Partnership Firms

Partnership is business is an agreement between two or more than partners to do a legal business.They agreed to provide all the resource required for business for the purpose of earning profit.Those people who invest money in the partnership are called partner.A partner may be directly involved in the business are called the active partner or a partner only invest in the business is called sleeping partner.Before establishing a partnership business, a partner sits together to discuss the different matter related to business.

Concept of Partnership Firm

A partnership business is an agreement between two or more than two partners to do a legal business. They agree to provide all the resources required for business for the purpose of earning the profit. Those people who invest money in the partnership are called partner. A partner may be directly involved in the business or a partner can only invest in the business. A partner who is directly involved in business is called the active partner and the partner who only invests the capital is called sleeping partner. Before establishing a partnership business, the partners sit together to discuss the different matter related to business. After discussion, they agree in certain term and condition of the business. The agreement between them can be drafted in written form. The agreement between partners in written form is called a partnership deed.

According to L.H Haney, “Partnership is the relation existing between persons competent to make a contract, who agree to carry on a lawful business in common with a view to private gain."

According to J.L Hansen, “A partnership is a form of business organization in which two or more persons join together to undertake some type of business activity."

In conclusion, the partnership is a form of the business organization established by two competent people to make legal business. A partnership firm in Nepal is guided and regulated by Nepal Partnership Act, 2020.

Characteristics of partnership

1. Formation
   A partnership firm can be established by minimum two people by jointly investing capital. A partnership firm can start its business by registering in concern department of Nepal government. According to partnership act 2020, to form a partnership business minimum two men are required and the maximum is not defined.
   
   
2. Mutual Agreement
   A partnership firm is established after making the mutual agreement between the partners. The agreement can be in written or oral as well as in both forms. The agreement between partners in written form is called a partnership deed.
   
   
3. Transfer of shares
   The shares of a partnership firm cannot be transferred from one name to another name without consent (agreement of other partners). All the partners of the business must agree to transfer the share of one to another. Therefore, transfer of the share in partnership is difficult.
   
   
4. Sharing of profit/Loss
   The profit or loss of partnership business is shared among the partners on the basis of the ratio of their investment. All the partners in business are able to bear the loss of business as well as has a right to claim over a profit of a business.
   
   
5. Unlimited liability
   The partnership business has unlimited liability. It means all the partner are required to pay a debt of business by selling their personal property as well. In this business, liability is not limited to the property of the business.
   
   
6. No Separate legal entity
   Partnership firm does not have its separate legal existence. In partnership firms, its partners are taken as one share. A partnership firm cannot make an agreement contract or perform business in its name independently.
   
   
7. Management
   The management of the partnership firm may be handled by all the partners. The work and responsibility of this business are to share among the partners equally. All the partners will give experience and skills.
   
   
8. Mutual Agency
   In partnership business, partners can play the role of both agents principle. Active partners work in a business for benefits of all other partners. At this time, he/she is playing the role of the agency. On the other hand, when partner represents outside, they are playing as principal.
   
   
9. Utmost good faith
   In partnership business, there is utmost good faith among partners. Active partner work for the betterment of the organization and other partners invest money in the good faith of partners.
   
   
10. Individuality of partners
    Partners in partnership firm have their own personal identity and respect in their society. Their identity will not be affected while being outside the business. Partners have to provide all their skills in social responsibility for the betterment of the organization.

Differences between Sole trading concern and Partnership Firm

Types of Partner

1. Active Partner
   The partner who has invested more in partnership business and directly involves in business activities is called an active partner. They take all responsibility of business, he/she bears unlimited liability, share the profit of business and devote their full time to the business. For the full-time involvement, active partners receive remuneration and for the investment, he will receive the share of profits.
   
   
2. Sleeping Partner
   The partners who have invested money but don’t get involved in a business activity is called a sleeping partner. A sleeping partner bears the loss of business, has unlimited liability and takes all other responsibility as like active partner but he/she is not directly involved in business activities.
   
   
3. Nominal Partner
   The partner who has not invested money but nominated as a partner is called nominal partner. He/ she doesn't bear any risk or loss of business. It is a special kind of partners who is nominated as a partner because of his reputation in society.
   
   
4. Quasi Partner
   The partner who is retired from business but the investment is not returned is called quasi-partner. This partner is neither liable for business activity nor has right over the profit of business after retirement.
   
   
5. Limited Partner
   The partner whose liability is limited to his investment only is called limited liability. As the active partner, limited liability partner shares profit, invest money and participate in business but the difference is that limited partners do not have unlimited liability as an active partner.
   
   
6. Minor Partner
   The partner below the age of 16 years age is called minor partner. They are not allowed to sign the legal document of business because of this he can be a partner only under the guardianship of another partner.
   
   
7. Sub Partner
   The partner who shares the profit of business with other partners is called sub-partners. It has co-investment (joint investment) with other partners. This is made with mutual agreement and understanding with other partners. There profits and loss of business are share by sub-partners according to agreements made internally by partners.
   
   
8. Incoming Partner
   The partners who are going to enter in business is called incoming partners. The incoming partner is required to pay the premium amount to be a partner of existence business. The agreement between existence partners is required to enter a new partner.
   
   
9. Outgoing Partner
   The partner who is going to retire from business is called an outgoing partner. The outgoing partner can retire from the business by making an agreement with other partners. He can retire by selling his share to other partners or outside parties in the consent of existing partner. The outgoing partner is not liable for future liabilities of the partnership.
   
   
10. Holding out - Estoppel Partners
    The partner who represents himself as a partner but does not invest money in business is called holding out or estoppel partners. He is a partner only in the eye of law or creditors. This partner doesn't share profits and does not bear loss as well. Therefore, he has no any liability of the business.
    
    
11. Secret Partners
    A Partners who invests money in the business and shares profit and losses but doesn't like to be disclosed as a partner in front of the public is called secret partners. He provides all necessary helps assistant to business indirectly.

Rights of Partner in Partnership

1. Right to manage business
   All the partners have an equal right to be involved in the management and operation of the partnership business. A partner can involve in planning, decision making, organizing and controlling activities of the business.
   
   
2. Right to express views and ideas
   All the partners have a right to give their ideas, knowledge, and experience by making any business decision. Such suggestion is discussed and decided with mutual consent of all partners.
   
   
3. Right to inspect books account
   Every partner has right to inspect and take a copy of accounts and financial statements like trial balance, profit and loss account and balance sheet of business in a timely manner.
   
   
4. Right to share profit
   Each partner is authorized to claim over a profit of a business. Profit is shared on the basis of a ratio of investment.
   
   
5. Right to be indemnified
   All partners are authorized to get compensation for the loss and expenses made personally by partners for business.
   
   
6. Right to use property
   All the partners have a right to use a property of business for growth and promotion of business. A partner doesn't have the right to use the property of the business for personal assistance.
   
   
7. Right to join the ownership
   All the partners have the right to claim joint ownership of the property of the business firms. All the partners have joint ownership of the property. So that one partner can't sell the property of the firm without a consent of other partners.
   
   
8. Right to get retirement
   A partner has right to get retire from business in the consent of other existing partners.
   
   
9. Right to bind other partners
   A partner has a right to demand loss (compensation) for the loss or damage occur to the business due to the negligence of other partners.
   
   
10. Right to dissolve the business
    A partner can purpose the dissolve of business if he does not see any future prospect.

Duties and Responsibility of Partners

1. Mutual confidence and understanding
   As the partnership starts with an agreement between the partners, it is the duty of the partners not to break confidence, agreement, and understanding between the partners.
   
   
2. To share losses
   All the partners are required to share loss from business in the proportion (ratio) of their investment.
   
   
3. Not to transfer interest
   It is the duty of partner not to transfer his/her ownership in business without the agreement of partner.
   
   
4. To act within the scope of authority
   No partner is allowed to work beyond his/her authority. It is the responsibility of the partner to perform within his authority.
   
   
5. Not to demand remuneration
   Even the active partner is not authorized to demand remuneration if it is not mentioned in partnership deed.
   
   
6. To indemnify the business
   The partner is required to compensate loss that has occurred in business because of his/her negligent.
   
   
7. Not to run a competitive business
   It is the most important responsibility of partner that he shouldn't run similar nature of business by himself.
   
   
8. To maintain up to date account
   An active partner must maintain up to date financial state like profit and loss a/c, balance sheet etc. They must be provided on time as demanded by partners.
   
   
9. Not to use the property of the business
   The property of business must be used for business purpose only. It is the duty of partner that he must not use for personal benefits.

Partnership Deed

Partnership deed is the legal agreement between the partners before starting the business. The partnership is started with the agreement between two or more people. As more people are involved in a business. The written agreement is made to solve a probable future dispute. Partnership deed acts as the evidential document for registration.

According to Partnership Act 2020, “The partnership deed must be submitted along with registration form before registration.”

Partnership deed covers all the information regarding registration of new partnership like names and address of business, objectives, the capital contribution of partners etc. This paper is duly signed by all the members of the partnership to give legal approval. It is the most important document of the partnership business.

Components of Partnership Deed

1. Name and address of the firm
   The name and the address of the firm should be clearly mentioned.
   
   
2. Name and address of partners
   It contains the name and address of all the partners.
   
   
3. Nature of business
   Nature of the business should be mentioned in the partnership deed whether it is industry or trade or service.
   
   
4. Duration of partnership
   Duration of a partnership should be defined whether it is fixed or uncertain.
   
   
5. Capital contribution by partner
   The amount of contribution as capital contributed by all the partners to establish the firm must be clearly written in the partnership deed.
   
   
6. Interest on capital
   The interest rate on capital must be clearly mentioned in the partnership deed so that any misunderstandings do not arise among the partners.
   
   
7. Method of profit and loss distribution
   The ratio of distributing profit and loss should be mentioned clearly.
   
   
8. Right and duties of partners
   Right and duties of the partners should be mentioned in the partnership deed so that the misunderstandings do not arise in its absence.
   
   
9. Salary and commission of partners
   Salary and commission should be mention in partnership deed of all partners.
   
   
10. Admission and retirement of partners
    Some partners may be retired and new may be hired. So the procedure for the admission and retirement of the partner should be mentioned in the partnership deed.
    
    
11. The effect on the death of a partner
    The adjustment at the death of the partner and the payment for their success should be mentioned clearly in the partnership deed.
    
    
12. Valuation of goodwill
    The procedure for the valuation of goodwill during the admission, retirement, and death should be clearly mentioned in partnership deed.
    
    
13. Revaluation of assets and liabilities
    The procedure for the revaluation of assets and liabilities during the admission, retirement, and death should be clearly mentioned in partnership deed.
    
    
14. Accounts and audit
    The process of preparing the account and the provision of the audit is to be mentioned in the partnership deed clearly.
    
    
15. Settlement in case of dissolution
    The method of the dissolution of the partnership firm and the process of settlement of account should be mentioned clearly in the partnership deed.

Registration of Partnership Firm in Nepal

A partnership firm in Nepal is guided by Partnership Act 2020, for the registration and renewable of the partnership firm in Nepal, the following steps should be taken:

Submission of Application

It is the first step in the registration process. The partners are required to take the prescribed form provided by the department of industry and commerce of Nepal Government. Along with the application form, the following information must be provided:

• Name and address of partners as well as business.
• The amount of capital investment.
• Type of partners with their share in a business.
• Name of the partner, representing the business.

Along with this information, partners are required to submit the copy of their citizenship certificates as well as partnership deed if made.

Submission of Registration Fee

The registration fee is to be deposited in NR bank in the name of the concerned department. The voucher of the amount deposited must be submitted along with application form. The registration fee of the partnership firm will be verified in accordance with capital invested which is as follow:

Obtain Registration Certificate

After submitting the application and registration fee voucher, the concerned authority of the department will examine all the information provided. If the provided information is satisfactory the department will issue the certificate of registration. It will work as an evidence for registration.

Renewable of the Partnership firm in Nepal

According to Act 2020, the partnership firm must be renewed within 35 days of every fiscal year. While renewing partnership firm, the form is to be filled up and renewal fee must be paid. The renewable fee or partnership is presented in the following schedule

Dissolution of Partnership Firm in Nepal

Dissolution is the process of ending up the partnership business. It is the termination of a partnership. According to the Act 2020, a partnership firm will be dissolved under the following condition:

1. Dissolution by agreement
2. Dissolution by written notice
3. Dissolution at any time
4. Dissolution by the expiry of the time
5. Dissolution at once
6. Dissolution by the concerned department

1. Dissolution by Agreement:
   A partnership firm can be dissolved by partners. According to Partnership Act 2020, the partnership firm may dissolve by the agreement between the partners.
   
   
2. Dissolution by Written Notice:
   According to Partnership Act 2020, the partnership firm can be dissolved by written notice. Partners should write the note of dissolution and submit to all other partners. 

3. Dissolution at Any Time:
   The partnership firm can also be dissolved at any time. Followings are the most probable reason for the dissolution of partnership at any time.

• If the debts and liability cannot be repaid.
• If the share of partners is sold or transfer to others.
• If partners are engaged in unlawful activities.
• If the partners have got the punishment of imprisonment.

4. Dissolution After Expiry of Time:
   According to Section 32 of Partnership Act 2020, the partnership firm can be dissolved if specified time mentioned in partnership deed has expired.

5. Dissolution At Once:
   The partnership firm may be dissolved when the active partner became insolvent or die.

6. Dissolution by Concerned Department:
   The concerned department of Nepal Government may dissolve a partner under the following condition:

• If the partnership has not submitted the renewable application with another necessary document every year.
• If a partnership firm is involved in unlawful activity.
• If any partner of partnership has applied for dissolution.

Advantages of Partnership Firms

1. Prompt Decision:
   As the partners are directly involved in business activity, they are always available for decision making. Because of this, the partnership firm has higher chances of getting the prompt decision. This could be much more beneficial for the emergency situation.
   
   
2. Facility of loan:
   As a partnership firm is established by two or more than two people i.e. the size of the partnership is comparatively large. The goodwill and reputation are also high, because of this, a partnership firm has a large source of the loan. It can generate sufficient money for expansion and growth.
   
   
3. Easy to start
   A partnership firm can be started by making the agreement between partners and concerned department of Nepal Government. This business does not require complex legal procedures for an establishment.
   
   
4. Sufficient Capital:
   In comparison to sole trading concern, the partnership can generate sufficient capital for business. Different partners have a different source of money. Because of this, the partnership can generate a large sum of money for its establishment, growth and its expansion.
   
   
5. Incentives to work:
   In a partnership business, the partners are directly or indirectly involved in business activities. That partner who has directly or actively been involved in business will get salary as well as share in profit. Therefore, a hardworking partner will get the incentives in form of profit share.
   
   
6. Effective Management:
   The works and responsibilities of partnership firms are divided among the partners. Different partners are allocated with different work responsibility. This helps to bring effectiveness in the management of the business of an organization.
   
   
7. Flexibility:
   Partnership business is more flexible than sole trading concern because the business can be easily financed for growth and expansion. On the other hand, partners may go out or come into business but the partnership business is not affected.
   
   
8. Secrecy:
   In the partnership, there is no legal obligation to partners to publish its financial information, if the partners intend to keep the information secret. It is possible to maintain the secrecy of the information.
   
   
9. Equal rights of partners:
   The concept of minority and majority is not allowed in partnership. All the partners have an equal right to participate in decision-making and involve in business activity. The concept of share is applied only in profit distribution.
   
   
10. Easy to dissolve:
    A partnership business can be dissolved after making the agreement between partners regarding the dissolution of a business. The dissolution of the partnership firm does not require any complex legal proceedings.

Disadvantages of Partnership

1. Limited Capital:
   As the partnership business is established and managed by a few partners, it has less chance of accumulating a large amount of capital. In comparison to the joint stock company, the partnership has less capital.
   
   
2. Unlimited liability:
   The liability of the partnership firm is not limited to the property of a business. It means the partners are required to sell their personal property in case of more debt over the property of a business.
   
   
3. Difficult to transfer share:
   The share of the partnership firm is only transferable after the agreement of the partners. A partner wishing to sell the share of a partnership must get consensus before selling it. Therefore, it has difficulty in share.
   
   
4. Uncertain existence:
   A partnership business may face dissolution in case of death, insolvency or mental or physical illness of active partners. The partnership of business could be shut down by the partner after making the agreement between them. Therefore, it has an uncertain existence.
   
   
5. Lack of public faith:
   Since the partnership business has limited sizes, non-existence in the eye of the law, it has less public faith. The public doesn’t believe in partnership business as much as the joint stock company because it has difficulty in both expansion and growth.
   
   
6. Problem of dispute:
   Even though the partnership business firm is formed by the agreement of partners, the partners may not agree all the time. The partners may disagree regarding the profit and use of authority. This dispute between partners may create a problem in the existence of a business.
   
   
7. Lack of prompt decision:
   The partners are required to build consequences before making any decision in the partnership business. For this, all the partners must be together to discuss the matter of business. It takes a long time and brings delay in decision making.
   
   
8. Risk of implied authority:
   In partnership business, active partners are authorized to make a decision on behalf of a business or other partners. There is no certainty that active partners will make a decision for the betterment of the business. There is a risk that active partners may take a decision on personal benefits. Therefore, a partnership has the risk of implied authority.