Chapter 6 of 8

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CA Foundation Business Laws★ The Indian Partnership Act, 1932 and the Limited Liability Partnership Act, 2008 — roughly 16 marks together. Section 69's effects of non-registration and a partner's implied authority are the two most reliably examined points.

The Partnership Act, 1932 & the LLP Act, 2008

Mutual agency as the true test of partnership, what a partner can bind the firm to, why registration matters far more than students expect, and the body corporate that gives partners limited liability.

⏱ 34 min readModerate difficulty✓ Free · exam-pattern aligned

Timed practiceMCQs from this chapter with instant scoring

FlashcardsFormulas & traps on spaced repetition

CA Foundation PYQsSolved previous-year questions

By the end of this chapter you'll be able to…

1State the definition and essentials of partnership and apply section 6's true test of mutual agency
2Explain why sharing profits is not conclusive, and identify the recipients of profit shares who are not partners
3Distinguish partnership from co-ownership, from a Hindu Undivided Family business and from a company
4Classify partners as active, sleeping, nominal, in profits only, sub-partner or by holding out, and state the liability of each
5State a minor's position under section 30, including his election on attaining majority
6Separate the duties of partners that cannot be varied by agreement from those that can
7Apply section 19 to decide whether an act falls within a partner's implied authority, and recall the acts expressly excluded
8State the liability of the firm for a partner's wrongful acts and misapplication of money
9State the effects of non-registration under section 69 and its exceptions, and explain why the disability runs only one way
10Identify the modes of dissolution and apply the order of settlement of accounts
11Explain the LLP as a body corporate, state the liability position, and distinguish it from a general partnership and from a company

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Why this chapter matters in CA Foundation

Partnership rests on one idea — mutual agency — and almost every problem in the chapter is testing whether the candidate can apply it. Sharing profits does not make a person a partner; the power to bind and be bound does. That single test resolves the questions on who is a partner, what acts bind the firm, why a retiring partner must give public notice, and why the list of acts outside implied authority looks the way it does. Section 69 is the other high-yield point: registration is optional but the disabilities of non-registration are so severe, and run in only one direction, that stating the asymmetry is what earns the marks.

Before you start — revise these

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Contract Act: Performance, Breach & Special Contracts

The agency provisions of the Contract Act underlie mutual agency, which is the true test of partnership and the source of a partner's implied authority.

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Contract Act: Capacity, Consent & Validity

A minor cannot be a partner because partnership arises from contract and a minor's agreement is void ab initio — section 30 is the statutory response to that.

The Partnership Act, 1932 & the LLP Act, 2008

Weightage: Roughly 16 marks together. The effects of non-registration under section 69 and the implied authority of a partner are the two most reliably examined points, and the LLP comparison questions appear at almost every sitting.

The Indian Partnership Act, 1932

Definition and essentials

Section 4 defines partnership as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are individually called partners and collectively a firm, and the name under which their business is carried on is the firm name.

The essentials, drawn from that definition:

An association of two or more persons.
An agreement between them. Partnership arises from contract, not from status — which is why the members of a Hindu Undivided Family carrying on a family business are not partners.
A business, which includes every trade, occupation and profession. A single venture may be a business, but there must be an activity carried on with a view to profit.
An agreement to share profits. Sharing losses is not essential, though in the absence of agreement losses are shared in the same proportion as profits.
The business must be carried on by all or any of them acting for all — mutual agency.

The true test: mutual agency

Section 6 provides that in determining whether a group of persons is a firm, regard shall be had to the real relation between the parties as shown by all relevant facts taken together.

The explanation adds the point that decides most problems: the sharing of profits is not by itself conclusive. A person may receive a share of profits without being a partner. The explanation lists such cases — a lender of money to a business receiving interest varying with profits, a servant or agent receiving remuneration by a share of profits, a widow or child of a deceased partner receiving an annuity out of profits, and a previous owner of the business receiving a portion of profits as consideration for the sale of the goodwill.

The true test is mutual agency: each partner is both an agent of the firm and of the other partners, and a principal bound by their acts. A person who cannot bind the others, and cannot be bound by them, is not a partner however he is paid.

Partnership distinguished

From co-ownership. Co-ownership may arise without agreement, as by inheritance; partnership always arises from agreement. Co-ownership does not necessarily involve business or profit-sharing; partnership does. A co-owner may transfer his interest without the others' consent; a partner cannot. There is no mutual agency between co-owners. A co-owner may claim partition; a partner may only claim his share on dissolution.

From a Hindu Undivided Family business. A HUF business arises by status and birth; partnership by agreement. A HUF coparcener acquires an interest by birth; a partner only by agreement. Only the karta has implied authority in a HUF; every partner has it. A minor is a coparcener from birth; a minor cannot be a partner. The liability of coparceners other than the karta is limited to their share; partners are jointly and severally liable to an unlimited extent.

From a company. A firm is not a separate legal entity distinct from its partners; a company is. Partners have unlimited liability; shareholders' liability is limited. A firm has no perpetual succession and is affected by the death or insolvency of a partner; a company has perpetual succession. A partner cannot transfer his interest without consent; shares are freely transferable subject to the articles. A firm's property is the partners' property held for the firm; a company's property is its own.

Kinds of partnership and kinds of partner

A partnership at will is one where no provision is made for the duration of the partnership or for its determination. It may be dissolved by any partner giving notice in writing to all the others.

A particular partnership is one formed for a particular adventure or undertaking, and it ends when that venture is complete.

The types of partner examined are:

Active or actual partner — takes part in the conduct of the business, is an agent of the others, and must give public notice on retirement to avoid continuing liability.
Sleeping or dormant partner — contributes capital and shares profits but does not take part in the conduct of the business. He is liable to third parties like any other partner, but need not give public notice on retirement, because third parties never relied on his membership.
Nominal partner — lends his name to the firm without contributing capital or sharing profits. He is liable to third parties who gave credit on the faith of his apparent membership.
Partner in profits only — shares profits but not losses, as agreed among the partners; he remains liable to third parties for all acts of the firm.
Sub-partner — a person with whom a partner agrees to share his own share of profits. He has no relation with the firm, no rights against it and no liability to it.
Partner by estoppel or holding out — a person who by words or conduct represents himself, or knowingly permits himself to be represented, as a partner is liable to anyone who on the faith of that representation gives credit to the firm.

A minor cannot be a partner, since partnership arises from contract and a minor's agreement is void. Section 30 permits a minor to be admitted to the benefits of partnership with the consent of all partners. His share is liable for the acts of the firm, but he is not personally liable. He may inspect and copy the accounts of the firm but not other books. Within six months of attaining majority, or of learning that he had been admitted to the benefits, whichever is later, he must elect by public notice whether to become a partner; if he gives no notice, he becomes a partner on the expiry of that period.

Rights and duties of partners

Subject to contrary agreement, every partner has the right to take part in the conduct of the business; to be consulted, ordinary matters being decided by a majority and matters altering the nature of the business requiring unanimous consent; to have access to and inspect and copy the books; to share equally in profits; to receive interest on advances beyond capital at six per cent per annum; to be indemnified for payments made and liabilities incurred in the ordinary and proper conduct of the business, and in an emergency for acts done to protect the firm; and to act in an emergency as a person of ordinary prudence would.

The duties are stated partly as absolute duties that cannot be varied by agreement, and this distinction is worth making in an answer. The duties not capable of variation are: to carry on the business to the greatest common advantage, to be just and faithful to one another, and to render true accounts and full information of all things affecting the firm. The duties capable of variation include indemnifying the firm for loss caused by fraud or wilful neglect, attending diligently, not claiming remuneration, sharing losses, using firm property only for the firm, accounting for personal profits derived from any transaction of the firm or from the use of its property or business connection, and not competing with the firm without consent.

Relations of partners to third parties

Implied authority. Section 19 provides that the act of a partner which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm. This is the partner's implied authority, and it is the practical expression of mutual agency.

The section then lists acts which, in the absence of usage or custom of trade to the contrary, the implied authority does not empower a partner to do:

submit a dispute relating to the business to arbitration;
open a banking account on behalf of the firm in his own name;
compromise or relinquish any claim or portion of a claim by the firm;
withdraw a suit or proceeding filed on behalf of the firm;
admit any liability in a suit or proceeding against the firm;
acquire immovable property on behalf of the firm;
transfer immovable property belonging to the firm;
enter into partnership on behalf of the firm.

This list is worth memorising, because problems are set directly on it. The unifying idea is that these acts are not part of carrying on business in the usual way; they either dispose of the firm's rights or alter its structure, and each requires the express authority of the other partners.

Liability for wrongful acts. Where by the wrongful act or omission of a partner acting in the ordinary course of the business, or with the authority of his partners, loss or injury is caused to a third party, the firm is liable to the same extent as the partner.

Liability for misapplication. Where a partner acting within his apparent authority receives money or property from a third party and misapplies it, or where a firm in the course of its business receives money or property and it is misapplied by any partner while in the firm's custody, the firm is liable to make good the loss.

Liability of a new partner is only for acts done after he becomes a partner, unless he agrees otherwise. A retiring partner remains liable for acts done before retirement, and continues liable to third parties for acts after retirement until public notice of the retirement is given — except that a sleeping partner and the estate of a deceased partner need no such notice.

Registration of firms

Registration is not compulsory under the Act, and no penalty attaches to non-registration. But section 69 imposes disabilities so severe that registration is effectively necessary in practice, and this is one of the most reliably examined points in the paper.

The consequences of non-registration:

A partner cannot sue the firm or any other partner to enforce a right arising from the contract of partnership or conferred by the Act.
The firm cannot sue a third party to enforce a right arising from a contract.
The firm and its partners cannot claim a set-off exceeding one hundred rupees, or other proceedings to enforce a right arising from a contract, in a suit brought against them.

The exceptions, where non-registration does not bar a claim:

The right to sue for dissolution of the firm.
The right to sue for accounts of a dissolved firm.
The right to realise the property of a dissolved firm.
Suits by an insolvent partner's official assignee, receiver or court.
Suits or claims not exceeding one hundred rupees in value.
The right of a third party to sue the firm — non-registration is a disability of the firm, not a shield.
Rights arising otherwise than out of contract, such as a suit for infringement of a trade mark.
Firms situated in areas exempted from the registration provisions.

Two points repay emphasis. The disability bites on the firm's ability to sue, never on the third party's ability to sue the firm — so an unregistered firm can be sued but cannot sue. And registration effected after the suit is filed does not cure the defect, which is why a firm must register before litigating.

Dissolution

Dissolution of a firm means the dissolution of the partnership between all the partners of a firm; a dissolution of partnership between some partners only, with the business continuing, is a reconstitution rather than a dissolution.

The modes:

By agreement — with the consent of all partners or in accordance with a contract between them.
Compulsory dissolution — where all partners, or all but one, are adjudicated insolvent, or where the business becomes unlawful.
On the happening of certain contingencies, subject to contract: expiry of a fixed term; completion of the adventure; death of a partner; adjudication of a partner as insolvent.
By notice of a partner, where the partnership is at will.
By the court, on suit by a partner, on grounds of a partner's unsoundness of mind, permanent incapacity, conduct prejudicially affecting the business, persistent breach of the agreement, transfer of the whole of a partner's interest, the business being carried on only at a loss, or any other ground the court considers just and equitable.

After dissolution, partners remain liable to third parties for acts done until public notice of the dissolution is given, save for a partner who has died, been adjudicated insolvent, or was a sleeping partner. Partners retain authority to wind up the affairs of the firm and to complete transactions begun but unfinished.

Settlement of accounts. Losses, including deficiencies of capital, are paid first out of profits, next out of capital, and lastly by the partners individually in the proportions in which they were entitled to share profits. The assets, including any contributions to make up deficiencies, are applied in this order: first in paying the debts of the firm to third parties; then in paying each partner rateably what is due to him for advances as distinguished from capital; then in paying each partner rateably what is due to him on account of capital; and the residue divided among the partners in their profit-sharing proportions.

The Limited Liability Partnership Act, 2008

The concept and why it exists

A limited liability partnership is a body corporate formed and incorporated under the Act, a legal entity separate from its partners, with perpetual succession. Any change in the partners does not affect its existence, rights or liabilities.

The LLP exists to solve a real problem. A traditional partnership imposes unlimited joint and several liability on every partner for the acts of every other — a professional firm's partner in one city could be ruined by the negligence of a partner he had never met. A company solves that but brings extensive compliance, rigid structure and the separation of ownership from management. The LLP combines the limited liability of a company with the flexibility of a partnership, and it is regulated by the Ministry of Corporate Affairs through the Registrar of Companies.

Key features

Minimum two partners, with no maximum. Any individual or body corporate may be a partner.
At least two designated partners, who must be individuals, at least one of whom must be a resident in India. Designated partners are responsible for compliance with the Act and are liable for penalties for contraventions.
Every designated partner requires a Designated Partner Identification Number.
The mutual rights and duties of partners, and of the LLP and its partners, are governed by the LLP agreement. In the absence of agreement, the provisions of the First Schedule apply.
The LLP must maintain books of account, file an annual Statement of Account and Solvency and an Annual Return, and have its accounts audited where turnover or contribution exceeds prescribed limits.

Liability

The LLP is liable for the wrongful acts or omissions of a partner acting in the course of its business or with its authority, and its liabilities are met out of its property.

A partner is not personally liable, directly or indirectly, for an obligation of the LLP solely by reason of being a partner. But a partner remains personally liable for his own wrongful act or omission, and he is not shielded from that by the LLP's separate personality.

Where the LLP or any of its partners carries on business with intent to defraud creditors, the liability of the LLP and of the partners who acted with that intent is unlimited.

An obligation of the LLP, whether in contract or otherwise, is solely the obligation of the LLP.

LLP distinguished from a general partnership

Legal status. An LLP is a body corporate and a separate legal entity; a firm is not distinct from its partners.
Liability. LLP partners have limited liability; partners in a firm have unlimited joint and several liability.
Perpetual succession. An LLP has it; a firm does not.
Number of partners. An LLP has no maximum; a partnership is limited to the number prescribed under the Companies Act.
Registration. Incorporation of an LLP is compulsory; registration of a firm is optional, though non-registration attracts the section 69 disabilities.
Governing law and regulator. The LLP Act, 2008, administered by the Registrar of Companies; the Partnership Act, 1932, administered by the Registrar of Firms.
Property. An LLP owns property in its own name; firm property is held by the partners.
Agency. A partner in an LLP is an agent of the LLP alone, not of the other partners; in a firm a partner is an agent of the firm and of the other partners.

LLP distinguished from a company

Governing statute — the LLP Act, 2008 against the Companies Act, 2013.
Internal governance — an LLP is governed by the LLP agreement, which the partners are largely free to draft; a company is governed by the Companies Act and its articles, with far less flexibility.
Management — LLP partners manage the business directly; a company is managed by a board of directors distinct from the shareholders.
Compliance — an LLP has substantially lighter filing and meeting requirements, with no requirement for board or general meetings.
Minimum capital — no minimum contribution is prescribed for an LLP.
Ownership and management — separated in a company, combined in an LLP.

An LLP may be converted from a firm, a private company or an unlisted public company, and may itself be wound up voluntarily or by the Tribunal.

How this chapter is examined

The recurring practical problems are: whether a person sharing profits is a partner, testing section 6 and the true test of mutual agency; whether an act binds the firm, testing the list of matters outside implied authority; whether a retiring partner remains liable, testing public notice and the exemption for sleeping partners; and whether an unregistered firm or its partner can sue, testing section 69 and its exceptions.

Descriptive and distinguishing questions ask for partnership against co-ownership, against a HUF business and against a company; LLP against partnership and against a company; and the rights and duties of partners, where the answer should separate the duties that cannot be varied by agreement from those that can. For any section 69 question, state expressly that a third party may always sue an unregistered firm — the disability runs one way only, and saying so is what shows the provision has been understood.

Key formulas & results

Everything to memorise for the exam hall, in one card. Screenshot this for revision.

Definition of partnership (section 4)

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

The closing words are the operative ones: 'acting for all' is mutual agency, and it is what the rest of the Act builds on.

The true test (section 6)

Regard the real relation between the parties from all relevant facts. Sharing of profits is evidence but NOT conclusive. The test is mutual agency — can each bind the others and be bound by them?

A lender paid out of profits, a servant remunerated by a profit share, a deceased partner's widow receiving an annuity, and a seller of goodwill paid from profits are all non-partners.

Acts outside implied authority (section 19)

Submit to arbitration; open a bank account in his own name for the firm; compromise or relinquish a claim; withdraw a suit; admit liability in a suit; acquire immovable property; transfer the firm's immovable property; enter into partnership on behalf of the firm

Each either disposes of the firm's rights or alters its structure, so none is carrying on business in the usual way. Subject to trade usage to the contrary.

Effects of non-registration (section 69)

An unregistered firm's partner cannot sue the firm or a co-partner; the firm cannot sue a third party on a contract; and neither can claim a set-off exceeding one hundred rupees

The disability runs one way only: a third party may always sue an unregistered firm. Registration after filing the suit does not cure the defect.

Exceptions to section 69

Suit for dissolution; suit for accounts of a dissolved firm; realising the property of a dissolved firm; suits by an insolvent partner's official assignee or receiver; claims up to one hundred rupees; suits by third parties against the firm; rights arising otherwise than out of contract; exempted areas

The dissolution-related exceptions exist so that non-registration cannot trap partners in a firm they wish to end.

Public notice on retirement

A retiring partner remains liable to third parties for acts of the firm after retirement until public notice is given — except a sleeping partner and the estate of a deceased partner

The exemption follows from mutual agency: third parties never relied on a sleeping partner's membership, so nothing needs to be corrected.

Settlement of accounts on dissolution (section 48)

Losses paid first from profits, then from capital, then by partners individually in profit-sharing proportions. Assets applied: (1) debts to third parties, (2) partners' advances rateably, (3) partners' capital rateably, (4) residue in profit-sharing proportions.

Advances rank ahead of capital, which is why a partner's loan to the firm is a distinct and better-ranking claim than his capital.

LLP liability

The LLP is liable for a partner's wrongful acts in the course of business; a partner is not personally liable solely by reason of being a partner, but remains liable for his own wrongful act or omission

Where business is carried on with intent to defraud creditors, the liability of the LLP and of the partners who so acted is unlimited.

Minor admitted to benefits (section 30)

Admitted with the consent of all partners; share liable for the firm's acts but no personal liability; may inspect the accounts only; must elect by public notice within six months of majority or of learning of his admission, whichever is later

If he gives no notice he becomes a partner on expiry of the period, which is the trap in most problems.

FOUNDATION EXAMINATIONCA Foundation

1. State the definition of partnership and explain the true test for…[5]

Definition. Section 4 of the Indian…

5/5

Tap the paper to answer it.

Practice Studio

CA Foundation answers are written, not ticked

Write one on The Partnership Act, 1932 & the LLP Act,… and it comes back marked to the CA Foundation scheme in about twenty seconds.

Write one answer

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Traps CA Foundation sets — and how to dodge them

These are the exact option-traps and misreads that cost marks under negative marking.

WATCH OUT

✗ Concluding that a person sharing profits must be a partner

✓ Section 6 makes profit sharing evidence but not conclusive. Apply the true test of mutual agency — whether the person can bind the firm and be bound by it. Lenders, employees, sellers of goodwill and a deceased partner's widow may all take profit shares without being partners.

WATCH OUT

✗ Treating a sleeping partner as not liable to third parties

✓ A sleeping partner is fully liable to third parties like any other partner. What distinguishes him is only that he need not give public notice on retirement, because no third party relied on his membership.

WATCH OUT

✗ Saying a minor is a partner in the firm

✓ A minor cannot be a partner; he is admitted to the benefits of partnership under section 30. His share is liable for the firm's acts but he is not personally liable, and he may inspect only the accounts, not the other books.

WATCH OUT

✗ Assuming a partner can bind the firm to anything done in the firm's name

✓ Implied authority extends only to acts done to carry on the business in the usual way. Section 19 expressly excludes eight acts, including submitting to arbitration, compromising a claim, and acquiring or transferring immovable property.

WATCH OUT

✗ Saying an unregistered firm cannot be sued

✓ Section 69 disables the firm from suing, not third parties from suing it. The disability runs one way only, and stating that expressly is what shows the provision is understood.

WATCH OUT

✗ Curing a section 69 defect by registering after filing suit

✓ The firm must be registered and the plaintiffs shown as partners in the register at the time the suit is instituted. Later registration does not validate a suit already filed.

WATCH OUT

✗ Barring a suit for dissolution or for accounts of a dissolved firm because the firm is unregistered

✓ These are express exceptions to section 69, along with realising the property of a dissolved firm. Otherwise partners would be trapped in a firm they could not lawfully end.

WATCH OUT

✗ Paying partners' capital before their advances on dissolution

✓ Section 48 ranks advances ahead of capital. The order is third-party debts, then partners' advances rateably, then capital rateably, then the residue in profit-sharing proportions.

WATCH OUT

✗ Treating an LLP partner as wholly immune from liability

✓ A partner is not liable merely by reason of being a partner, but remains personally liable for his own wrongful act or omission, and liability is unlimited where business was carried on with intent to defraud creditors.

WATCH OUT

✗ Describing LLP registration as optional like partnership registration

✓ Incorporation of an LLP is compulsory — the entity does not exist until incorporated. Registration of a firm is optional, though section 69 makes it practically necessary.

Exam-pattern practice

PYQ-style questions with full solutions. Work through them as a readiness check — mark yourself honestly and get your gap report at the end.

Readiness check

Are you exam-ready for The Partnership Act, 1932 & the LLP Act, 2008?

15 problems from this chapter. Try each one, reveal the worked solution, mark yourself honestly — get your gap report at the end.

15 questions~11 min

5-minute revision

The whole chapter, distilled. Read this the night before the exam.

•Partnership arises from agreement; the true test is mutual agency, not profit sharing.
•A lender, an employee, a deceased partner's widow and a seller of goodwill may all take profit shares without being partners.
•A sleeping partner is fully liable to third parties but needs no public notice on retirement.
•A minor cannot be a partner; he is admitted to the benefits under section 30 and must elect within six months of majority or lose the protection.
•Three duties cannot be varied by agreement: greatest common advantage, being just and faithful, and rendering true accounts.
•Implied authority covers acts carrying on the business in the usual way; eight acts are expressly excluded by section 19.
•An internal restriction on implied authority does not bind a third party who does not know of it.
•Section 69 bars an unregistered firm from suing, but never bars third parties from suing it.
•Registering after filing a suit does not cure a section 69 defect.
•Suits for dissolution, for accounts of a dissolved firm and to realise its property are exceptions to section 69.
•Section 48: third-party debts, then partners' advances, then capital, then residue in profit-sharing proportions.
•Public notice is needed on retirement and dissolution, except for sleeping partners, deceased partners' estates and insolvent partners.
•An LLP is a body corporate with perpetual succession; incorporation is compulsory.
•An LLP partner is an agent of the LLP alone, not of the other partners — which is what makes limited liability possible.
•An LLP partner remains liable for his own wrongful act, and liability is unlimited where there was intent to defraud creditors.

CA Foundation question blueprint

How this topic is asked, tier by tier — so you can prep to the pattern.

Typical weightage: 16

Exam-hall strategy

Battle-tested tips from mentors and toppers for this topic under the sectional clock.

In any 'is X a partner' problem, state the true test of mutual agency before applying it, and address profit sharing expressly as evidence rather than proof.
For implied authority questions, quote the section 19 formula about carrying on business in the usual way, then check the list of excluded acts.
In section 69 problems, state the asymmetry — the firm cannot sue but can be sued — and check the exceptions before concluding.
For retirement and dissolution liability, ask first whether public notice was given, then whether the partner falls within an exemption.
In settlement of accounts, write the four-tier order explicitly and place advances above capital.
For LLP comparison questions, answer on named bases with paired points, and always state the two situations in which limited liability is lost.
When asked for rights and duties, separate the three duties that cannot be varied from those that can, and explain why.

Beyond the exam

Where this skill shows up in the job you're competing for — and in life.

Most large Indian audit

Most large Indian audit, law and consulting firms are constituted as LLPs precisely because unlimited joint and several liability is untenable in a multi-partner professional practice.

Section 69 makes registration effectively compulsory in p…

Section 69 makes registration effectively compulsory in practice, since an unregistered firm cannot sue its customers for unpaid invoices or claim a set-off in a suit brought against it.

Partnership deeds routinely restrict implied authority an…

Partnership deeds routinely restrict implied authority and require joint signatures above a threshold, but section 20 means such restrictions bind third parties only if they know of them — which is why banks are given express mandates.

The ranking of partners' advances ahead of capital under …

The ranking of partners' advances ahead of capital under section 48 is why partners lending to their own firm document the advance as a loan rather than as additional capital.

Where else this topic is tested

Prepare once, score in every exam that asks it.

CA Intermediate Paper 2 — Corporate and Other Laws, which covers the LLP Act in greater depth

CA Foundation Paper 1 — Accounting, whose partnership accounts chapter applies these legal rules

CS Executive — Setting up of Business Entities and Closure

CMA Foundation — Fundamentals of Business Laws

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Questions aspirants ask

Pulled from the Q&A community and mentor sessions.

Apply the true test of mutual agency: can this person bind the others and be bound by them in the ordinary course of the business? Profit sharing is evidence but section 6 says it is not conclusive, and its explanation lists four categories of profit recipients who are not partners. In every one of them, the person lacks the power to act for the business, which is the fact that decides it.

Because public notice exists to correct a reliance. Third parties dealing with the firm knew the active partner and may continue extending credit on the faith of his membership, so that belief must be publicly ended. A sleeping partner's membership was never known, so no third party relied on it and there is nothing to correct. The same reasoning exempts the estate of a deceased partner and an insolvent partner.

It can be sued freely — section 69 disables the firm from suing, not third parties from suing it. Its partners may also sue for dissolution, for accounts of a dissolved firm and to realise its property, since those are express exceptions. What it cannot do is sue a third party on a contract, allow a partner to sue the firm or a co-partner on the partnership contract, or claim a set-off above one hundred rupees.

No. The requirement is tested at the date the suit is instituted: the firm must be registered and the plaintiffs shown in the register as partners at that time. A suit filed while unregistered must be withdrawn and refiled after registration, and limitation continues to run in the meantime — which is why a claim can be lost entirely through delay in registering.

Yes, in two situations. He is always personally liable for his own wrongful act or omission, because the LLP's separate personality shields him from others' conduct and not his own. And where the LLP or any partner carries on business with intent to defraud creditors or for any fraudulent purpose, the liability of the LLP and of the partners who acted with that intent is unlimited.

Section 19 lists eight, subject to trade usage to the contrary: submitting a dispute to arbitration, opening a bank account for the firm in his own name, compromising or relinquishing a claim, withdrawing a suit, admitting liability in a suit, acquiring immovable property for the firm, transferring the firm's immovable property, and entering into partnership on the firm's behalf. Each either disposes of the firm's rights or alters its constitution, so none is carrying on business in the usual way.