Chapter 18

NATURE OF PARTNERSHIP

A partnership is an association of persons who

have agreed to carry on a joint business and
share the profits thereof.

Learning Objectives
Definition and Essentials of Partnership
Mode of Determining Existence of Partnership
Partnership at Will
Partners, Firm and Firm Name
Partnership and Co-ownership
Partnership and Joint Hindu Family
Partnership and Joint Stock Company

DEFINITION AND ESSENTIALS OF PARTNERSHIP

Partnership is 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 people who have entered into
partnership with one another are individually called partners and collectively firm, and the
name under which their business is carried on is called the firm name.
[Section 4 of the Partnership Act, 1932]
An analysis of this definition shows that the following features constitute are essential to the
formation of a partnership.
1.

Association of two or more persons

2.

Result of an agreement

3.

Agreement to carry on some business

4.

Sharing of profits

5.

Mutual agency

ESSENTIALS OF PARTNERSHIP
1.

2.

Association of Two or More Persons . It is one of the most basic elements of a valid
partnership. To form a partnership there should be at least two persons. A partnership
cannot survive if the number of partners gets reduced to one for whatever reasons
death, insolvency, lunacy, etc.it may be. This is so because one cannot be ones own
partner. Although the Partnership Act is silent over the maximum number of partners in a
firm, Section 11 of the Companies Act, 1956, puts a ceiling on the number of partners in a
firm. Accordingly, following are the number of partners in different kinds of business.
Where the firm is carrying on banking business, the number of partners should not
exceed 10; and
Where the firm is carrying on any other business, the number of partners should not
exceed 20.
Result of an Agreement . Partnership is formed as a result of an agreement between two
parties. It does not arise out of status or inheritance as in the case of Hindu Undivided
Family (HUF). It even does not arise by operation of law as in the case of co-ownership or
Joint Stock Company. Thus, creation of an agreement [whether express (written or oral) or
implied] between two or more people is the very foundation of partnership. Besides, the
contract must contain all essential elements of a valid contract.

.ESSENTIALS OF PARTNERSHIP
3.

4.

Agreement to Carry on Some Business . Another essential element of a

partnership is that it is formed for the purpose of carrying on some (but
lawful) business. An association or society formed primarily to carry on
some charitable, religious or social works cannot be regarded as
partnership. Even a co-ownership does not amount to partnership.
Sharing of Profits. Sharing the profits of business amongst all the
partners is the core of partnership. There will be no partnership where
only one of the partners is entitled to the whole of the profits of the
business. Unless otherwise agreed, sharing of profits implies sharing of
losses as well. However, all the partners may not concur to share losses.
It is open to one or more partners to agree to bear all the losses of the
business. The ratio in which the profits and losses will be shared need
not be equal. But merely sharing of profits does not necessarily entitle
someone to be treated as partner. For instance, a manager who besides
his fixed salary gets a share in the profits of a firms business can only
claim to be an employee of the firm and not a partner.

.ESSENTIALS OF PARTNERSHIP

Sharing of profits not a conclusive test The division of profits amongst the partners is an
essential condition to sustain a partnership. But merely sharing profits does not automatically
make someone a partner. In this regard Explanation II to Section 6 states, the receipt by a
person of a share of the profits of a business or of a payment contingent upon the earning of
profits or varying with the profits earned by a business, does not itself make him a partner
with the persons carrying on the business;
And in particular, the receipt of such share as paymentby a lender of money to persons engaged or about to engage in any business;
by a servant or agent as remuneration;
by the widow or child of a deceased partner, as annuity; or
by a previous owner or part owner of the business, as consideration for the sale of goods or
share thereof,
does not make the receiver a partner with the persons carrying on the business.
Example 1. A and B who jointly own a house, let it out on a rent of Rs 5,000 per month. They
share the rental income equally. Yet A and B cannot be regarded as partners. They are simply
co-owners of the property.
Example 2. X and Y buy 100 bales of cotton, which they agree to sell for their joint account,
each party sharing profits equally. Here X and Y are partners in respect of such an account.

.ESSENTIALS OF PARTNERSHIP
5. Mutual Agency . Mutual agency is the conclusive test of a partnership. Business of
the firm may be carried on by all or any of the partners acting for all. This means
that a partner is both an agent and a principal in a partnership firm. He is an agent
because he can bind other partners, who are his principals, by his acts and he is
again a principal, who in turn is bound by the acts of other partners.
The true test, therefore, to determine whether a person is a partner or not, is to
see interalia, whether the relationship of principal and agent exists between the
parties.
It is, however, not necessary that all partners should actively participate in
business. The partners may authorize any one or more amongst themselves to
manage the business of the firm. Under such an arrangement, the remaining
partners will be bound by their acts subject to the understanding that such acts
relate to carrying on the business of the firm and have been carried out in the
name of the firm.

MODE OF DETERMINING EXISTENCE OF PARTNERSHIP

To determine whether a group of people constitutes a partnership, all the essential
elements of partnership discussed above should be kept in view. Presence of all
these elements validly constitutes a partnership. If there exists a specific
agreement regarding the sharing of profits of business, and the business is carried
on by all or any of them acting for all, there subsists a valid partnership. But in the
absence of a specific agreement it is difficult to ascertain the real relationship
among the parties. In such cases, their real bond is to be determined from other
relevant facts e.g., circumstances under which the agreement took place, conduct
of parties, books of account etc. In this regard Section 6 specifically provides:
In determining whether a group of persons is or is not a firm, or whether a person
is a partner in a firm, regard shall be had to the real relation between the parties,
as shown by all relevant facts taken together.
The true test, therefore, in determining whether a partnership exists, is to observe
whether the relation of principal and agent exists between the parties, and not
whether the parties merely share the profits of the business. It is the element of
mutual agency, which distinguishes a partnership from co-ownership and other
forms of associations.

PARTNERSHIP AND CO-OWNERSHIP DISTINGUISHED

1.
2.
3.

4.
5.
6.
7.

Difference between partnership & co-ownership can be summed up in the

following seven points.
Co-ownership is not necessarily the result of an agreement, but a partnership is.
Co-ownership may not involve profit or loss, but partnership does as the former
does not necessarily involve carrying on of a business whereas a partnership
does.
One co-owner can, without the consent of the others, transfer his interest to a
stranger. A partner cannot do this without the consent of all the other partners.
A co-owner is not an agent of the other co-owner, but a partner is.
A co-owner has no lien on the property co-owned neither for expenses nor for
what may be due from the others as their share of a common debt, but a
partner has.
In co-ownership there is no maximum limit of co-owners. In partnership the
maximum limit of partners has been fixed at 10 for a banking business and 20 for
other businesses.
A co-owner has the right to claim partition of property owned with other coowners. A partner has no such exclusive right. He can sue the other partners for
his share in the property of the firm only in the event of the dissolution of firm.

PARTNERSHIP AND JOINT HINDU FAMILY

DISTINGUISHED

1.

2.
3.

4.

5.

The main points of distinction between a partnership and HUF business are as follows:
Basis of Formation A partnership arises out of a contract between partners. Whereas an
HUF arises by the operation of Hindu Law. It is created by status or birth in the family; no
agreement is needed for it.
Regulating Law A partnership is governed by the provisions of the Indian Partnership Act,
1932. An HUF business is governed by Hindu Law Succession Act.
Number of Members In a partnership business, the number of members cannot exceed 20
in case of non-banking business and 10 in case of banking business. But there is no such
ceiling on the number of members (co-parceners) in HUF.
Admission of New Members No new partner can be admitted to the existing partnership
without the consent of all the other partners. In case of HUF firm a person becomes a
member (co-parcener) merely by his birth.
Minor Member A minor cannot become a full-fledged partner in a firm; he can be
admitted only to the benefits of partnership. In an HUF, a male child becomes a full-fledged
member by birth.
Contd.

.PARTNERSHIP AND JOINT HINDU FAMILY DISTINGUISHED

6.

7.

8.

9.

10.

Rights of Females In a partnership women can become partners and they enjoy the same rights
and privileges, as do male partners. In case of an HUF business on the other hand, the
membership is restricted to male members only. However, as per Hindu Law Succession Act,
1956, a female relative of a deceased male member gets a co-parcenery interest in the event of
his death.
Implied Agency In a partnership, every partner has implied authority to represent the firm and
bind the other partners by his acts. In HUF this right rests with the Karta only, other members
may be allowed by Karta expressly or impliedly to contract debts on behalf of the firm (Lal Chand
vs Ghanaya lal ).
Liability of Members In a partnership, the liability of all the partners is unlimited; every partner
is jointly and severally liable to third parties for the full debts of the firm. Whereas in case of HUF
liability of each member, except the Karta , is limited to the extent of his share in the property of
the family.
Right to Accounts Each partner not only enjoys a right to inspect the books of account of the
firm and demand a copy thereof, he can even demand the accounts of the past dealings. But a
co-parcener has no right to ask for the accounts of past dealings. He can ask for the position of
the existing assets only.
Mode of Dissolution A partnership firm is dissolved on the insolvency or death of a partner. But
the death, lunacy or insolvency of a co-parcener does not affect an HUF. It continues to operate
even after the death of a co-parcener.

PARTNERSHIP AND COMPANY DISTINGUISHED

Formation, Registration, and the Regulating Act. A partnership comes into
existence by an agreement between the partners. The formation of
partnership involves no legal formalities. Even registration of a partnership
firm is not compulsory. In contrast, a company can only be formed after
fulfilling certain legal formalities. Its registration under the Companies Act is
essential. A partnership firm is governed by the provisions of the Indian
Partnership Act, 1932, whereas a company is governed by the provisions of
the Companies Act, 1956.
2. Legal Status . A partnership firm has no legal existence independent of its
members. The firm and partners are one and the same in the eyes of law
except for the purposes of taxation. But a company enjoys a legal existence
separate from and independent of its members.
3. Number of Members . The minimum number of partners in a partnership
firm is two and the maximum is ten in case of a firm carrying on banking
business, and 20 in case of any other business. In a private company, the
minimum number of members is two and the maximum is fifty. In a public
company the minimum number of members is seven and there is no limit as
to the maximum number of members.
Contd.
1.

.PARTNERSHIP AND COMPANY DISTINGUISHED

4.

5.

6.

7.

Liability of Associates . The liability of partners is unlimited. They are

jointly and severally liable to pay the firms debts to an unlimited extent.
But the liability of shareholders is always limited to the unpaid amount
on the shares held or the amount of guarantee undertaken by them.
Relationship of Agency . Partnership is based on the relationship of
mutual agency between the partners i.e., every partner is an agent of
the rest of the partners. But a member of a company is neither the agent
of the company nor of other members.
Transferability of Share. A partner cannot transfer his share and interest
in the firm without the unanimous consent of all the other partners. But
a member of a company can transfer his share to anyone he likes
without the consent of other members.
Management . In a partnership every partner is at liberty to take part in
the management of the firms business. In case of a company the right to
control and manage the affairs of business is vested in directors elected
by the shareholders.
Contd.

.PARTNERSHIP AND COMPANY DISTINGUISHED

8.

Change of Objects. Partners, by mutual agreement can change the

objects of their firm as and when they like. On the contrary, the objects
of a company, as laid down in its Memorandum, can be altered only by
fulfilling certain legal formalities.
9. Audit . If the turnover or gross receipts of a partnership firm does not
exceed Rs 40 lakh in a year, audit of a firms accounts is not mandatory.
But the audit of financial statements of a company is a statutory
requirement irrespective of turnover or gross receipts the company has
had in a given financial year.
10. Winding Up. A partnership firm may be dissolved following the death or
insolvency of a partner. It can also be wound up any time by any partner,
if it is at will. But a company is not affected by the death or insolvency
of a shareholder and no sole member can call for its liquidation,
voluntarily.