The Buyt Desk
Partnership firms are most common in India after proprietorship. Understand what a partnership firm is and its fundamental features before joining one as a partner.
A partnership firm is formed by two or more individuals known as Partners. Partners come together to carry out a business under the name of the partnership firm. A partnership is not a distinct legal entity but is about partners. It is just a name given to the compositions of partners. The asset/property under the firm’s name are legally assets of partners as per the percentage in the partnership deed. Just to ease the taxation process, the partnership firm is considered as an entity distinct from the partners forming it. But for the rest of the laws, it is not firm but partners composing it as a partnership firm are not a separate legal entity on its own.
Definition of Partnership
In India, Partnership Firms are governed by the Indian Partnership Act, of 1932. Indian Partnership Act, Section 4 defines Partnership as, “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”. This definition clearly indicates the five fundamental features of partnership that is: (1) A contract or deed (2) between two or more people (3) who carry on a business on common grounds (4) with the intention of sharing profits and (5) all partners can run the business or one or few acting for all.
5 fundamental features of a Partnership Firm
All the 5 elements mentioned in the definition must exist together to form and run a partnership. If anyone feature is missing, there cannot exist a partnership. Here these 5 elements are explained in detail.
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Contract for Partnership
The partnership comes into existence only after a contract is signed by all partners. It does not come into existence through inheritance, status or operation of law. For example: In the partnership firm, after the death of a partner, the partner’s son can only claim the parent’s share in the partnership property but cannot become a partner by default. He can enter into the partnership firm only through a contract for the same with all other partner’s concerns. Two people running a business cannot be called partners until there is a contract for their partnership. The contract is the base of the partnership firm.
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The Maximum No. of Partners in a Partnership is 20 and the minimum is 2
2 people are required to comprise a partnership and the maximum number clause is not described in the Indian Partnership Act. The Companies Act describes the business as illegal if the partnership is of more than 10 people for banking business and more than 20 people for any other business. If authorized by the company’s Memorandum of Association, a company can enter into a contract of partnership.
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Running Business in a Partnership
All the parties/partners should agree to carry on a business. The business can be anything from trade, occupation to the profession. The charitable work will not be a partnership. Only when the firm is doing business can it be called partnership and people in the contract as partners.
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Sharing of Profits
The fundamental idea of a partnership firm is to share the profits among partners earned by running the business. If the intention of running the business is not to make profits, then it is not legally considered a partnership. All the partners should share the profits in whatever ratio agreed. If anyone is not entitled to profit then he/she is not a partner in the partnership. But it is not necessary for all partners to share losses, one or few can agree to bear all the losses. Whatever the partners agree on should be mentioned in detail in the partnership contract/deed. If not mentioned, it will be shared equally among all partners.
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Mutual Agency in a Partnership
The partnership demands all partners or one /few partners on behalf of all to run the business. The partnership must be a mutual agency of partners. All partners are bound by the acts of every other partner. Mutual agency permits every partner to run the business on behalf of other partners.
