Introduction to Partnership Law in Nepal

The Partnership Act, 2020 (1964) is the principal legislation regulating partnership firms in Nepal. It establishes the legal framework for the formation, operation, management, and dissolution of partnership businesses. Partnership Act, 2020 (1964) | Medha Law and Partners. The Act provides the basis for recognizing partnership firms as legal entities once they are registered with the Department of Commerce or designated government authority.

Partnership firms are one of the most common business structures in Nepal, particularly for small and medium-sized enterprises (SMEs), family-owned businesses, and professional service providers. Partnership Act, 2020 (1964) | Medha Law and Partners. Unlike companies incorporated under the Company Act, 2063 (2006), partnership firms are relatively easier to form, require less compliance, and allow partners to directly manage business operations.

The law defines a partnership firm as an arrangement between two or more persons who agree to carry on a business together with the objective of earning profits. The partnership is based on a partnership agreement, which is the foundational contract governing rights, duties, profit distribution, and management responsibilities of partners.

The Partnership Act 2020 (1964) remains in effect even today, although subsequent laws such as the Contract Act, 2056 (2000) and the Company Act, 2063 (2006) have modernized Nepal’s commercial law framework. Despite its age, the Act continues to regulate the vast number of partnership firms across the country. Its provisions on business registration, partnership agreements, liability of partners, and dissolution of firms remain highly relevant.

The partnership model is especially suitable for businesses that value flexibility, lower costs, shared capital contribution, and personal management control. However, because partners are personally liable for the debts and obligations of the firm, this business form carries legal and financial risks that must be carefully considered. Medha Law and Partners Is a leading law firm in Nepal.

Historical Background of the Partnership Act, 2020 (1964)

Nepal’s commercial laws began formal development in the mid-20th century as the economy started shifting from a traditional agrarian base to more organized trade and industrial activity. Before the enactment of the Partnership Act 2020 (1964), partnerships were primarily governed by customary practices and general principles of contract law.

The introduction of the Act was a response to Nepal’s growing need for:

A formal legal framework for business partnerships
Regulatory oversight by government authorities
Standardized registration procedures for partnership firms
Clear definition of rights, duties, and liabilities of partners
Mechanisms for dissolution and settlement of accounts

The Act was enacted during King Mahendra’s reign as part of a broader modernization of Nepalese laws, which also saw the codification of the Muluki Ain (General Code) and other sectoral legislation.

Key objectives of the Partnership Act 2020 (1964) included:

Providing legal recognition to partnership firms through registration
Encouraging trade and commerce by simplifying business formation
Ensuring that businesses complied with basic record-keeping requirements
Protecting creditors by holding partners jointly and severally liable for firm obligations
Offering clear dissolution procedures in case of disputes or closure

Since its enactment, the Act has not undergone major amendments, but it remains applicable alongside modern commercial statutes. In practice, many businesses that begin as partnership firms later convert into private limited companies once they expand operations, seek larger capital, or wish to limit liability. Nonetheless, the Act continues to serve as the foundation of Nepal’s partnership law.

Legal Framework Governing Partnerships in Nepal

Partnership law in Nepal is primarily governed by the Partnership Act, 2020 (1964). However, several other laws supplement and interact with it. Together, they create a comprehensive legal framework for the regulation of partnership firms.

1. Partnership Act, 2020 (1964)

The Partnership Act, 2020 (1964) is the main legislation that provides for:

Definition of partnership firms and scope of business activities
Eligibility of partners to form a firm
Partnership registration process with the Department of Commerce
Contents of a partnership agreement
Rights and duties of partners
Liabilities of partners for debts and obligations
Renewal of partnership registration
Audit and record-keeping requirements
Dissolution procedures for partnership firms

The Act mandates that all partnership firms must be registered before commencing business. Unregistered partnerships are not recognized as legal entities and cannot enforce their contracts in court.

2. Contract Act, 2056 (2000)

The Contract Act, 2056 (2000) supplements the Partnership Act by governing the contractual aspects of partnership agreements. Since a partnership is based on mutual agreement, all provisions relating to contract formation, validity, performance, and termination apply.

Key relevance to partnerships includes:

Legal requirements for a valid contract (consent, consideration, lawful object, capacity)
Rules on enforceability of agreements
Principles governing breach of contract and remedies

This Act ensures that the partnership agreement serves as a legally binding document enforceable by law.

3. Company Act, 2063 (2006)

While the Company Act, 2063 (2006) governs companies, it interacts with partnership law in two ways:

Businesses registered as partnership firms under the Partnership Act 2020 (1964) may later convert into private limited companies.
Some provisions provide comparative guidance, especially regarding accounting, auditing, and reporting standards.

This Act is often referenced when businesses expand and require incorporation for larger capital mobilization and liability protection.

4. Evidence Act, 2031 (1974)

The Evidence Act, 2031 (1974) applies to partnership disputes that reach the courts. It governs the admissibility of documentary evidence such as partnership agreements, registration certificates, books of accounts, and audit reports.

5. Department of Commerce and Industry Regulations

The Department of Commerce under the Ministry of Industry, Commerce, and Supplies is the registering authority for partnership firms. Its regulations specify:

Registration procedures
Required documents
Renewal obligations
Fees and charges

The Department maintains official records of partnership firms, ensuring legal recognition and oversight.

6. Taxation Laws

Partnership firms in Nepal are also governed by taxation laws, including the Income Tax Act, 2058 (2001). Registered firms must obtain a Permanent Account Number (PAN) and file annual tax returns. Unregistered firms may face tax penalties and cannot claim certain benefits.

Definition and Nature of Partnership Firm

The Partnership Act, 2020 (1964) defines a partnership firm as a business established by two or more persons who enter into an agreement to operate a business and share profits among themselves. This definition emphasizes three fundamental elements:

Agreement – A partnership is formed on the basis of a partnership agreement that outlines the rights, duties, capital contribution, and profit-sharing ratios of partners.
Business Activity – The purpose of the firm must be to conduct business with the intention of generating profit. Charitable or non-profit objectives cannot be pursued under the Partnership Act.
Profit Sharing – The partners agree to share profits (and losses) in a ratio specified in the partnership agreement.

Key Features of a Partnership Firm under Nepalese Law

Minimum and Maximum Number of Partners: A partnership requires at least two partners. The Act does not prescribe a strict maximum limit, but in practice, large partnerships often transition into companies under the Company Act, 2063 (2006).
Voluntary Association: The firm is formed voluntarily through mutual agreement. No one can be compelled to join a partnership.
Mutual Agency: Each partner acts as both an agent of the firm and the other partners, meaning that actions of one partner within the scope of business bind the entire firm.
Unlimited Liability: Partners are jointly and severally liable for the debts and obligations of the firm. This is one of the main distinguishing features compared to companies.
Non-Separate Legal Entity: Unlike a company, a partnership firm is not considered a separate legal entity distinct from its partners. Its existence is directly tied to the partners’ contractual relationship.
Continuity: The firm is dissolved if a partner withdraws, dies, or is declared insolvent, unless the partnership agreement provides otherwise.

Thus, the Partnership Act 2020 (1964) establishes partnership firms as flexible but risk-exposed entities suitable for small to medium businesses in Nepal.

Eligibility to Form a Partnership Firm in Nepal

Not all individuals are eligible to become partners in a partnership firm. The Act lays down certain conditions:

Number of Partners: Minimum of two partners must agree to form the firm.
Capacity of Partners:
- Must be a major (above 18 years of age).
- Must be of sound mind.
- Must not be disqualified by law (for instance, bankrupt individuals, persons convicted of crimes of moral turpitude, or government employees restricted from engaging in private business cannot become partners).
Nationality:
- Both Nepalese citizens and foreign nationals can form partnership firms, but foreign partners must comply with Foreign Investment and Technology Transfer Act (FITTA), 2019.
- Any foreign investment requires prior approval from the Department of Industry and related authorities.
Legal Standing: Corporations or other legal entities may also participate as partners, provided they are legally authorized to do so.

Therefore, eligibility depends not only on the Partnership Act 2020 (1964) but also on related laws governing foreign investment, company operations, and public service restrictions.

Registration of Partnership Firms in Nepal

Under the Partnership Act 2020 (1964), registration of partnership firms is mandatory before commencing operations. Registration ensures legal recognition of the firm, protects the interests of partners, and allows the firm to operate as a legally enforceable entity.

Benefits of Registration

Legal recognition by the Department of Commerce
Ability to file lawsuits and enforce contracts in courts
Access to bank loans and opening of firm accounts
Protection of business name from duplication
Compliance with taxation and government regulations

Unregistered firms cannot enforce agreements in a court of law, which severely limits their ability to operate effectively.

Required Documents for Registration

Applicants must prepare and submit the following documents to the Department of Commerce or relevant registering authority:

Completed application form prescribed under the Act
Partnership Agreement (Deed of Partnership) signed by all partners
Copy of citizenship certificate or passport of each partner
Passport-sized photographs of partners
Proof of business address (rental agreement, land ownership certificate, or utility bill)
Tax registration documents, if applicable
Payment receipt of prescribed registration fees

The documents must be accurate, complete, and signed by all partners. Any missing or incorrect documentation may result in rejection or delay of the application.

Step-by-Step Registration Process

The process of registering a partnership firm in Nepal involves the following steps:

Drafting the Partnership Agreement – Partners must prepare a detailed partnership deed specifying rights, duties, capital contribution, profit-sharing ratios, management structure, and dispute resolution mechanism.
Application Submission – The completed application form along with supporting documents is submitted to the Department of Commerce, Ministry of Industry, Commerce and Supplies, or designated local office.
Payment of Registration Fees – Fees vary depending on the capital contribution and business type. Proof of payment must be attached to the application.
Examination by the Authority – The Department reviews the documents for compliance with the Partnership Act, 2020 (1964). If necessary, it may seek clarifications or corrections.
Issuance of Registration Certificate – Upon approval, the Department issues a Partnership Registration Certificate, legally recognizing the firm.
PAN and Tax Registration – After registration, the firm must obtain a Permanent Account Number (PAN) from the Inland Revenue Department for taxation purposes.
Commencement of Business Operations – The firm may now commence its business legally, open bank accounts, and enter into contracts.

Government Fees for Registration

Sole proprietorships: NPR 1,000 – NPR 2,000 (under other business laws)
Partnership firms: Generally NPR 5,000 upwards, depending on capital contribution
Additional fees for document certification or late filing may apply

The fee structure is periodically updated by the Government of Nepal.

Partnership Agreement in Nepal

The partnership agreement, also called the deed of partnership, is the most fundamental document for establishing a partnership firm under the Partnership Act, 2020 (1964). This document governs the internal relationship among partners and defines how the business will be conducted.

Mandatory Elements of a Partnership Agreement

According to practice under Nepalese law, a valid partnership agreement generally includes:

Name of the Firm – Must be unique and not conflict with existing registered businesses.
Nature of Business – Clear description of activities permitted under law.
Principal Place of Business – Full address with supporting documents.
Capital Contribution – Amount of capital each partner agrees to contribute, whether in cash, property, or other assets.
Profit and Loss Sharing Ratio – The manner in which profits and losses will be divided among partners.
Management and Decision-Making – Distribution of managerial roles and procedures for decision-making.
Admission of New Partners – Conditions and procedures for adding new partners.
Retirement, Death, or Insolvency of Partners – Rules for continuation or dissolution of the firm.
Dispute Resolution Mechanism – Provision for settlement of disputes, often through arbitration or mediation.
Duration of the Firm – Whether the partnership is for a fixed term or indefinite.

Without a written agreement, disputes are resolved solely on the basis of the Partnership Act, 2020 (1964), which may not adequately reflect the partners’ intentions.

Rights and Duties of Partners

The Partnership Act 2020 (1964) outlines the mutual rights and obligations of partners to ensure fair conduct and accountability.

Rights of Partners

Right to Participate in Management – Each partner has an equal right to take part in management unless otherwise stated in the agreement.
Right to Profit Share – Partners are entitled to share profits in the agreed ratio. In the absence of an agreement, profits are shared equally.
Right to Access Books of Accounts – Every partner can inspect and copy books of account maintained by the firm.
Right to Indemnification – Partners can claim reimbursement for expenses made in good faith for the benefit of the firm.
Right to Prevent New Partner Admission – No new partner can be introduced without the consent of all existing partners.
Right to Compensation for Fraud or Negligence – Partners are entitled to recover losses caused by misconduct of another partner.

Duties of Partners

Duty of Good Faith – Partners must act honestly and in the best interest of the firm.
Duty to Share Losses – Partners must share losses in the agreed ratio.
Duty Not to Compete – Partners cannot engage in competing businesses without consent.
Duty to Render Accounts – Partners must maintain transparency in financial dealings.
Duty of Care – Partners must avoid negligent acts that could harm the firm.

These rights and duties maintain balance and prevent exploitation in the partnership framework.

Liability of Partners

The liability of partners under the Partnership Act 2020 (1964) is unlimited.

Key Features

Joint Liability – All partners are collectively responsible for debts of the firm.
Several Liability – Each partner may be held individually liable for the full extent of firm’s debts.
Liability for Acts of Partners – Partners are bound by acts of other partners performed within the scope of business.
Liability on Retirement or Death – A retiring partner remains liable for acts done before retirement unless creditors discharge him/her. Similarly, legal heirs may be liable for obligations of a deceased partner to the extent of inherited assets.

This unlimited liability is one of the primary risks associated with partnership firms compared to private limited companies.

Legal Recognition of Partnership Firms

A partnership firm gains legal recognition only after registration under the Partnership Act 2020 (1964). Registration allows the firm to:

Sue and be sued in its own name.
Enforce contracts in courts.
Open bank accounts and conduct transactions.
Obtain a Permanent Account Number (PAN) for taxation.
Enter into lease agreements and property transactions.

Unregistered firms cannot enforce rights through litigation, which restricts business operations and exposes partners to unnecessary risks.

Books of Accounts and Audit Requirements

The Act requires every partnership firm to maintain proper books of account.

Required Records

Cashbook and general ledger
Sales and purchase registers
Profit and loss account
Balance sheet
Partner capital accounts

Audit Requirements

Small firms are not legally mandated to undergo annual audits unless specified in the partnership agreement.
Larger firms or those engaged in regulated industries may require audits under tax laws or regulatory provisions.
In practice, many firms appoint auditors voluntarily to ensure financial transparency and compliance.

Maintaining proper records is not only a legal obligation but also facilitates smooth dispute resolution and tax compliance.

Renewal of Partnership Registration

Partnership firms must renew their registration periodically to remain legally valid.

Renewal Procedure

Application for Renewal – Partners submit a renewal application to the Department of Commerce before expiry.
Submission of Documents – Required documents include a copy of the partnership registration certificate, updated partnership agreement (if amended), and tax clearance certificate.
Payment of Renewal Fees – Prescribed government fees must be paid at the time of renewal.
Verification – The Department checks compliance with legal requirements.
Issuance of Renewal Certificate – Once approved, a renewed registration certificate is issued, allowing the firm to continue operations.

Failure to renew may result in suspension of business operations, inability to enforce contracts, and eventual removal from the official register.

Conversion of Partnership Firm into Company

The Partnership Act, 2020 (1964) does not provide direct provisions for conversion of partnership firms into companies. However, in practice, partners who wish to expand their business and limit their liability often register a new company under the Companies Act, 2063 (2006) and transfer the assets and liabilities of the partnership firm into the new company.

Procedure for Conversion

Decision by Partners – All partners must agree to convert the firm into a company.
Drafting Memorandum and Articles of Association – Prepared according to the Companies Act.
Transfer of Assets and Liabilities – Partnership assets, contracts, and obligations are transferred to the new company.
Registration with Office of Company Registrar (OCR) – Application submitted with required documents and fees.
Dissolution of Partnership – Once the company is registered, the partnership may be formally dissolved.

Conversion provides advantages such as limited liability, separate legal personality, and easier access to credit and investment.

Dissolution of Partnership Firms

The dissolution of a partnership firm in Nepal is governed by the Partnership Act, 2020 (1964). Dissolution may occur voluntarily or through legal intervention.

Types of Dissolution

Voluntary Dissolution by Agreement – Partners mutually agree to end the business.
Dissolution Due to Expiry or Completion – Firm automatically dissolves when its duration expires or purpose is achieved.
Dissolution Due to Death or Insolvency – Firm may dissolve upon death or insolvency of a partner unless agreement provides otherwise.
Court-ordered Dissolution – District Court may dissolve a firm if:
- A partner becomes of unsound mind
- A partner engages in misconduct affecting business
- Business cannot be carried on except at a loss
- Other just and equitable grounds exist

Process of Dissolution

Settlement of accounts
Payment of debts and liabilities
Distribution of remaining assets among partners in agreed ratio

Legal Effect of Dissolution

Once dissolved, the firm ceases to exist, and partners remain liable for obligations incurred before dissolution.

Comparison with Other Business Structures

Partnership vs. Sole Proprietorship

Ownership – Sole proprietorship has a single owner, while partnership has two or more partners.
Liability – Both have unlimited liability, but partnership liability is shared.
Continuity – Sole proprietorship ends with the death of the owner; partnerships may continue depending on agreement.

Partnership vs. Company

Legal Personality – Partnership has no separate legal personality, while a company is a distinct legal entity.
Liability – Partnership liability is unlimited, whereas company shareholders enjoy limited liability.
Registration – Partnership registered under Partnership Act 2020 (1964); company under Companies Act 2063 (2006).
Regulation – Companies face stricter compliance requirements than partnerships.

This comparison shows that partnership is more flexible but riskier, while company structure offers stronger legal safeguards.

Challenges of Partnership Firms in Nepal

Unlimited Liability – Partners remain personally liable for debts.
Limited Access to Capital – Banks and investors prefer incorporated entities.
Disputes Among Partners – Conflicts can lead to dissolution.
Lack of Separate Legal Personality – Firm cannot own property or sue in its own name unless registered.
Low Public Confidence – Businesses often prefer dealing with incorporated companies.
Regulatory Burden – Renewal requirements and compliance may pose challenges for small firms.

Advantages of Partnership Firms in Nepal

Ease of Formation – Simple registration process with the Department of Commerce.
Low Cost of Operation – Minimal government fees compared to companies.
Flexibility – Partners have wide freedom in managing affairs.
Tax Simplicity – Partnerships may face simpler tax obligations compared to corporations.
Shared Responsibility – Workload and risks are distributed among partners.
Confidentiality – Financial and business information is less publicly accessible than in companies.

Role of Government Authorities

Department of Commerce and Supplies Management – Responsible for registration and renewal of partnership firms.
Office of Company Registrar (OCR) – Registers companies when partnerships convert into companies.
Tax Authorities – Require firms to obtain Permanent Account Number (PAN) and comply with tax obligations.
District Courts – Handle dissolution and dispute resolution matters.

These bodies ensure legal compliance and orderly conduct of partnership firms in Nepal.

Legal Remedies and Dispute Resolution

Disputes among partners or between a firm and third parties may be resolved through:

Negotiation among partners
Mediation or arbitration if provided in the partnership agreement
District Court litigation under the Partnership Act 2020 (1964)

Legal remedies available include injunctions, damages, dissolution orders, and settlement of accounts.

Recent Developments and Modern Application

Although enacted in 1964, the Partnership Act, 2020 continues to regulate partnership firms. However, in practice:

Partnerships are gradually being replaced by private limited companies due to liability concerns.
Technology has enabled online business registration processes under the Department of Commerce.
Discussions are ongoing regarding possible modernization of the Act to align with international standards.

Despite these developments, partnership remains a preferred form of business for small-scale enterprises, family businesses, and professional firms in Nepal.

Conclusion

The Partnership Act, 2020 (1964) remains the central law governing partnership firms in Nepal. It provides the legal framework for formation, registration, rights and duties of partners, liability, accounts, and dissolution. While partnerships are easy to form and operate, the unlimited liability of partners and lack of separate legal personality limit their scope compared to companies.

Nevertheless, for small businesses, professional services, and family ventures, partnerships continue to serve as a practical and cost-effective business structure. The Act has stood for decades, and although reforms may be required to address modern business realities, it remains a cornerstone of Nepal’s commercial legal framework.

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