BUSINESS LAW

TERM PAPER

PARTNERSHIPS IN BUSINESS PLANS

Presented to: Mr. Shariq Mehmood Business Law

GROUP MEMBERS

Zain Anjum Qadeer Rauf Mubashir Arshad Arsalan Zulfiqar Cheema Haider Ali Zaheer Taimur Saleh Kalyar Muhammad Naeem Syed Ahmad Ali

Partnership
Partnerships are also frequent regardless of and among sectors. Non-profit organizations, for example, may partner together to increase the likelihood of each achieve their mission. Governments may partner with other governments to achieve their mutual goals, as may religious and political organizations. In education, accrediting agencies increasingly evaluate schools by the level and quality of their partnerships with other schools and across sectors. Partnerships also occur at personal levels, such as when two or more individuals agree to domicile together. Partnerships between governments, interest-based organizations, schools, businesses, and individuals, or some combination thereof, have always been and remain commonplace. Partnerships have widely varying results and can present partners with special challenges. Levels of give-and-take, areas of responsibility, lines of authority, and overarching goals of the partnership must all be negotiated. While partnerships stand to amplify mutual interests and success, some are considered ethically problematic, or at least debatable. When a politician, for example, partners with a corporation to advance the corporation's interest in exchange for some benefit, a conflict of interest may make the partnership problematic from the standpoint of the public good. Developed countries often strongly regulate certain partnerships via anti-trust laws, so as to inhibit monopolistic practices and foster free market competition. Among developed countries, business partnerships are often favored over corporations in taxation policy, since dividend taxes only occur on profits before they are distributed to the partners. However, depending on the partnership structure and the jurisdiction in which it operates, owners of a partnership may be exposed to greater personal liability than they would as shareholders of a corporation.

Different Definitions
A Common Definition
A partnership is an arrangement where entities and/or individuals agree to cooperate to advance their interests. In the most frequent instance, a partnership is formed between one or more businesses in which partners (owners) co-labor to achieve and share profits or losses

Definition in Civil Law

A partnership is a nominate contract between individuals who, in a spirit of cooperation, agree to carry on an enterprise; contribute to it by combining property, knowledge or activities; and share its profit. Partners may have a partnership agreement, or declaration of partnership and in some jurisdictions such agreements may be registered and available for public inspection. In many countries, a partnership is also considered to be a legal entity, although different legal systems reach different conclusions on this point.

Partnership in Islamic Law

Qirad
The qirad was one of the basic financial instruments of the medieval Islamic world. It was an arrangement between one or more investors and an agent where the investors entrusted capital to an agent who then traded with it in hopes of making profit. Both parties then received a previously settled portion of the profit, though the agent was not liable for any losses.

Origins and history

Although the qirad is never mentioned the Qur'an, many Islamic traditions attribute its origin to the Prophet Muhammad and his companions. These traditions describe Muhammad and his companions either using the qirad or endorsing the institution. Many will notice that the qirad is almost identical to the institution of the commenda later used in Western Europe, though whether

the qirad transformed into the commenda, or the two institutions evolved independently cannot be stated with certainty.

Legal technicalities
Though there existed several different major schools of Islamic law, the basic legalities of the qirad were rather uniform throughout the schools. Dinars and Dirhams, as well as gold, silver, and copper coins in circulation were allowed to be invested. However, goods such as barley were restricted from the qirad because the possible fluctuations in their value in the free market. The agent was allowed to take the investment and split up his investments in any way as well as invest in anything he wanted, except in cases were stocks are plentiful and not seasonally bound. Although it is not forbidden for an investor to forbid the agent they buying of certain kinds of goods. In this way, many of the third parties involved in the qirad were actually unaware of their involvement which allowed the agent to trade more freely and without liability. Although the fractional split in profit was agreed on beforehand, the investor could not stipulate a specific sum of the money from the profit, or that a certain profit be made. In this way, the qirad remained a complete risk on the investor and did not infringe on the free market economy. It was however possible to make a deal on split of the profit beforehand by stipulating a specific percentage. This could be either a low or a high percentage. The principal investment cannot be paid back, either by the investor ending the agreement, or the agent ending the agreement, if the principal is still invested in goods. The goods must be sold before the principal can be handed back, and the profits split. On the other hand, the investor is allowed to buy goods from the agent if he does not connect any conditions to this transaction. The agent can also ask the help of a servant of the investor, but this servant also has to share in the profit and cannot be asked to do any other work than work connected to the investment. A servant can also invest in the same investment as his master and also shares in the profit.

If the agent has to hire help for a job, the wage for this person can be paid from the principal, except if the wage should result in loss for the investor, the agent himself is responsible for whatever is not covered by the principal. The agent can use the principal for food and clothes if he should travel for his business, and the principal is large enough to allow it. If he stays at home this is not allowed. An agent can invest the money of an investor, the agent then becomes an investor himself, but he is then liable for the losses of the second agent. If the principal decreases, the original investor is allowed to ask the original agent to cover the loss.

Types of Partnership
Business Partnering
Business partnering is "the development of successful, long term, strategic relationships between customers and suppliers, based on achieving best practice and sustainable competitive advantage" (Lendrum, 1997).

Mission
The mission of Business partnering and the key-aspects of the discipline have been developed recently in the tourism field. The mission of Business partnering (for tourism) consists in "creating, organizing, developing and enforcing operative (short-term), tactical (medium-term) and strategic (long-term) partnerships" (Droli, 2007). "Partnering is the process of two or more entities creating synergistic solutions to their challenges."

Examples
Joint selling is an example of operative partnering activity. Account intelligence sharing reselling or "value chain integration" (Child, Faulkner, 1998) are examples of tactical partnering initiatives. Joint product development is a typical strategic partnering activity. Partnering agreements are commonly used in the different kind of partnerships. One example is the Strategic Partnering Arrangement in the aviation sector which was put together by the UK Ministry of Defense and AgustaWestland. Both Partners share an agreed common objective to improve helicopter services and support to the Front Line. The MOD also wishes to provide the best value for money to the taxpayer while AgustaWestland seeks to provide the best returns to its shareholders via a stable, long-term income stream.

Benefits
Reduction of general costs. Business partnering can be cheaper and more flexible than a merger or acquisition, and can be employed when a merger or acquisition is not feasible.

Business partnering increases the "competitive advantage" (Porter, 1985). The direct benefits of Business partnering consists in a greater competitive advantage through the co-operation (the coappetitive advantage) and even better opportunities of revenues, occupation and investment in the sector of application. Business partnering creates a no more traditionally-based solidarity or "organic", but a rationale form of "mechanic solidarity" (Durkheim, 1893). Partnering takes a new approach to achieving business objectives. It replaces the traditional customer-supplier model with a collaborative approach to achieving a shared objective; this may be to build a hospital, improve an existing service contract or launch an entirely new programme of work. Essentially, the Partners work together to achieve an agreed common aim whilst each participant may still retain different reasons for achieving that common aim.

Sources
Partnering requires all Partners to transform their businesses in terms of relationships, behaviors, processes, communications and leadership. Neither participant can succeed without the other so the recommended approach is to implement the transformation as a joint activity wherever possible. Partnering has existed for centuries. The opportunities of partnering for human growth were pointed out by The Bible The brother who helps his brother is like a fortress (Pro 18, 19). In economics, Business partnering has gained significant momentum and focus within leading global businesses, as "a medium for achieving significant revenue growth" (Doz, Hamel, 1998)

Equity Partner:
An equity partner is a partner in a partnership who is a part owner of the business, and is entitled to a proportion of the distributable profits of the partnership. The term is used in contradistinction to a salaried partner (or contract partner) who are paid a salary, but do not have any underlying ownership interest in the business and will not share in the distributions of the

partnership (although it is quite common for salaried partners to receive a bonus based upon the firm's profitability). Although they are both regarded as partners, in legal and economic terms, equity partners and salaried partners have little in common other than joint and several liabilities. The degree of control which each type of partner exerts over the partnership depends upon the relevant partnership agreement. The division between equity and salaried partners could, in theory, occur in any partnership, but in practice, the distinction is most frequently referred to in law firms and accountancy firms.

Type of equity partnership

In their most basic form, equity partners enjoy a fixed share of the partnership (usually, but not always an equal share with the other partners). However, in more sophisticated partnerships, different models exist for determining either ownership or profit distribution (or both). Probably the most common two forms are "lockstep" and "eat-what-you-kill" (sometimes referred to, less graphically, as "source of origination"). Lockstep involves new partners joining the partnership with a certain number of "points". As time passes, they accrue additional points, until they reach a set maximum. The length of time it takes to reach the maximum is often used to describe the firm (so, for example, one could say that one firm has a "seven year lockstep" and another has a "ten year lockstep" depending upon the length of time it takes to reach maximum equity). Eat-what-you-kill is rarely, if ever, seen outside of law firms. The principle is simply that each partner receives a share of the partnership profits up to a certain amount, and any additional profits are distributed to the partner who was responsible for the "origination" of the work which generated the profits.

British law firms tend to use the lockstep principle, whereas American firms are more accustomed to eat-what-you-kill. When British firm Clifford Chance merged with American firm Rogers & Wells, many of the difficulties associated with that merger were blamed upon the difficulties of merging a lockstep culture with an eat-what-you-kill culture.

General Partnership:
In the commercial and legal parlance of most countries, 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 estoppels. 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.

Characteristics
Partnerships have certain default characteristics relating to both (a) the relationship between the individual partners and (b) the relationship between the partnership and the outside world. The former can generally be overridden by agreement between the partners, whereas the latter generally cannot be. The assets of the business are owned on behalf of the other partners, and they are each personally liable, jointly and severally, for business debts, taxes or tortuous liability. For example, if a partnership defaults on a payment to a creditor, the partners' personal assets are subject to attachment and liquidation to pay the creditor. By default, profits are shared equally amongst the partners. However, a partnership agreement will almost invariably expressly provide for the manner in which profits and losses are to be shared.

Each general partner is deemed the agent of the partnership. Therefore, if that partner is apparently carrying on partnership business, all general partners can be held liable for his dealings with third persons. By default a partnership will terminate upon the death, disability, or even withdrawal of any one partner. However, most partnership agreements provide for these types of events, with the share of the departed partner usually being purchased by the remaining partners in the partnership. By default, each general partner has an equal right to participate in the management and control of the business. Disagreements in the ordinary course of partnership business are decided by a majority of the partners, and disagreements of extraordinary matters and amendments to the partnership agreement require the consent of all partners. However, in a partnership of any size the partnership agreement will provide for certain electives to manage the partnership along the lines of a company board. Unless otherwise provided in the partnership agreement, no one can become a member of the partnership without the consent of all partners, though a partner may assign his share of the profits and losses and right to receive distributions ("transferable interest"). A partner's judgment creditor may obtain an order charging the partner's "transferable interest" to satisfy a judgment.

Separate legal personality

There has been considerable debate in most states as to whether a partnership should remain aggregate or be allowed to become a business entity with a separate legal personality. In the United States, section 201 of the Revised Uniform Partnership Act (RUPA) of 1994 provides that "A partnership is an entity distinct from its partners." In England & Wales, a partnership does not have separate legal personality; although the English & Welsh Law Commission in Report 283 proposed to amend the law to create separate personality for all general partnerships, the British government has decided not to implement the proposals relating to general partnerships. The Law Commission's proposal to confer separate legal status on limited partnerships will be taken forward. In Scotland partnerships do have some

degree of legal personality. The Limited Liability Partnerships Act 2000 confers separate personality on Limited Liability Partnerships - separating them almost entirely from General Partnerships and Limited Partnerships, despite the naming similarities. While France, Luxembourg, Norway, the Czech Republic and Sweden also grant some degree of legal personality to commercial partnerships, other countries such as Belgium, Germany, Italy, Switzerland and Poland do not allow partnerships to acquire a separate legal personality, but permit partnerships the rights to sue and be sued, to hold property, and to postpone a creditor's lawsuit against the partners until he or she has exhausted all remedies against the partnership assets. In December 2002 the Netherlands proposed to replace their ordinary partnership, which does not have legal personality, with a public partnership which allows the partners to opt for legal personality. Japanese law provides for Civil Code partnerships which have no legal personality and Commercial Code partnership corporations which have full corporate personhood but otherwise function similarly to partnerships. The two main consequences of allowing separate personality are that one partnership will be able to become a partner in another partnership in the same way that a registered company can, and a partnership will not be bound by the doctrine of ultra vires but will have unlimited legal capacity like any other natural person.

Joint Venture:
A joint venture is a business agreement in which parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets. There are other types of companies such as JV limited by guarantee, joint ventures limited by guarantee with partners holding shares. In European law, the term 'joint-venture' (or joint undertaking) is an elusive legal concept, better defined under the rules of company law. In France, the term 'joint venture' is variously translated

as 'association d'entreprises', 'entreprise conjointe', 'co-entreprise' and 'entreprise commune'. But generally, the term societe anonyme loosely covers all foreign collaborations. In Germany,'joint venture' is better represented as a 'combination of companies' (Konzern) On the other hand, when two or more persons come together to form a temporary partnership for the purpose of carrying out a particular project, such partnership can also be called a joint venture where the parties are "co-venturers". The venture can be for one specific project only - when the JV is referred more correctly as a consortium (as the building of the Channel Tunnel) - or a continuing business relationship. The consortium JV (also known as a cooperative agreement) is formed where one party seeks technological expertise or technical service arrangements, franchise and brand use agreements, management contracts, rental agreements, for one-time contracts. The JV is dissolved when that goal is reached.

Concept
A JV on a continuing basis is the normal business undertaking. It is similar to a business partnership with two differences: the first, a partnership generally involves an ongoing, longterm business relationship, whereas an equity-based JV comprises a single business activity. Second, all the partners have to agree to dissolve the partnership whereas a finite time has to lapse before it comes to an end (or is closed by the Court due to a dispute). The term JV refers to the purpose of the entity and not to a type of entity. Therefore, a joint venture may be a corporation, a limited liability enterprise, a partnership or other legal structure, depending on a number of considerations such as tax and tort liability. JVs are normally formed both inside one's own country and between firms belonging to different countries. JVs are usually formed in order to combine strengths or to bypass legal restrictions within a country; for example an insurance company cannot market its policies through a banking company. Some JVs are also formed because the law of a country allows dispute settlement, should it occur, in a third country. They are also formed to minimize business,tax and political risks. The JV is an alternative to the parent-subsidiary business partnership in emerging

countries, discouraged, on account of (a) ignoring national objectives (b) slow-growth (c) parental control of funds and (d) disallowing competition. JVs can be in the manufacture of goods, services, travel space, banking, insurance, web-hosting business, etc. Today, the term 'JV' applies to more occasions than the choice of JV partners; for example, an individual normally cannot legally carry out business without finding a national partner to form a JV as in many Arab countries where it is mentioned that there are over 500 Indian JVs in Saudi Arabia. Also, the JV may be an easier first-step to franchising, as McDonald's and other fast foods found out in China in the early difficult stage of development. Other reasons for forming a JV are:

reducing 'entry' risks by using the local partner's assets inadequate knowledge of local institutional or legal environment access to local borrowing powers perception that the goodwill of the local partner is carried forward in strategic sectors, the county's laws may not permit foreign nationals to operate alone access to local resources through participation of national partner influence of local partners on government officials or 'compulsory' requisite (see China coverage below)

access by one partner to foreign technology or expertise, often a key consideration of local parties (or through government incentives for the mechanism)

again, through government incentives, job and skill growth through foreign investment, and

incoming foreign exchange and investment.

Downsides
Some of the downsides of a joint venture may be:

differing philosophies governing expectations and objectives of the JV partners

an imbalance in the level of investment and expertise brought to the JV by the two parent organizations

inadequate identification, support, and compensation of senior leadership and management teams or

conflicting corporate cultures and operational styles of the JV partners

A JV can terminate at a time specified in the contract, upon the death of an active member (unusual) or if a court so decides in a dispute taken to it. Joint ventures have existed for many years in the US, from their usage in the railroad industry (one party controls the sources of oil and the other party the rights of ferrying it) and even to manufacturing and services. In the financial services industry JVs were widely employed for marketing products or services that one of the parties, which acting alone, would have been legally prohibited from doing so.

Joint venture companies

JV companies are the preferred form of corporate investment but there are no separate laws for joint ventures. Companies which are incorporated in India are treated on par as domestic companies.

The above two parties subscribe to the shares of the JV company in agreed proportion, in cash, and start a new business.

Two parties, (individuals or companies), incorporate a company in India. Business of one party is transferred to the company and as consideration for such transfer; shares are issued by the company and subscribed by that party. The other party subscribes for the shares in cash.

Promoter shareholder of an existing Indian company and a third party, who/which may be individual/company, one of them non-resident or both residents, collaborate to jointly carry on the business of that company and its shares are taken by the said third party through payment in cash.

Private companies (only about $2500 is the lower limit of capital, no upper limit) are allowed in India together with and public companies, limited or not, likewise with partnerships. Sole proprietorship too is allowed. However, the latter are reserved for NRIs. Through capital market operations foreign companies can transact on the two exchanges without prior permission of RBI but they cannot own more than 10 percent equity in paid-up capital of Indian enterprises, while aggregate foreign institutional investment (FII) in an enterprise is capped at 24 percent. The establishment of wholly owned subsidiaries (WOS) and project offices and branch offices, incorporated in India or not. Sometimes, it is understood, that Branches are started to test the market and get a its flavor. Equity transfer from residents to non-residents in mergers and acquisitions (M&A) is usually permitted under the automatic route. However, if the M&As are in sectors and activities requiring prior government permission (Appendix 1 of the Policy) then transfer can proceed only after permission. Joint ventures with trading companies are allowed together with imports of secondhand plants and machinery. It is expected that in a JV, the foreign partner supplies technical collaboration and the pricing includes the foreign exchange component, while the Indian partner makes available the factory or building site and locally made machinery and product parts. Many JVs are formed as public limited companies (LLCs) because of the advantages of limited liability. JVs are expected in the nuclear industry following the NSG waivers for nuclear trade. The nuclear power industry has been witnessing several JVs. The country has set an imposing target of achieving an installed capacity of 20 GW by 2020 and 63 GW by 2030. The total size of the Indian nuclear power market will be around $40 billion by 2020 with a growth rate (AAGR) of 9.2% in installed nuclear capacity during 200820. The total investments made are to a tune of around $1.30 billion following the Indo-US nuclear deal in 2008.

There is a group of industries reserved for the small scale sector wherein foreign investment cannot exceed 24% and if does then approval is necessary from the FIPB, and the unit loses its smallness and requires an industrial license. There are many JVs. lying outside of this discussion Hindusthan Unilever-Unilever, SuzikiGovt. of India (Maruti Motors), Bharti Airteli-Singapore Telecom, ITC-Imperial Tobacco, P&G Home Products, Whirlpool, having financial participation with the financial institutions and the lay public which are monitored by SEBI (Securities and Exchange Board of India), also an autonomous body. This lies outside this discussion. Under the countrys laws, a public company must:

Have at least seven shareholders Have at least three directors Obtain government approval for the appointment of its management. Have both a "trading certificate" and certificate of incorporation before commencing its business.

Publish also a prospectus (or file a statement) before it can start transact business. Hold statutory meetings

There are several other provisions contained in the Companies Act 1956 which also need to be followed.

Dissolution
The JV is not a permanent structure. It can be dissolved when:

Aims of original venture met Aims of original venture not met Either or both parties develop new goals Either or both parties no longer agree with joint venture aims Time agreed for joint venture has expired Legal or financial issues

Evolving market conditions mean that joint venture is no longer appropriate or relevant

Limited liability partnership

A limited liability partnership (LLP) is a partnership in which some or all partners (depending on the jurisdiction) have limited liability. It therefore exhibits elements of partnerships and corporations. In an LLP one partner is not responsible or liable for another partner's misconduct or negligence. This is an important difference from that of an unlimited partnership. In an LLP, some partners have a form of limited liability similar to that of the shareholders of a corporation. In some countries, an LLP must also have at least one "general partner" with unlimited liability. Unlike corporate shareholders, the partners have the right to manage the business directly. As opposed to that, corporate shareholders have to elect a board of directors under the laws of various state charters. The board organizes itself (also under the laws of the various state charters) and hires corporate officers who then have as "corporate" individuals the legal responsibility to manage the corporation in the corporation's best interest. An LLP also contains a different level of tax liability from that of a corporation. Limited liability partnerships are distinct from limited partnerships in some countries, which may allow all LLP partners to have limited liability, while a limited partnership may require at least one unlimited partner and allow others to assume the role of a passive and limited liability investor. As a result, in these countries the LLP is more suited for businesses where all investors wish to take an active role in management. There is considerable confusion between LLPs as constituted in the U.S. and that introduced in the UK in 2001 and adopted elsewhere - see below - since the UK LLP is, despite the name, specifically legislated as a Corporate body rather than a Partnership.

Limited partnership
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. The GPs are, in all major respects, in the same legal position as partners in a conventional firm, i.e. they have management control, share the right to use partnership property, share the profits of the firm in predefined proportions, and have joint and several liabilities for the debts of the partnership. As in a general partnership, the GPs have actual authority as agents of the firm to bind all the other partners in contracts with third parties that are in the ordinary course of the partnership's business. As with a general partnership, "An act of a general partner which is not apparently for carrying on in the ordinary course the limited partnership's activities or activities of the kind carried on by the limited partnership binds the limited partnership only if the act was actually authorized by all the other partners." Like shareholders in a corporation, LPs have limited liability, meaning they are only liable on debts incurred by the firm to the extent of their registered investment and have no management authority. The GPs pay the LPs a return on their investment (similar to a dividend), the nature and extent of which is usually defined in the partnership agreement. General Partners thus carry more liability, and in cases of financial misfortune, the GP becomes "the generous partner". Limited partnerships are distinct from limited liability partnerships, in which all partners have limited liability.

Limited liability
When the partnership is being constituted or the composition of the firm is changing, LPs are generally required to file documents with the relevant state registration office. LPs must also explicitly disclose their LP status when dealing with other parties, so that such parties are on notice that the individual negotiating with them carries limited liability. It is customary that the

notepaper, other documentation, and electronic materials issued to the public by the firm will carry a clear statement identifying the legal nature of the firm and listing the partners separately as general and limited. Hence, unlike the GPs, the LPs do not have inherent agency authority to bind the firm unless they are subsequently held out as agents and so create an agency by estoppels or acts of ratification by the firm create ostensible authority. In some jurisdictions, the limited liability of the LPs is contingent on their not participating in management.

Partnership accounting
When two or more individuals engage in an enterprise as co-owners, the organization is known as a partnership. This form of organization is popular among personal service enterprises, as well as in the legal and public accounting professions. The important features of and accounting procedures for partnerships are discussed and illustrated below. Accounting for Initial Investments Because ownership rights in a partnership are divided among two or more partners, separate capital and drawing accounts are maintained for each partner.

Investment of cash
If a partner invested cash in a partnership, the Cash account of the partnership is debited, and the partner's capital account is credited for the invested amount.

Investment of assets other than cash

If a partner invested an asset other than cash, an asset account is debited, and the partner's capital account is credited for the market value of the asset. If a certain amount of money is owed for the asset, the partnership may assume liability. In that case an asset account is debited, and the

partner's capital account is credited for the difference between the market value of the asset invested and liabilities assumed.

Capital Interest
A capital interest is an interest that would give the holder a share of the proceeds in either of the following situations:

The owner withdraws from the partnership. The partnership liquidates.

The mere right to share in earnings and profits is not a capital interest in the partnership. This determination generally is made at the time of receipt of the partnership interest.

Capital account
Capital account of each partner represents his equity in the partnership. Capital account of a partner is increased in the following situations:

The owner made additional investments during the year. The owner received guaranteed payments from the partnership. Partnership earned profits, and a share of profits was allocated to the partner. The increased in the capital will record in credit side of the capital account.

Salary and interest allowances are guaranteed payments, discussed later. Capital account of a partner is decreased when the owner makes withdrawals of cash or property

Compensation for Services and Capital

The partnership agreement may specify that partners should be compensated for services they provide to the partnership and for capital invested by partners.

For example, one partner contributed more of the assets, and works full time in the partnership, while the other partner contributed a smaller amount of assets and does not provide as much services to the partnership. Compensation for services is provided in the form of salary allowance. Compensation for capital is provided in the form of interest allowance. Amount of compensation is added to the capital account of the partner. To illustrate, assume that a partner received $500 as an interest allowance. The amount is included in the net income/loss distribution entry when the books are closed to the capital accounts at year end: Debit Credit Partner A, Capital Income Summary $500 As a result, the above entry Income Summary, which is a temporary equity closing account used for year-end, is reduced by $500, and the capital account is increased by the same amount. When the partner makes a cash withdrawal of moneys he received as an allowance, it is treated as a withdrawal, or drawing. Debit Credit Partner A, Drawing $500 Cash $500 $500

As a result, Drawing account increased by $500, and the Cash account of the partnership is reduced by the same account. At the end of the accounting period the drawing account is closed to the capital account of the partner. The capital account will be reduced by the amount of drawing made by the partner during the accounting period.

Guaranteed Payments
Guaranteed payments are those made by a partnership to a partner that are determined without regard to the partnership's income. Compensation for services and capital are guaranteed payments. A partnership treats guaranteed payments for services, or for the use of capital, as if they were made to a person who is not a partner. This treatment is for purposes of determining gross income and deductible business expenses only. For other tax purposes, guaranteed payments are treated as a partner's distributive share of ordinary income. Guaranteed payments are not subject to income tax withholding. The partnership generally deducts guaranteed payments on line 10 of Form 1065 as business expenses. They are also listed on Schedules K and K-1 of the partnership return. The individual partner reports guaranteed payments on Schedule E (Form 1040) as ordinary income, along with his distributive share of the partnership's other ordinary income. Allocation of Net Income Revenues - Expenses = Net income If total revenues exceed total expenses of the period, the excess is the net income of the partnership for the period. If expenses exceed revenues of the period, the excess is a net loss of the partnership for the period. Management fees, Salary and interest allowances are guaranteed payments. The partnership generally deducts guaranteed payments on line 10 of Form 1065 as business expenses. If partners pay themselves high salaries, net income will be low, but it does not matter for tax purposes. Partner compensation and allocated net income are considered ordinary income for tax purposes and as such are reported on the form 1040. It does not matter whether or not a partner

withdrew any amount of money from his capital account. It's the net income, allocated to the partner, and his compensation from the partnership that are taxed, not the amount withdrawn. Net income or loss is allocated to the partners in accordance with the partnership agreement. In the absence of any agreement between partners, profits and losses must be shared equally regardless of the ratio of the partners' investments. If the partnership agreement specifies how profits are to be shared, losses must be shared on the same basis as profits. Net income does not includes gains or losses from the partnership investment.

Closing Process
Closing process at the end of the accounting period includes closing of all temporary accounts by making the following entries.

Close all revenues accounts to Income Summary. Close all expenses accounts to Income Summary. Close Income Summary by allocating each partner's share of net income or loss to the individual capital account.

Close each partner's drawing account to the individual capital accounts.

To illustrate, assume that there are two equal partners, Partner A and Partner B. The partnership agreement specifies that after providing for salary and interest allowances the remaining income is divided equally. Assume also that net income of the partnership was $100,000 and the two partners received allowances as indicated in the table below. The allocation of net income would be reported on the income statement as shown. Net Income $100,000 Partner A Partner B Total Allocation of net income 60,000 Salary allowances 30,000 40,000 20,000 100,000 50,000

Interest allowances Remaining income

20,000 10,000

10,000 10,000

30,000 20,000

Net Income of the partnership is calculated by subtracting total expenses from total revenues. After that salary and interest allowances are subtracted from Net Income, and the result is Remaining Income, which is divided equally in accordance with the partnership agreement. At the end of the accounting period each partner's allocated share is closed to his capital account. Based on the net income allocation shown above, the closing entry is: Debit Income Summary $100,000 Partner A, Capital Partner B, Capital $60,000 $40,000 Credit

Statements for Partnerships

The allocation of net income and its impact on the partners' capital balances must be disclosed in the financial statements. All three financial statements are affected: the income statement, statement of owners (partners') equity, and balance sheet. In addition, the statement of partners' equity reflects the equity of each partner and summarizes the allocation of net income for the year.

Statement of Partners' Equity

Statement of partners' equity starts with capital balances at the beginning of the accounting period, and reflects additional investments, made by the partners during the year, net income for the period, and withdrawals. Additional investments and allocated net income increase capital accounts of the partners. All kind of allowances, like salary allowances and capital allowances, are treated as withdrawals.

Withdrawals reduce capital accounts. The end result is capital balances of the partners at the end of the accounting period. A sample statement of partners' equity is shown below. Partner A Partner B Capital, Jan. 1, 2008 Total

$40,000 $30,000 $70,000

Additional Investments $10,000 $20,000 $30,000 Capital plus investments $50,000 $50,000 $100,000 Net Income for the year $60,000 $40,000 $100,000 Balance Withdrawals Capital, Dec. 31, 2008 $110,000 $90,000 $200,000 $30,000 $20,000 $50,000 $80,000 $70,000 $150,000

Equity section of the balance sheet The partners' equity section of the balance sheet reports the equity of each partner, as illustrated below. Partner A, Capital Partner B, Capital Total partners' equity $80,000 $70,000 $150,000

Admitting a new partner

A new partner may be admitted by agreement among the existing partners. When this happens, the old partnership is dissolved and a new partnership is created, with a new partnership agreement. A new partner may buy into the business in three ways:

by purchasing an interest directly from existing partners

by making an investment in the business, or by contributing assets from an existing business.

Assume that Partner A and Partner B admit Partner C as a new partner, when Partner A and Partner B have capital interests $30,000 and $20,000, respectively. Partner C pays, say, $15,000 to Partner A for one-third of his interest, and $15,000 to Partner B for one-half of his interest. These payments go to the partners directly, not to the business. The following entry is made by the partnership. Debit Credit Partner A, Capital 10,000 Partner B, Capital 10,000 Partner C, Capital 20,000

The extra $5,000 Partner C paid to each of the partners, represents profit to them, but it has no effect on the partnership's financial statements. Now, assume instead that Partner C invested $30,000 cash in the new partnership. In this case, the following entry would be made to admit Partner C. Debit Credit Cash Partner C, Capital 30,000 30,000

Finally, let's assume that Partner C had been operating his own business, which was then taken over by the new partnership. In this case the balance sheet for the new partner's business would serve as a basis for preparing the opening entry. The assets listed in the balance sheet are taken over, the liabilities are assumed, and the new partner's capital account is credited for the difference.

Equal partners
Example 1. Assume that a sole proprietor agreed to admit a single equal partner for a certain amount of money. The sole proprietor, Partner A, will give the new partner, Partner B, an equal share in the partnership. 100% interest of the sole proprietor will be divided in half, so that each of the two partners will have 50% interest in the partnership. In effect, Partner A sold 50% of his equity to Partner B. Example 2. Assume that Partner A and Partner B have 50% interest each, and they agreed to admit Partner C and give him an equal share of ownership. Each of the three partners will have 33.3% interest in the partnership. Interests of Partner A and Partner B will be reduced from 50% each to 33.3% each. In effect, each of the two partners sold 16.7% of his equity to Partner C. Example 3. Assume there are three equal partners, who have 33.3% interest each, and they agreed to admit a fourth equal partner. Each of the four partners will have 25% interest in the partnership. Interests of the three partners will be reduced from 33.3% each to 25% each. In effect, each of the three partners sold 8.3% of his equity to the new partner. In either case, all partners must agree to the specific way to realign their partnership interests as a result of admitting a new partner.

Unequal partners
Example 1. Assume there are two unequal partners in the partnership. Partner A owns 60% equity, Partner B owns 40% equity, and they agreed to admit a third partner. Partner C has several options to join the partnership.

He can buy equity from Partner A. He can buy equity from Partner B. He can buy equity from Partner A and Partner B.

Partner A and Partner B may both agree to sell 50% of their equity to Partner C. In that case, Partner A will have 30% interest, Partner B will have 20%, and Partner C will own (30% + 20%) 50% interest in the partnership. Partner A and Partner B may both agree to sell 25% of their equity to Partner C. In that case, Partner 3 will own (15% + 10%) 25% interest in the partnership. Partner A may decide to sell 25% of his equity to partner C. Partner B may decide to sell 50% of his equity to partner C. Partner C will own (15% + 20%) 35% of the partnership equity. Example 2. Assume now that there are three partners. Partner A owns 50% interest, Partner B owns 30% interest, and Partner C owns 20% interest. Collectively, they own 100% interest in the partnership. They agreed to admit a fourth partner, Partner D. As in the previous case, Partner D has a number of options. He can buy shares of interest from one of the partners, or from more than one partner. Assume that the three partners agreed to sell 20% of interest in the partnership to the new partner. There are more than one way to realign partnership interests. Equal percentage reduction. The three partners may agree to reduce their equity by equal percentage. In order to sell 20% equity to the new partner, each of the partners has to sell (20% : 3) 6.7% of his equity to the new partner. Equal proportion reduction. The three partners may chose equal proportion reduction instead of equal percentage reduction. Had there been only one partner, who owned 100% interest, selling 20% interest would reduce ownership interest of the original owner by 20%. The same approach can be used to buy equity from each of the partners. Each of the existing partners may agree to sell 20% of his equity to the new partner. The result for the new partner will be the same as if a single owner sold him 20% interest.

This table illustrates realignment of ownership interests before and after admitting the new partner. Before Partner A 50% Partner B 30% Partner C 20% Partner D 0% After (50% * 80%) 40% (30% * 80%) 24% (20% * 80%) 16% 20%

To summarize, there does not exist any standard way to admit a new partner. A new partner can be admitted only by agreement among the existing partners. When this happens, the old partnership is dissolved and a new partnership is created, with a new partnership agreement.

Partnership bonus
Bonus paid to the partnership. A new partner may pay a bonus in order to join the partnership. Bonus is the difference between the amount contributed to the partnership and equity received in return. Assume that Partner A and Partner B have balances $10,000 each on their capital accounts. The partners agree to admit Partner C to the partnership for $16,000. In return, Partner C will receive one-third equity in the partnership. The following table illustrates calculation of the bonus. Equity of Partner A Equity of Partner B Contribution of Partner C $10,000 $10,000 $16,000

Total equity after admitting Partner C $36,000 Equity percentage of Partner C Equity of Partner C Contribution of Partner C 33.3% $12,000 $16,000

Minus equity of Partner C Bonus paid to "A & B Partnership"

$12,000 $4,000

In this case, Partner C paid $4,000 bonus to join the partnership. The amount of any bonus paid to the partnership is distributed among the partners. The following table illustrates the distribution of the bonus. Debit Cash Partner C, Capital Partner A, Capital Partner B, Capital $16,000 $12,000 $2,000 $2,000 Credit

Bonus paid to a partner.

Assume now that Partner A and Partner B have balances $10,000 each on their capital accounts. The partners agree to admit Partner C to the partnership for $7,000. In return, Partner C will receive one-third equity in the partnership. Why would the existing partners allow a new partner to buy an equal share of equity with smaller contribution? It might be because the new partner brings something very valuable to the partnership. It might be special skills. The following table illustrates calculation of the bonus. Equity of Partner A Equity of Partner B Contribution of Partner C $10,000 $10,000 $7,000

Total equity after admitting Partner C $27,000 Equity percentage of Partner C Equity of Partner C 33.3% $9,000

Contribution of Partner C Minus equity of Partner C Bonus paid to Partner C

$7,000 $9,000 $2,000

In this case, Partner C received $2,000 bonus to join the partnership. The amount of the bonus paid by the partnership is distributed among the partners according to the partnership agreement. The following table illustrates the distribution of the bonus. Debit to Cash increases the account, while debit to a capital account of a partner decreases the account. Debit Credit Cash Partner C, Capital Partner A, Capital $1,000 Partner B, Capital $1,000 In an equal partnership bonus paid to a new partner is distributed equally among the partners. In an unequal partnership bonus is distributed according to the partnership agreement. Assume that Partner A is a 75% partner, and Partner B is a 25% partner. Partner C was admitted to the partnership. He paid $5,000 cash. In return, he received $9,000 equity in the partnership. A $4,000 ($9,000 - $5,000) bonus paid to Partner C would be distributed as follows: Partner A will pay ($4,000 * 75%) $3,000. His capital account will be debited $3,000. Partner B will pay ($4,000 * 25%) $1,000. His capital account will be debited $1,000. Debit Cash Partner C, Capital Partner A, Capital $3,000 ($4,000 * 75%) $5,000 $9,000 Credit $7,000 $9,000

Partner B, Capital $1,000 ($4,000 * 25%)

Withdrawal of Partner
By agreement, a partner may retire and be permitted to withdraw assets equal to, less than, or greater than the amount of his interest in the partnership. The book value of a partner's interest is shown by the credit balance of the partner's capital account. The balance is computed after all profits or losses have been allocated in accordance with the partnership agreement, and the books closed. If a retiring partner withdraws cash or other assets equal to the credit balance of his capital account, the transaction will have no effect on the capital of the remaining partners. To illustrate, assume that several years after the formation of "A,B, & C" partnership Partner C decided to retire. The partners agreed to the withdrawal of cash equal to the amount of Partner C's equity in the assets of the partnership. Assume that the partners' capital accounts had credit balances as follows:

Partner A $60,000 Partner B $40,000 Partner C $30,000

If Partner C withdraws $30,000 in cash, the entry on the books is as follows: Debit Credit Partner C, Capital 30,000 Cash 30,000

If a retiring partner agrees to withdraw less than the amount in his capital account, the transaction will increase the capital accounts of the remaining partners.

For example, if Partner C withdraws only $20,000 in settlement of the interest, the difference between Partner C's equity in the assets of the partnership and the amount of cash withdrawn is $10,000 ($30,000 - $20,000). This difference is divided between the remaining partners on the basis stated in the partnership agreement. Assume that the partnership agreement specifies that in such a case the difference is divided according to the ratio of their capital interests after allocating net income and closing their drawing accounts. On this basis, Partner A's capital account is credited for $6,000 and Partner B's is credited for $4,000. The entry in the books of the partnership is as follows: Debit Credit Partner C, Capital 30,000 Cash Partner A, Capital Partner B, Capital 20,000 6,000 4,000

If a retiring partner withdraws more than the amount in his capital account, the transaction will decrease the capital accounts of the remaining partners. The excess of the amount withdrawn over retiring partner's equity in the partnership is divided between the remaining partners on the basis stated in the partnership agreement.

Purchasing of Partner's Interest

When a partner retires from the business, the partner's interest may be purchased directly by one or more of the remaining partners or by an outside party. If the retiring partner's interest is sold to one of the remaining partners, the retiring partner's equity is merely transferred to the other partner.

For example, assume that Partner C's equity is sold to Partner B. The entry for the transaction on the books of the partnership is as follows: Debit Credit Partner C, Capital 30,000 Partner B, Capital 30,000

The amount paid to Partner C by Partner B is a personal transaction and has no effect on the above entry. Any gain or loss resulting from the transaction is a personal gain or loss of the withdrawing partner and not of the business. If the retiring partner's interest is purchased by an outside party, the retiring partner's equity is transferred to the capital account of the new partner, Partner D. Debit Credit Partner C, Capital 30,000 Partner D, Capital 30,000

The amount paid to Partner C by Partner D is also a personal transaction and has no effect on the above entry.

Death of a Partner
The death of a partner dissolves the partnership. On the date of death, the accounts are closed and the net income for the year to date is allocated to the partners' capital accounts. Most agreements call for an audit and revaluation of the assets at this time. The balance of the deceased partner's capital account is then transferred to a liability account with the deceased's estate. The surviving partners may continue the business or liquidate. If the business continues, the procedures for settling with the estate are the same as those described earlier for the withdrawal of a partner.

Liquidation of a Partnership
Liquidation of a partnership generally means that the assets are sold, liabilities are paid, and the remaining cash or other assets are distributed to the partners. When normal operations are discontinued, adjusting and closing entries are made. Thus, only the assets, liabilities and partners' equity accounts remain open. If noncash assets are sold for more than their book value, a gain on the sale is recognized. The gain is allocated to the partners' capital accounts according to the partnership agreement. If noncash assets are sold for less than their book value, a loss on the sale is recognized. The loss is allocated to the partners' capital accounts according to the partnership agreement. As the assets are sold, the cash is applied first to the claims of creditors. Once all liabilities are paid, the remaining cash and other assets are distributed to the partners according to their ownership interests as indicated by their capital accounts.

Partnership taxation
Partnership taxation is the concept of taxing a partnership business entity. Many jurisdictions regulate partnerships and the taxation thereof differently.

Common Law
Many common law jurisdictions apply a concept called "flow through taxation" to partnerships. Partnerships are a flow-through entity where the taxes are assessed at the entity level but which are applied to the partners of the partnership

Strategic alliance
A Strategic Alliance is a relationship between two or more parties to pursue a set of agreed upon goals or to meet a critical business need while remaining independent organizations.

Partners may provide the strategic alliance with resources such as products, distribution channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or intellectual property. The alliance is a cooperation or collaboration which aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts. The alliance often involves technology transfer (access to knowledge and expertise), economic specialization, shared expenses and shared risk.

Types of strategic alliances

Various terms have been used to describe forms of strategic partnering. These include international coalitions (Porter and Fuller, 1986), strategic networks (Jarillo, 1988) and, most commonly, strategic alliances. Definitions are equally varied. An alliance may be seen as the joining of forces and resources, for a specified or indefinite period, to achieve a common objective. There are seven general areas in which profit can be made from building alliances.[2]

Stages of Alliance Formation

A typical strategic alliance formation process involves these steps:

Strategy Development: Strategy development involves studying the alliances feasibility, objectives and rationale, focusing on the major issues and challenges and development of resource strategies for production, technology, and people. It requires aligning alliance objectives with the overall corporate strategy.

Partner Assessment: Partner assessment involves analyzing a potential partners strengths and weaknesses, creating strategies for accommodating all partners management styles,

preparing appropriate partner selection criteria, understanding a partners motives for joining the alliance and addressing resource capability gaps that may exist for a partner.

Contract Negotiation: Contract negotiations involves determining whether all parties have realistic objectives, forming high calibre negotiating teams, defining each partners contributions and rewards as well as protect any proprietary information, addressing termination clauses, penalties for poor performance, and highlighting the degree to which arbitration procedures are clearly stated and understood.

Alliance Operation: Alliance operations involves addressing senior managements commitment, finding the calibre of resources devoted to the alliance, linking of budgets and resources with strategic priorities, measuring and rewarding alliance performance, and assessing the performance and results of the alliance.

Alliance Termination: Alliance termination involves winding down the alliance, for instance when its objectives have been met or cannot be met, or when a partner adjusts priorities or re-allocates resources elsewhere.

The advantages of strategic alliance includes: 1. Allowing each partner to concentrate on activities that best match their capabilities. 2. Learning from partners & developing competences that may be more widely exploited elsewhere 3. Adequacy a suitability of the resources & competencies of an organization for it to survive. There are four types of strategic alliances: joint venture, equity strategic alliance, non-equity strategic alliance, and global strategic alliances.

Joint venture is a strategic alliance in which two or more firms create a legally independent company to share some of their resources and capabilities to develop a competitive advantage.

Equity strategic alliance is an alliance in which two or more firms own different percentages of the company they have formed by combining some of their resources and capabilities to create a competitive advantage.

Nonequity strategic alliance is an alliance in which two or more firms develop a contractual-relationship to share some of their unique resources and capabilities to create a competitive advantage.

Global Strategic Alliances working partnerships between companies (often more than 2) across national boundaries and increasingly across industries. Sometimes formed between company and a foreign government, or among companies and governments

How to make a Business Partnership Agreement:

If you and your partners dont spell out your rights and responsibilities in a written partnership agreement, youll be ill-equipped to settle conflicts when they arise, and minor misunderstandings may erupt into full-blown disputes. In addition, without a written agreement saying otherwise, your states law will control many aspects of your business.

How a partnership agreement helps your business

A partnership agreement allows you to structure your relationship with your partners in a way that suits your business. You and your partners can establish the shares of profits (or losses) each partner will take, the responsibilities of each partner, what will happen to the business if a partner leaves and other important guidelines.

Uniform partnership act

Each state (with the exception of Louisiana) has its own laws governing partnerships, contained in whats usually called The Uniform Partnership Act or The Revised Uniform Partnership Act or, sometimes, the UPA or the Revised UPA. These statutes establish the basic legal rules that apply to partnerships and will control many aspects of your partnerships life unless you set out different rules in a written partnership agreement. Dont be tempted to leave the terms of your partnership up to these state laws. Because they were designed as one-size-fits-all fallback rules, they may not be helpful in your particular situation. Its much better to put your agreement into a document that specifically sets out the points you and your partners have agreed on.

What to include in your partnership agreement

Heres a list of the major areas that most partnership agreements cover. You and your partnersto-be should consider these issues before you put the terms in writing:

Name of the partnership. One of the first things you must do is agree on a name for your partnership. You can use your own last names, such as Smith & Wesson, or you can

adopt and register a fictitious business name, such as Westside Home Repairs. If you choose a fictitious name, you must make sure that the name isnt already in use.

Contributions to the partnership. Its critical that you and your partners work out and record whos going to contribute cash, property or services to the business before it opens and what ownership percentage each partner will have. Disagreements over contributions have doomed many promising businesses.

Allocation of profits, losses and draws. Will profits and losses be allocated in proportion to a partners percentage interest in the business? And will each partner be entitled to a regular draw (a withdrawal of allocated profits from the business) or will all profits be distributed at the end of each year? You and your partners may have different ideas about how the money should be divided up and distributed, and each of you will have different financial needs, so this is an area to which you should pay particular attention.

Partners authority. Without an agreement to the contrary, any partner can bind the partnership without the consent of the other partners. If you want one or all of the partners to obtain the others consent before binding the partnership, you must make this clear in your partnership agreement.

Partnership decision-making. Although theres no magic formula or language for divvying up decisions among partners, youll head off a lot of trouble if you try to work it out beforehand. You may, for example, want to require a unanimous vote of all the partners for every business decision. Or if that leaves you feeling fettered, you can require a unanimous vote for major decisions and allow individual partners to make minor decisions on their own. In that case, your partnership agreement will have to describe what constitutes a major or minor decision. You should carefully think through issues like these when setting up the decision-making process for your business.

Management duties. You might not want to make ironclad rules about every management detail, but youd be wise to work out some guidelines in advance. For example, who will keep the books? Who will deal with customers? Supervise employees? Negotiate with suppliers? Think through the management needs of your partnership and be sure youve got everything covered.

Admitting new partners. Eventually, you may want to expand the business and bring in new partners. Agreeing on a procedure for admitting new partners will make your lives a lot easier when this issue comes up.

Withdrawal or death of a partner. At least as important as the rules for admitting new partners to the business are the rules for handling the departure of an owner. You should set up a reasonable buyout scheme in your partnership agreement. To learn more about this issue, read Plan for changes in partnership ownership with buy-sell provisions.

Resolving disputes. If you and your partners become deadlocked on an issue, do you want to go straight to court? It might benefit everyone involved if your partnership agreement provides for alternative dispute resolution, such as mediation or arbitration.

Related Case Studies:

Partnership Case Study: Pentagram January 23, 2008 by Tim Rich
With 19 partners working from offices in the U.S. and the U.K., Pentagram has built an unshakable reputation for stellar design. What makes the company so successful? The secret is rooted in the firm's organizational structure, which dates back to its founding in 1972. While many design businesses have adopted top-down management schemes, limited themselves to one director-owner or made half-baked attempts at sharing ownership, Pentagram has finessed a democratic, multifaceted approach to partnership. What can you learn from this legend? Here are six tips on making the Pentagram model work for you: Be passionate about making all partners equal. Pentagram exists without a hierarchy, and each partner has the same voting rights on decisions from day one. This democracy among partners is vital to the open exchange of knowledge and must be founded on a fair and equal distribution of ownership. Partnerships live and die by communication, so invest significant amounts of time and money to regularly bring all the partners together to examine each other's performance and discuss issues. Pentagram does this at its twice-yearly partner meetings. All partners must be open to critical analysis of their creative work and financial performance. Honest critiques are key to Pentagram's reputation and success. Carefully consider the dynamics of the organization you want to create, and constantly search for new potential partners who will add to the creative value of the business as a whole. Create synergies between partners rather than duplicate design disciplines and approaches.

 Help new partners adjust to the challenges and commitment required. For example, Pentagram eases the up-front financial burden for new partners buying into the firm. Accept that bringing exceptionally talented people together within one organization will always involve clashes. Promote a clear culture of rational debate, so issues can be aired publicly among partners, debated and settled through an open and democratic voting process.

Mohrilal V/s Shri Ballabh A.I.R. 1967, Rajasthan.

This is a civil regular second appeal by the defendant Mohrilal in a suit for dissolution of partnership rendition of accounts, which was dismissed by the trial court but on appeal, that decision was reversed and the case was remanded back. The plaintiff Shri Ballabh carried the defendant Mohrilal also carried on business with his name and style in the same town. On13th May, 1950 the plaintiff and the defendant entered into partnership agreement by which they agreed to carry on the business of sale and purchase of gur, sugar, potatoes, tobacco, etc. The partnership business consisted of the sale and purchase of tobacco among the other products and that business was conducted in the name of partnership which was agreed to be styled as Ram avatar Company. Both had agreed between themselves that the work of sale and purchase of various commodities was to be conducted by the defendant and that they would maintain the day to day accounts Kachhi Rokar from which the same will be entered every evening in Pakki Rokar to be maintained by the plaintiff. But in this case plaintiff did not have license to carry on tobacco business but defendant had it under Central Excises and Salt Act. Such a business couldnt be done unless one was a license holder. The whole of tobacco business, according to the plaintiff, belonging to partnership was unlawful.

It is admitted by the plaintiff that partnership accounts between the parties with reference to other products had been settled except for tobacco. This forced the plaintiff to file a suit out of which the appeal arises for dissolution. The defendant on the other hand admitted that he had entered into partnership with plaintiff by means of agreement.

Both courts below held that tobacco business was a part and parcel of partnership business. The learned judge felt persuaded to come to the conclusion that tobacco business was not conducted jointly by partnership. It seems to have been intended that plaintiff appellant and defendant respondents were acting within the limits of authority. The real effect of partnership was nothing more and less than pooling the profits and losses of the said business and sharing it between the parties. The suit for dissolution of partnership and rendition of accounts could not be maintained in any court of law.

Case: Gilford Motor Co. vs. Horne (1933)1Ch. 935 Horne, a former employee of the GM CO. had agreed not to compete with the company for a given number of ears within reasonable local limits. Horne desirous of re-entering business, in violation of contractual obligation, formed a private company with majority share holdings. GM Co. filed a suit against the company and the court granted an injunction restraining Horne, and his company with going ahead in the competing business .

Case: Delhi Development Authority vs. Skipper Construction Company(P) [1996]4 SCALE 202.
The skipper construction company failed to pay full purchase price of a plot to DDA. Instead construction was started and the space sold to various persons. The two sons of the directors who had business in their own name claimed that they had separated from their father and the companies they were running had nothing to do with the properties of their parents. But no satisfactory proof in support of their claim could be produced. Held that the transfer of shareholding between the father and the sons must be treated as same. The fact that the members of his family had created several corporate bodies did not prevent the

court from treating all of them as one entity belonging to and controlled by the director and his family.

Equivalent citations: AIR 1967 Raj 280 Bench: I Modi Mohrilal vs Shri Ballabh And Anr. on 13/12/1966 JUDGMENT I.N. Modi, J.
1. This is a civil regular second appeal by the defendant Mohrilal in a suit for dissolution of partnership and rendition of accounts, which was dismissed by the trial court but on appeal that decision was reversed and the case was remanded back with a direction that a preliminary decree for the taking of the accounts be passed and the suit be decided according to law. The material facts are these: 2. The plaintiff Shri Ballabh and his brother Ram Raghunath carried on business in the name and style of Shri Ballabh Ram Raghunath at Sambhar. The defendant Mohrilal also carried on business in the name of Shivnarain Mohrilal in the same town. On Jeth Sudi 6 Smt. 2006 equivalent to the 13th May, 1950, the plaintiffs and the defendant entered into a partnership agreement by which they agreed to carry on the business of sale and purchase of gur, sugar, potatoes, tobacco, etc. It is unnecessary for the purposes of the present appeal to set out all the conditions agreed to between the parties at the time of the agreement, and it should suffice to mention that the partnership business was to consist of the sale and purchase of tobacco among other articles referred to above and that such business shall be conducted in the name of the partnership which was agreed to be styled as Ramavatar Company. The agreement of partnership is Ex. 1. It may be

pointed out at this place that it seems to have been agreed between the parties that the work of sale and purchase of the various commodities was to be conducted by the defendants and that they would maintain the day to day accounts in a Kachhi Rokar from which the same will be entered every evening in a Pacci Rokar to be maintained by the plaintiffs. According to the plaintiffs as they held no license for doing wholesale business in the sale and purchase of tobacco, the business in that commodity was carried on by the defendant under a license dated the 16th February, 1951, which he held for the purpose under the Central Excises and Salt Act, 1944 and further that the plaintiffs were content to leave this business to be done by the defendant as the latter held a license in his own name and such business could not be done unless one was a license holder for the same. It is admitted by the plaintiffs that the partnership account between the parties with reference to all other articles had been settled except in the case of tobacco account. They called upon the defendant to render it to them but without any purpose, and, therefore, they have been compelled to file the suit, out of which this appeal arises, for the dissolution of partnership and rendition of accounts in respect of the tobacco business. 3. Defendant admitted that he had entered into partnership with the plaintiffs by means of the agreement Ex. 1 but pleaded that inasmuch as the partnership did not have or take any license for dealing in the wholesale sale and purchase of tobacco, business in that commodity was not carried on in partnership but belonged to him exclusively. He raised some other pleas also but with those we are not concerned for the purpose of the present appeal. 4. Both the Courts below have held that the tobacco business was part and parcel of the partnership business of the parties. The trial Court came to the conclusion that as the said business had been done by the partnership without a licence in the name of the partnership firm, this was in contravention of the provisions of the Central Excises and Salt Act, 1944 and the rules made there under and, consequently, it was unlawful, and, in this view of the matter, dismissed the plaintiffs suit with costs. On appeal the learned District Judge, Jaipur District, Jaipur, reversed that decision and remanded the suit with a direction that a preliminary decree be passed for rendition of accounts and for

further proceedings according to law. The learned Judge felt persuaded to come to that conclusion as in his opinion the tobacco business was not conducted jointly by the partnership and that the real effect of the partnership was nothing more and nothing LOSS than pooling the profit & loss of the said business and sharing it between the parties. In this view of the matter the learned Judge held that the contract of partnership did not contravene title provisions of the Act of 1944. Aggrieved by this decision the defendant has come up in appeal to this Court. 5. The contention of the learned counsel for the defendant is that the learned District Judge had made out an entirely a new case in appeal for the plaintiffs which he was not competent to do and for which there was no sufficient justification on the record, and that the learned Judge's view that the agreement between the parties was only to pool together the profit and loss of the tobacco business and to share the same between them was an oversimplification of the true position between the parties. On the other hand, learned counsel strongly contended that the business with which we are concerned in this case being one in a commodity regulated by the Act of 1944 and having been carried on by the partnership in the absence of a licence thereunder was entirely illegal and that the Courts of law could not countenance such a business and order its dissolution or direct rendition of accounts with respect to it. In support of this submission reliance was placed on a Bench decision of this Court in Brij Mohan v. N. V. Vakharia, ILR (1965) 15 Raj 496 = (AIR 1965 Raj 172). That was a case under the Medicinal and Toilet Preparations (Excise Duties) Act, 1955, and appears to me to be parallel to the case before me. In that case also a partnership was set up between the parties for the manufacture of medicinal and toilet preparations. One of the partner Vakharia had a license under the rules framed under the Medicinal and Toilet Preparations (Excise Duties) Act, 1955, and this license was neither got amended in the name of the partnership, nor was a fresh license obtained in its name for the carrying on of the business in question. One of the partners Mohan Das then brought a suit for dissolution of partnership and rendition of accounts. Defendant Vakharia resisted this suit on the ground that partnership was illegal and therefore no decree for dissolution and rendition of accounts with respect to such business could be passed. It

was held that a business like the one which the parties were carrying in that case could not be lawfully carried on without a proper license in the name of the partnership in accordance with the provisions of Section 6 of the Act, and Rule 85 (4) of the Rules made there under, and that if the same was being carried on in disregard of such a requirement that amounted to an offence under Section 7 of the Act and consequently a suit for dissolution and accounts of a partnership which was illegal could not possibly be maintained. In coming to this conclusion the Court placed reliance on a decision of the Supreme Court in Govind Rao v. Nathmal, Civil Appeal No. 30 of 1960, D/-11-4-1962 (SC), which is an unreported case. 6. I have no doubt that on the view taken in Vakharla's case, ILR (1985) 15 Raj 496 = (AIR 1965 Raj 172) (supra) the plaintiffs' suit cannot but be dismissed. The position to my mind is simple enough. Here was a partnership formed for carrying on wholesale business in the sale and purchase of tobacco between the parties to the suit amongst certain other commodities also. The defendant Mohrilal alone held a license from competent authority for carrying on such a business. The partnership Company did not hold such a license. According to Section 6 of the Act of 1944, read with Schedule 1 thereof, wholesale business in the purchase or sale of tobacco could not be carried on except under a license, obtained under the Act, from such date as may be specified in a notification issued by the Central Government in this behalf. It is not disputed before me that such a notification was issued long before the time with which we are concerned in this case. Section 9 of the Act then inter alia provides that whoever contravenes any of the provisions of a notification issued under Section 6 shall be guilty of an offence which shall be punishable with imprisonment for a term which may extend to six months or with fine which may extend to two thousand rupees or with both. Reference may also be made in this connection to Rule 178 of the Rules made under the Act. Sub-rule (2) thereof lays down that every license shall be deemed to have been granted or renewed personally to the licensee. Sub-rule (4) further lays down that if the holder of a license enters into partnership in regard to the business covered by a license he shall report the fact to the licensing authority within 30 days of his entering Into such partnership and shall get his license suitably amended, and that where a partnership is thus entered into, a partner as well as the original holder of the license shall be bound by that license. Reading all these provisions

collectively in the light of the circumstances of the case which I have adverted to above, I have no hesitation in coming to the conclusion that the partnership in this case was illegal and, therefore, it is not for the Courts of law to order a dissolution or rendition of accounts with respect to such partnership. 7. To dissuade from the conclusion to which I have felt disposed to come, learned counsel strenuously contended that the business of purchasing and selling tobacco as indeed the rest of the business in the various other commodities, in connection with which the partnership between the parties had been formed, had been left entirely to the defendant who held a license for the purpose, and, that so far as the plaintiffs were concerned, they were to all intents and purposes financing partners and, consequently, the present case was taken out of the purview of Vakharia's case and was distinguishable from it and, therefore, the decree passed by the Court below was correct. In support of his submission learned counsel drew my attention to Champsey Dossa v. Gordhandas Kessowji, AIR 1917 Bom 250, and the decision of their Lordships of the Privy Council in the same case on appeal in Gordhandas Kessowji v. Champsey Dossa, AIR 1921 PC 137. It has been held in this case that where a licencee under Section 11 of the Bombay Salt Act, who is prohibited by the terms of his license, from sub-letting the whole or a part of the privilege, admits some members of his family and others as partners in the business to share the profits, such partners thus not having taken any part in the manufacture of salt, the arrangement did not infringe the provisions either of the license or of Section 11 of the Act. Basing his argument on this view learned counsel raised a powerful argument before me that the business in the present case of purchasing or selling tobacco on a wholesale basis had been admittedly assigned by the parties to the defendant alone and. therefore, the correct position with reference to this part of the business was that the parties were merely to share the profits and losses in that connection. On having given my careful and anxious consideration to this submission, I have not fell persuaded to accept it as sound. The principal reason which induced me to come to this conclusion is that the facts in Champsey Dossa's case were substantially different inasmuch as the agreements of partnership in that case said nothing about the sub-letting or alienation of the

rights which the licensee had obtained to manufacture salt, and the only agreement was that the parties shall share in the profits of certain shops in certain proportions. In these circumstances the only question that arose for decision in that case was whether the partner holding a license having admitted certain other persons to share in the profits which he derived from the manufacture and sale of salt, thereby sub-let, sold, mortgaged or otherwise alienated whole or in part the privilege granted by the license for manufacturing salt on the land within the limits mentioned in the license, and this question was answered in the negative. The ratio of the decision was that the admission of partners to share in the profits cannot be considered as a sub-letting or alienation of the privilege or a part thereof unless there has been a document directly transferring to the partners or attempting to transfer to the partners a part of the right to manufacture or vend. Tin's decision on appeal was upheld by their Lordships of the Privy Council in a very short judgment wherein they merely said that although the ease had been fully argued before them, there were no reasons adduced which would enable their Lordships to doubt the correctness of the judgment appealed from. 8. Now so far as I am able to think, the present case is radically different on facts. The plaintiffs themselves have laid their ease in the plaint from which it is impossible to draw any other conclusion than this that the partnership that had been set up between the parties was, amongst other commodities, to carry on the wholesale trade in tobacco also. Reference may be made in this connection to paragraph 2 of the plaint. The same impression is confirmed by a perusal of the agreement Ex. 1. Both the plaintiff Shri Ballabh and the defendant Mohrilal when they were examined under Order X Rule 1 of the Code of Civil Procedure accepted that the actual business of purchasing and selling tobacco was left to the defendant obviously because it was he who held the license for that purpose, and without such license no such business could possibly be carried on, but it is further accepted by them that the entire business was to be carried out in the name of the partnership, viz. Ramavatar and Co. That being so, it seems to me to be futile to contend that the partnership in the present case was confined more or less to the sharing of the profits and losses in connection with the tobacco business and did not extend to the carrying on of that business by the partnership itself. It was

here that the real point of distinction lies between the present case and Dossa's case referred to above, and if once I come to the conclusion that in its essence and substance that was the object of the partnership, then there is no escape from the conclusion that such a partnership was illegal. It is true that the defendant was actually left to conduct the tobacco business, but If that business was to be conducted on behalf of the partnership and, in its name, then the defendant was merely an agent of the partnership and of the other partners, and further such a partnership could not be saved from the taint of unlawfulness because it held no licence in its name. It seems to me that the decision of their Lordships of the Supreme Court in Govind Rao's case adverted to above, on which reliance was placed in Vakharia's case is very instructive for the decision of the controversy raised in the present ease. The facts of that case were very strong. The plaintiff brought a suit for dissolution of a partnership and rendition of accounts on the allegation that there was a partnership between him and the respondent to any on trade in foodgrains. The plaintiff held a licence under the Central Provinces and Berar Food Grains Control Order, 1945, for dealing as a wholesale dealer in Nagpur District. The defendants also held a licence in the name of their joint family in Rajnandgaon, which was a princely State at that time, under the law in force in that State for dealing in food grains there. The plaintiff admitted in his plaint that the partnership was formed for the specific purpose of exporting food grains to places outside the Province of Nagpur because the defendants were not registered as dealers in the Province and could not get permits for export from the Province and it had been agreed between the parties that the plaintiff shall arrange to secure the necessary permits for export and the defendants were to supply the capital for purchase and also to arrange for purchase, dispatch and sale of goods. In these circumstances the question arose whether the partnership was not illegal in view of Section 3 of the Central Provinces and Berar Food Grains Control Order, 1945, which prohibited that no person shall deal in food grains as a wholesale dealer except tinder and in accordance with the license, issued by the Deputy Commissioner of the District. This question was answered against the plaintiff. It seems to have been contended before their Lordships that both the plaintiff-appellant and the defendant-respondents were acting within the limits of their authority which was available to them under the respective licenses held by them for trading in food grains within their respective

areas and, therefore, the partnership business was perfectly legal. In repelling this contention their Lordships made the following observations which with all respect, if I may say so, are very instructive for the decision of the case before me :-"What the learned counsel for the appellant seeks to do is to break up each transaction into certain component parts, each part, according to him, being a separate transaction. The argument runs something like this: The appellant had a permit for dealing in food grains in the Nagpur District. The first purchase was made through an arhatiya, who was also licensed. The appellant had also an export permit in his own name, and the respondents had a license for dealing in food grains in Rajnandgaon. The matter, however, cannot be looked at in this way at all. What we have to find out is whether the partnership was legal, because the suit was for accounts of the dissolved partnership. If the partnership was illegal or was for an unlawful purpose, then the Court will give no assistance to a plaintiff in such a case. It is obvious that the partnership was not licensed as a partnership. Therefore, the partnership could not deal in food grains in Central Provinces and Berar. The license in the name of the appellant was not one in favor of the partnership, and the whole of the transaction by the partnership was in contravention of the Food Grains Control Order. A Court would not enforce any claim arising from this illegal partnership". 9. Applying the law as laid down by their Lordships to the case before me, the conclusion to my mind seems irresistible that as the partnership in the present case was not licensed it could not deal in the wholesale trade of tobacco and the license in the name of the defendant could not be accepted to be in favour of the partnership and, consequently, the whole of the tobacco business which according to the plaintiffs belonged to the partnership was unlawful, and a suit for dissolution of such a partnership and rendition of accounts could not be maintained in any Court of law. 10. For the aforesaid reasons I allow this appeal, set aside the judgment and the decree of the Court below and dismiss the plaintiffs' suit, but without any order as to costs. Any further proceedings that might have been taken by the trial Court in pursuance of the decree of the learned District Judge must fall as under. The leave to appeal is refused.

Problems in Business Partnerships:

Pitfalls abound when entrepreneurs decide to become partners. Know what they are ahead of time so you can set up guidelines that allow people to walk away if things go wrong. From powerhouse financiers like Kohlberg Kravis Roberts to retailers like Baskin-Robbins to IT pioneers like Hewlett-Packard, business partnerships have been an important part of entrepreneurship and startup success. The reasons are simple: complementary skill sets, shared equipment or expenses, and the idea that one person with "hard" money capital can create synergy with the intellectual capital of another person so both can profit from their venture. In theory, a partnership is a great way to start in business. In my experience, however, it's not always the best way for the typical entrepreneur to organize a business. The tough thing about most partnerships is that they are just like marriages, and if you know anything about those statistics, you know half of all marriages don't survive. Making a marriage work involves handling a volatile mix of partnership issues: ego, money, stress, monthly overhead and day-to-day expenses. Throw in some employees you must manage, and you have a good idea of the work required to make a business partnership successful. If you're thinking about a partnership, consider the following list and avoid the potential pitfalls: 1. Sharing capital instead of expenses: Whenever you share your own capital--be it money, resources, information or property--you automatically give away your enterprise ability. In a perfect world, the person you are partnering with is upright, full of integrity, and not at all tempted to take this gift and run with it as his own. However, the world's not perfect. So be careful. Instead, work out an arrangement where expenses are shared in an "associative" arrangement. It also makes it easier to walk away if things go wrong. 2. Partnering with someone because you can't afford to hire: This is a partnership killer right from the start. The scene is always the same: Bob has a business idea and Fred has the business skills, but Bob can't afford to hire Fred as an employee, so they decide to share duties, expenses

and profits. What happens is both Bob and Fred end up working against each other, and Bob finds himself liable for Fred's obligations (financial and otherwise) under the partnership agreement. If you've got the idea and someone else has the skill, simply hire him or work out an independent contractor agreement. Don't give away what you don't have to. 3. Lacking a written and signed partnership agreement: Due to the nature of partnerships, every detail and obligation must be clearly defined and written out, and agreed upon by all parties. This is best done with a written legal agreement drafted by a well-qualified, mutually agreed-upon lawyer. Just make sure the attorney is well-versed in business partnerships, and be sure to keep her card handy at all times. You may need that person again when things go wrong. 4. Overlooking a limited partnership: One of the main downfalls of a partnership agreement is the assumption of liability each partner makes for the other. A way around this is a limited partnership, where the limited partner is not liable for the actions or obligations of the general partner. Again, make sure an attorney well-versed in partnership agreements writes this arrangement. 5. Lacking an out or an exit strategy: Big-time marriages start with a pre-nuptial agreement. In business and contractual terms, a pre-nup is analogous to an exit agreement. In any partnership agreement, define the terms of an exit strategy that allows you or your partner to walk away from the partnership, or that provides options to buy out the other party. This can be done very clearly and simply--and without imploding the operations of a successful business.

6. Expecting the friendship to outlast the breakup of the partnership: Again, from the perspective of a marriage, how many ex-couples do you know who are truly friends? Not many, I suspect. So don't go into any partnership with a friend expecting to remain friends after a partnership breakup. It may sound great to do business with your friends, but remember, in the business world, it's always business first and friendships second. Also remember, most times when the business ends so does the friendship. 7. Having a 50/50 partnership: Every business, including partnerships, needs a boss. If you decide to go the partnership route, make it a 60/40 or 70/30 split. Then you and the business have

a point person for accountability and overall operational control. Also, keep your buyout or exit strategy clear and in your favor--benefitting you and saving problems down the road. As a final note, I leave you with an interesting solution to the partnership issue from one of the companies mentioned earlier: Baskin-Robbins. Hopefully, it provides additional perspective. When Burton Baskin and Irvine Robbins first considered partnering in the ice cream business, Robbins' father advised against it, thinking the compromises each man would make in getting the partnership to work would kill the product's potential. So the men each worked on their own businesses for two years before combining Robbins' five shops with Baskin's three stores under one name decided by the flip of a coin. Only after successfully launching and running their own separate businesses did the subsequent partnership actually work. That's one partnership formula I do know of that proved effective. And if it worked for those two pioneers of retail success, it just may work for you.

How to Resolve Business Partnership Issues

Expectations are not being met.
Expectations may be quite different for each partner. When expectations aren't met, it's a set up for negative feelings. It's important that each partner knows what to expect from the others.

Partner has lost interest in the business or changed thinking.

Over time new attractions and options will continue to present themselves to all partners. When a partner becomes disenchanted with how the partnership is going, she is more likely to lose interest over time.

Can't talk to each other.

Communication is so critical to maintaining a viable partnership. When partners get so busy doing their own thing that they can't find time to sit down with the other(s), they will likely start to feel less engaged. An unresolved issue can also lead to partners being unable to talk about certain things.

It's a wrong partnership.

Sometimes the partnership has been a bad match from the beginning, but it was maintained for a variety of reasons. When the primary reason for the partnership was based on personal needs more than on business needs, if those needs aren't fulfilled, the partnership will flounder. Maybe one partner thinks and acts fast and the other wants to research things in great detail. These people may never be able to function well together. Basic behaviors and traits will not likely change even if the person tries. Are any of these your concern? How do you open the subject of improving the relationship for the good of the company? NOTE: Even if you think it may be a wrong partnership, it's worth making the effort to see if it's salvageable.

Be proactive.
If you want things to change, it's up to you to change them. Make the decision you're going to break the status quo, but you're going to do it strategically.

Be clear about what you want.

Start by thinking about what you want for yourself and the business. NOTE: Use the Partner Questionnaire to help you organize your thinking. You can ask your partner(s) to do the same and compare notes or you can determine what you think will work and present it to your partner for feedback.

Schedule time to talk business.

Once you have thought things through it's time to schedule a time to talk business. Give your partner plenty of lead time and full disclosure about what the meeting is about. Let him get prepared for the meeting, but don't let it be put off because he "doesn't have time".

Discuss actions you're each willing to take.

Be prepared with actions you are willing to take. You can request or suggest actions from your partner, but leave the topic open for discussion and agreement.

Write a plan for agreed upon changes.

Once you reach agreement, set Goals for yourselves and the business. To keep things moving in the right direction it's a good idea to schedule periodic meetings to iron out details. This is the perfect time to start the habit of regular planned communications.

Set a timeframe for evaluation.

Three months is a reasonable timeframe to see if the Plan is achieving the results you want. Schedule an actual time where you will sit down together to see what has been accomplished toward the Goals you set. If you see progress, you may want to give it another three months. If your evaluation tells you there is no hope, it may be time to make that very difficult decision to end the relationship. If you can't come to agreement or you're clearly going in different directions, it's probably time to part ways. Why waste any more time on a losing proposition? Yes, it's like breaking up a marriage. But sometimes it has to be. Rather than feeling defeated, congratulate yourself on gaining the freedom to move on to something better.

References:
www.wikipedia.org www.ask.com http://www.scribd.com/doc/37409915/Partnership-Act-1932http://www.howdesign.com/article/Pentagram/ http://www.indiankanoon.org/doc/1898482/ http://www.powerhomebiz.com/vol145/partnership4.htm http://www.morebusiness.com/running_your_business/businessbits/partnership-solving.brc http://www.businessknowhow.com/startup/partnershipissues.htm