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Partnership in India- Definition and Essentials

Definition:

Section 4 of the Indian Partnership Act, 1932 defines 'Partnership' as under:

'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.
Partnership- Two partners shaking hands

Further light on the definition was provided by the Calcutta High Court’s definition where they stated that- partnership is the relation between persons, created by contract whereby parties to such contract have agreed to share the profits of a business with a further condition that the proposed business must be carried out by all or any of them acting for all.


Persons who have entered into a partnership with one another are called individually as ‘partners’ and collectively as a ‘firm’. And the name under which is carried on is the ‘firm name’.


ESSENTIALS OF A PARTNERSHIP:

According to Section 4, the following essentials are necessary to constitute a ‘partnership’:


  1. There should be an agreement between the persons who want to be partners.

  2. The purpose of creating partnership should be carrying on of business.

  3. The motive for the creation of the partnership should be earning and sharing profits.

  4. The business of the firm should be carried on by all of them or any of them acting for all i.e. mutual agency.


1. An Agreement:

A Partnership arises from an agreement between two or more persons for the creation of this relation. The agreement here means a contract. This indicates the voluntary contractual nature of a partnership. The presence of such agreement must be there may it be expressed or implied. If the obligations are not outlined in a contractual nature, there arises no valid partnership.


A person signing an agreement



Section 5 clearly states that a partnership arises from a contract and not from status. Thus implied positions or statuses cannot, in their virtue be called a ‘partner’.





Persons capable of becoming partners:

The agreement to form a partnership has to be between two or more persons. Since a valid partnership requires a contract, the parties entering into it must be, therefore, eligible. The competent persons must be :


a) Of majority of age i.e. more than 18 years of age.

b) Of a sound mind.

However, there is nothing that prevents a person incompetent to contract from accepting any benefit and hence the business organization permits a minor to be admitted to the benefits of a partnership.


However, a partnership is not a legal person and thus, cannot enter into another partnership and firm in its name:

a) Persons;

b) Business carried on by all of them or any of them acting for all;

c) An agreement between those persons to carry on such business and shares its profit.

Insolvent as a partner:

The Partnership Act does not directly mention that only a solvent person can become a partner but Section 34 however, states that, when a person is adjudicated as insolvent, he ceases to be a partner.


2. Carrying On Business:

The object of every partnership must be carrying on a business and sharing its profits. It may be any business that is not unlawful. The Act defines business as including ‘every trade’, occupation or profession. The definition is not exhaustive and is capable of including any kind of commercial activity aimed at earning profits.


Business as usual

#Purchasing goods for self-consumption:

When the goods are purchased for resale, it is a business transaction. But if several persons join together to make a bulk purchase of certain goods and divide the very goods amongst themselves to have the benefit of having a bulk purchase. Such persons cannot be called partners, although each of them stands to something because purchasing goods without any idea of selling them is not carrying on a business.


#Particular Partnership [Section 8] :

According to Section 8, there can be a ‘particular partnership’ between partners whereby they engage in particular ventures or undertakings.


In K. Jaggaiah vs Kokumanu, the plaintiff and the two defendants joined together and obtained a contract for the maintenance of a road. There was held to be a partnership in the road-building activity.


Business should be ‘carried on':

It is further necessary that the business must be carried on by all partners or any of them acting for all of them. Carrying on of a business involves a series of transactions and not a merely isolated transaction.


3. Sharing of Profits:

The object of every partnership must be to carry on business for the sake of profits and to share the same. Therefore, clubs or societies which do not aim at making and sharing profits are not classified as a partnership.

The term ‘profit’ is defined in the Act as net gain i.e. excess of returns over outlay.


Indian Rupee Notes and Coins

Although sharing of profits is one of the premier elements of a partnership, it is not necessary that every person who shares profit be a partner. In Grace Vs Smith, it was stated by Grey CJ that, every man who has a share in profits must have a share in losses too. The principle laid down in Cox vs Hickman forms the basis of Section 6 of the Indian Partnership Act, which gives a caution that the presence of only some of the essentials of partnership does not necessarily result in partnership.


DETERMINING THE EXISTENCE OF A PARTNERSHIP* :

SECTION- 6 : "In determining whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts taken together."

Explanation 1:

The sharing of profits or of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such person partners.


Explanation 2:

The receipt by a person of a share of the profits of a business or of a payment contingent upon earning profits or varying with the profits earned by a business does not of itself make him a partner with persons carrying on the business and in particular, the receipt of such share or payment –


a) By a lender of money to persons engage or about to engage in any business.

b) By a servant or agent as remuneration;

c) By the widow or child of a deceased partner as annuity or;

d) By a previous owner or part-owner of the business as consideration for the sale of the goodwill or share thereof, does not itself make the receiver a partner with the persons carrying on the business.

*The above excerpt is taken from - Lawgist


Salaried Partners –

Although sharing the profits is a prime element of the partnership, there is a possibility that a partner may not get the payment contingent on the profits.


The validity of a Partnership does not depend on the contribution of capital by a partner:

The contribution of capital by a partner is not the sine qua non for the validity of partnership. As per Section 18 of the Indian Partnership Act, 1932 every partner is an agent of the firm, therefore an act of a partner is treated as an act of the firm.


According to Section 185 of the Indian Contract Act, 1872, consideration is not necessary for the creation of the agency. Hence, even without providing any capital contribution, a person can validly become a partner of the firm


4. Mutual Agency:


The existence of mutual agency is also essential to constitute a partnership. According to Section 4 of the Partnership Act, 1932, the partnership ‘business must be carried on by all or any of them acting for all.’


Two mutually liable partners.

It enables any partner to carry on the business on behalf of others. Any partner, therefore, can bind the others to his actions on behalf of the firm. Every partner can be an agent of any other partner and the relationship is that of mutual agency. Every partner thus occupies the dual position of a principal and that of an agent. This prevalence of mutual agency should be in every partnership.


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