CONCEPT

Section 4 of Indian Partnership Act, 1932, defines Partnership as ‘voluntary association between persons who have agreed to share profits or losses of business carried on by all or any of them acting for all’.

Persons who have entered into partnership with one another are called individually Partners and collectively a Firm.

The act does not attach the firm with a legal personality apart from its partners, except for the purposes of assessment of Income- tax.

A firm cannot become a member of another partnership firm, though its partners can join any other firm as partners.

ESSENTIAL FEATURES

1. ASSOCIATION OF TWO OR MORE PERSONS

At least two persons to form a partnership

Maximum of 10 persons in case of banking business and 20 in other types of business.

If the prescribed maximum is exceeded, it would become an illegal association .

A Partnership firm having members more than the statutory limit must be registered under the Companies Act or some other act.

2. AGREEMENT

Relation of partnership arises from contract and not from status or by operation of law.

Partners must enter into an agreement, voluntarily to form a partnership.

Agreement may be express or implied.

Partnership agreement must satisfy all the essentials of valid contract.

ESSENTIAL ELEMENTS OF VALID CONTRACT

1. AGREEMENT

Agreement backed by Acceptance and Offer.

2. COMPETENT PARTIES

Major in age Possessing sound mind He is not subject to legal disqualification A minor cannot enter into a contract

3. FREE CONSENT

A consent, which is not caused by Coercion, Fraud, Misrepresentation or Undue Influence- Innocent or Intentional.

4. AGREEMENT ENFORCEABLE AT LAW

5. LEGAL OBJECT

Agreement must not relate to anything which is contrary to the provisions of any law or has expressly forbidden by law.

6. COMPLIANCE WITH LEGAL FORMALITIES

Prescribed legal formalities, if necessary for the agreement to make it enforceable by law must have been observed.

3. LAWFUL BUSINESS

Partnership firm must be constituted to carry on some lawful business, and the business must be actually carried on.

An agreement to carry on business in future will not create partnership.

Sharing of profits need to be distinguished from sharing of gross returns

Example : A and B are joint owners of a house.They let out the house on monthly rent of Rs 3000, and share the income from rent equally. A and B cannot be taken as partners.

4. SHARING OF PROFITS

Agreement must be to share the profits.

Sharing of profits is a strong evidence of partnership but not a conclusive evidence.

5. MUTUAL AGENCY

Partners in a firm act in both capacities of an agent as well as principal.

Every partner is an implied agent of the other partners and of the firm.

A partner has an authority to bind his Co-partners by his acts done in the ordinary course of the business of the firm.

AGENT & PRINCIPAL

As an agent, a partner can bind by his acts the other partners.

As a principal, a partner can be bound by the acts of other partners.

OTHER FEATURES

1. UTMOST GOOD FAITH

Mutual trust and confidence

He must observe utmost good faith in all the dealings with his co-partners.

He must render true accounts and should not make secret profits from the business.

2. UNLIMITED LIABILITY

Every partner is jointly and severally liable to an unlimited extent for the debts of the partnership firm.

If the firm’s assets are insufficient to pay the debts, personal property of each partner can be attached to pay off the creditors.

3. TRANSFER OF INTEREST

No partner can transfer his share in the partnership without the prior consent of all the partners.

TEST OF PARTNERSHIP

AGREEMENT

LAWFUL BUSINESS

SHARING OF PROFIT

MUTUAL AGENCY