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2012-06-08 00:00:00LegalEnglishUnderstanding your rights and liabilities of partners when forming business partnerships is very important. Read more to learn about the... your Rights & Liabilities of partners in Business %%sep%% %%sitename%%

Partnership – Know your Rights and Liabilities

4 min read

Partnership is a very convenient way of starting a venture and doing business. Often a couple of friends, siblings or even colleagues, jump into the entrepreneurial world bound together as ‘partners’.

Legally speaking, a partnership is an association of two or more persons, known as general partners, who act as co-owners of a business and operate it for profit.

While you are not legally required to have a written partnership agreement, an oral agreement may suffice, it is still good business to put everything (the details of ownership, including the partners’ rights and responsibilities and their share of profits) down on paper to avoid potential misunderstandings and disagreements.

According to the Partnership Act of 1932, the partners are free to determine the mutual rights and duties by contract. We’ll help you with a glimpse of the rights and liabilities of partners:

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• Take active part in business, unless there is specific contract to the contrary;

• Be informed of all business matters relating to the company;

• Share equally in the profits earned, and shall contribute equally to the losses sustained by the firm;

•Where a partner is entitled to interest on the capital subscribed by him, such interest shall be payable only out of profits.

•Be indemnified in respect of payments made and liabilities incurred by him or in the ordinary and proper conduct of the business; and in doing such act, in an emergency, for the purpose of protecting the firm from loss, as would be done by a person of ordinary prudence, in his own case, under similar circumstances.

•On the dissolution of a firm every partner or his representative is entitled, as against all the other partners or their representatives, to have the property of the firm applied in payment of the debts and liabilities of the firm, and to have the surplus distributed among the partners or which representatives according to their rights.


Partners are bound to carry on the business of the firm:

  • To greatest common advantage
  • Be just and faithful to each other
  • To render true accounts and full information of all things affecting the firm to any partner, his heir or legal representative.

• If he derives any profits for himself from any transaction of the firm, or from the use of the property or business connection of the firm or the firm-name, he shall account for that profit and pay it to the firm

• If he carries on any business of the same nature as and competing with that of the firm, he shall account for and pay to the firm all profits made by him in that business.

• Indemnify the firm for any loss caused to it by his willful neglect in the conduct of the business of the firm.

• Even upon dissolution of a firm, the partners continue to be liable as such to third parties for any act done by any of them which would have been an act of the firm, if done before the dissolution, until public notice is given of the dissolution :

• In unlimited partnership, every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner.

You can be held personally responsible for another partner’s negligence or carelessness. This means that if your partnership firm is insufficient to meet its financial obligations, you may have to use your personal assets to pay off debtors, even though you personally may not be at fault.

The last-mentioned clause can be a big dampener for entering into a partnership, especially if you have insufficient capital. In such a scenario, you might be better served by a limited partnership.

Unlike a general partner, who is personally responsible for all debts and obligations of the partnership, a limited partner can lose only the amount of capital he has invested in the business.

On the down side, he has relatively little power within the partnership because he is not allowed to be actively involved in the management of the business; he is merely a financial contributor.

Nevertheless, he has the right to be informed of all business matters relating to the company and to share in its profits.

Before entering into a partnership, weigh all the pros and cons. Also, since each state has specific laws on the formation and dissolution of partnerships, as well as laws regarding the legal responsibilities of each partner, business owners are well advised to consult an attorney and a tax accountant before establishing a partnership.

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Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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