Definition and Characteristics of Partnership

Partnerships in India are governed by the Indian Partnership Act, 1932. Partnership is formed as a result of an agreement between two or more persons who have agreed to share the profits of a business carried on by all or any of them acting for all. 




Hence, the general principles of law of contracts and agency (as contained in the Indian Contract Act 1872) also apply to partnerships except where the Act specifically provides to the contrary. The Act mainly contains the provisions relating to the formation of partnership, the rights, duties and liabilities of partners and the procedure for its dissolution etc. In this unit you will learn about the definition and test of partnership, its difference with co-ownership and Joint Hindu Family, the procedure for its registration, and various types of partners including the position of a minor partner.

In simple words, a partnership is an association of persons who have agreed to share the profits of business. The persons who have entered into partnership with one another are individually called as ‘partners’ and collectively a ‘firm’ and the name under which their business, is carried on is called the ‘firm’s name’.

Section 4 of the Indian Partnership Act has defined partnership as Partnership is the relation between two or more persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

This definition clearly indicates the following characteristics of partnership.

1. It is an association of two or more persons.

2. It must arise out of an agreement.

3. The agreement must be to carry on a business.

4. The agreement must be to share the profits of the business.

5. The business must be carried on by all or any of them acting for all.

All the above elements must be present before an association of persons can be called a partnership. Let us now discuss these elements one by one.

 

Two or more persons: There should be at least two persons to form a partnership. If the number of partners gets reduced to one by any reason, say death or insolvency of partner it would cease to be a partnership. As for the maximum number of partners in a firm, the partnership Act is silent. However, the Companies Act, 2013, puts a ceiling on the number of partners in a partnership firm as under.

As per Rule 10 of Companies (Miscellaneous) Rules, 2014, if a partnership firm consists more than 50 persons, it will be illegal. Thus, the current limit is 50.

However, Section, 464 (1) of 2013 Act states, ‘Provided that the number of persons which may be prescribed under this sub-section shall not exceed one hundred’. This means, by rules limit ceiling can be prescribed, but whatever limit is prescribed it must not be greater than 100.

Notwithstanding, the above maximum ceiling of 100 partners does not apply to a partnership firm, formed by professionals who are governed by special Acts [Section 464(2)]. Accordingly, a firm of chartered accountants, for instance, can have maximum 50 partners (i.e., at par with a business firm), all being chartered accountants of-course, but by amendment of Companies Rule, the said limit may go even beyond 100.

 

Agreement between persons: A partnership originates from an agreement between persons. This agreement may be express (written or oral) or implied. It should also be noted that a partnership does not arise out of status as in the case of Joint Hindu Family or by operation of law as in the case of co-ownership. It is essentially the creation of a contract between two or more persons and all elements of a valid contract must be present. For example, the persons must be competent to contract, the object of partnership must be lawful, and so on.

 

Business: Partnership can be formed only for the purpose of carrying on some business. An association created primarily for charitable, religious and social purposes are not regarded as partnership. Similarly, when two or more persons agree to share the income of a joint property, it does not amount to partnership. Such relationship is termed as co-ownership. According to Section 2(b) of the Act, the term ‘business’ includes every trade, occupation and profession. Thus, business does not refer merely to trade or industry, but also includes profession like architecture, legal practice, chartered accountancy, etc.

 

Sharing of profits: Sharing the profits of business is the essence of partnership. Unless otherwise agreed, sharing of profits of a business implies sharing of its losses as well. However, a person can become a partner on the understanding that he will not share the losses. The ratio in which the profits and losses will be shared is a matter of agreement amongst the partners. It should be noted that though sharing of profits of a business is essential, it does not follow that everyone who participates in the profits of a business is necessarily a partner. For example, a manager who as a part of his remuneration shares in profits of the business can only claim to be an employee of the firm and not a partner.

 

Business carried on by all or any of them acting for all: The underlying principle which governs partnership is the agency relationship amongst the partners. The business of the firm may be carried on by all the partners or by any of them acting for all. This means that a partner is both an agent and a principal. He, can, by his acts, bind the other partners and is bound by the acts of the other partners. Thus, the partners have relationship of mutual agency between them and the law of partnership is regarded as an extension of the general law of agency.

It should also be noted that it is not essential that all partners should actively participate in business, the business may be managed by one or two partners and the remaining partners will be bound by their acts provided such acts relate to carrying on the business of the firm and have been done in the name of the firm.

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