: The main basis of the partnership business is good faith and mutual trust. Each partner should act honestly and give proper accounts to other partners.

7) Principal and agent relationship: There must be an agency relationship between the partners. Every partner is the principal as well as the agent of the firm. When a partner deals with other parties he / she acts as an agent of other partners and at the same time the other partners become the principal agent.

8) Restriction on transfer of shares: No partner can sell or transfer his / her share to others without the consent of the other partners. In case any partner does not want to continue in the partnership, he / she give a notice for dissolution of the partnership.

Question 2.
Discuss the registration procedure of partnership.
Answer:
For registering a partnership, the partners must prepare a statement containing the following particulars and submit the same to the Registrar along with the registration fee.

• Name of the firm.
• Name of the head office and branches, if any.
• The names and addresses of partners.
• Dates on which the partners joined the firm.
• Duration of the business.
• Date of opening the firm, type of business.

The statement must be stamped, dated and signed by all the partners. Along with this statement, a copy of the partnership deed should be submitted to the Registrar. If everything is in order, the Registrar shall record an entry in the Register of firms and will issue a ‘Certificate of Registration’.

Question 3.
Explain the contents of the partnership deed.
Answer:

• It is a document which containing the terms and conditions of a partnership.
• Partnership deed forms the basis of partnership.
• “Partnership deed is a document containing all the matters according to which mutual rights, duties and liabilities of the partners in the conduct of management of the affairs of the firm are determined”.
• The partnership deed can be both oral or in writing. A written agreement, however, should be preferred because nobody can dispute the contents.
• The partnership deed should not contain any term which is contrary to the provisions of the partnership Act. The deed has to be stamped according to Indian stamps Act, 1899. It should be signed by all partners and every partner should have a copy of the deed. The following clauses are generally included in the deed.
  • The name of the firm.
  • Names and addresses of partners.
  • Nature of the business.
  • Location of the business.
  • Duration of the period, if decided.
  • The amount of capital to be contributed by each partner.
  • The profit sharing ratio.
  • Rights, duties and liabilities of partners.
  • Salaries, commission pay able to any partner.
  • Amount of withdrawals allowed to each partner.
  • Rate of interest to be allowed on capital as well as rate of interest to be charged on drawings.
  • The method of evaluating good will at the time of admission, retirement or death of partner.
  • Procedure for dissolution of the firm.
  • Maintenance of books of accounts and audit of accounts.
  • Procedure for settlement disputes among the partners.

Question 4.
Explain the ways of dissolution of a partnership firm.
Answer:
A firm may be dissolved in the following circumstance.

• Dissolution by agreement: A partnership firm can be dissolved by an agreement among all the partners.
• Dissolution by notice: If a partnership is at will, it can be dissolved by any partner giving a notice to other partners.
• Compulsory dissolution: A firm may be compulsory dissolved when all the partners or all but one partner are insolvent or the activities of the firm may become illegal.
• Contingent dissolution: A firm will be dissolved on the happening of any of the situation:
  • Death of the partner
  • Expiry of the firm
  • Completion of the venture
  • Regignation by a partner.
• Dissolution through court: A partner can apply to the court for dissolution of the firm on any of these grounds:
  • Insanity of a partner
  • Incapacity of a partner
  • Misconduct by the partner
  • Breach of agreement
  • Transfer of share to a third person
  • Regular losses.

Question 5.
Write about different kinds of partnership.
Answer:
Partnership firms formed with different types of partnership as mentioned in the following chart.

 

1. Partnership on the basis of duration:
a) Partnership at will: The partnership which is formed for indefinite period is called as partnership at will. This partnership continues till the time the partners want it and will come to an end if they decide to dissolve it. Thus, partnership exists at the will of the partners.

b) Particular partnership: When the partnership is started for a particular work, then it is known as particular partnership. As and when the work is completed then partnership automatically comes to an end.

2. Partnership based on the liability:
a) General partnership: In this type, the liability of members is limited and all of them can participate in management. All the partners are collectively and personally liable for the liabilities of the firm. It means that personal properties of the partners can be utilized to meet liabilities of the business, if assets are not enough to pay the business liabilities.

b) Limited partnership: In limited partnership, the liability of atleast one partner is limited while liability of other partners may be limited. The partners with limited liability are called special partners, while those with unlimited liability are called general or active partners. The liability of special partners is limited only to their capital in the business, whereas the liability of general partners can go beyond their capital.

3. Limited Liability Partnership (LLP):
Limited Liability Partnership (LLP) is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership. A partnership firm could not expand its activities because of higher risks and unlimited liability. As the personal properties of partners will be utilized to meet business liabilities. With a view to overcome the limitations of a partnership and company form, an alternative form, limited liability partnership was created.

Question 6.
What are the features of Limited Liability Partnership?
Answer:
Meaning: Government of India passed limited liability partnership Act, 2008 and it was notified on 31st March, 2009. According to this act the LLP shall be a body corporate and a legal entity. Separate from its members. Any two or more persons associated for carrying on a lawful business with a view to earn profit, may be subscribing their names to an incorporation document and filling the same with the Registrar, for forming limited liability partnership.

Definition: According to Section 3 of the Limited Liability Partnership Act, 2008, “an LLP is a body corporate formed and incorporated under the Act. It is a legal entity separate from its partners”.

Features of limited liability partnership:

• Limited Liability: The important feature of LLP is the liability of partners is limited to extent of their share. The private property of the partners may not be utilized to meet liabilities of the business.
• Separate legal entity: Limited liability partnership is a separate legal entity as like as a company. The partners and firm are not one and the same, they are separate.
• Number of members: Every LLP shall have atleast two persons to form the business and atleast one designated partner should be residents of India. There is no limit on the max no. of partners in the LLP.
• Perpetual succession: Unlike a partnership firm, an LLP can confine its existance even after the death, retirement, insanity or insolvency of one or more partners.
• Mutual Rights and duties: Mutual rights and duties of the partners within the LLP and governed by an agreement between the partners or between the partners and LLP as the case may be the case.
• Not liable for un-authorized acts: No partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded form joint liability created by another partner’s wrongful business decisions and misconduct.

Very Short Answer Questions

Question 1.
What is partnership firm?
Answer:
1) ‘Partnership’ is an association of two or more persons who pool their financial and managerial resources and agree to carry on a business, and share its profit or losses. The person who form a ‘partnership and individually known as ‘partners’ and collectively known as firm or ‘partnership firm’.

2) Section 4 of the partnership Act, 1932 defines partnership as “the relationship between persons who have agreed to share the profits of a business carried on by all or any one acting for all”.

Question 2.
Write about Partnership Deed.
Answer:
1) Partnership Deed: Partnership deed is a document containing the terms and conditions of a partnership. It is an agreement in writing signed by all the partners duly stamped & registered.

2) The partnership deed defines certain rights, duties and obligations of partners and governs relations among them in the conduct of business affairs of the firm.

Question 3.
What do you mean by Active partner?
Answer:
Active partner:
1) The partner who actively participates in the day-to-day operations of the business is known as “active partner”.

2) He / she may act in different capacities such as Manager, Organizer, adviser and controller of all the affairs of the firm. He is also called as “working partner”.

Question 4.
Describe about sleeping partner.
Answer:
Sleeping partner:

• The partner who does not participate in the day – to – day activities of the business es known as ‘sleeping’ or ‘dormant’ partner.
• Such partner simply contributes capital and shares the profit and losses.

Question 5.
Define Partner by Estoppel.
Answer:

• A person who behaves in the public in such a way as to give an impression that he / she is a partner of the firm, is called ‘partner by estoppel’.
• Such a partner is not entitled to share the profits of the firm, but is fully liable if somebody suffers because of his / her false representation.

Question 6.
Discuss Partner by Holding out.
Answer:

• A partner (or) partnership firm declares that a particular person is a partner of their firm and such a person does not disclaim it, then he/she is known as a ‘partner by holding out’.
• Such partners are not entitled to profits but are fully liable as regards the firm’s debts.

Question 7.
What is a partnership at will?
Answer:
Partnership at will:

• A partnership that is formed for an indefinite period is called a partnership at will.
• This partnership continues till the time the partners want it and will come to an end if they decide to dissolve it. Thus, a partnership exists at the will of the partners.

Question 8.
Write about Limited Liability Partnership.
Answer:
Limited Liability Partnership (LLP):

• According to section 3 of the Limited Liability Partnership Act, 2008, “an LLP is a body corporate formed and incorporated under the Act. It is a legal entity separate from its partners”.
• LLP is an alternative corporate business that gives the benefits of the limited liability of a company and the flexibility of a partnership.
• With a view to overcoming the limitations of a partnership and company form, an alternative form, a limited liability partnership was created.
• This act passed in 2008, and it was notified on 3ist March 2009.

Question 9.
What is the dissolution of a partnership?
Answer:
Dissolution of partnership:

• Dissolution of partnership implies the termination of the original partnership agreement or change in contractual relationship among partners.
• A partnership is dissolved by the insolvency, retirement, incapacity, death expulsion, etc., of a partner or on the expiry/completion of the term/venture of the partnership.

Question 10.
What is the dissolution of a firm?
Answer:
The dissolution of a firm implies dissolution between all the partners. The business of the partnership firm comes to an end. Thus, the dissolution of the firm always involves the dissolution of the partnership, but the dissolution of a partnership does not necessarily mean the dissolution of the firm.