Partnership Business: A Legal Guide

Copyright by Legal Ladder

What is a partnership?

A partnership is a form of business organization, where two or more persons join together to jointly carry on some business.

A group of people could combine their resources and efforts to start a far larger company than either of these partners could handle on their own.

In case of loss, the burden also gets divided amongst various partners in a Partnership.

Definitions of the term “Partnership”

Kent defines ‘partnership’ as:

A contract of two or more competent persons to place their money, effects, labor, and skill or some or all of them in lawful commerce or business and to share the profit and bear the loss in certain proportions.

New York Civil Code defines it, as:

 “An association of two or more persons.”

Pollock defines it as:

“Partnership is a relation which subsists between persons who have agreed to share the profits of a business carried on by all or any of them on behalf of all of them.”

Definition under section-4 of The Indian Partnership Act, 1932:

“Partnership is the relation between the persons who have agreed to share the profits of a business carried on by all or any of them acting for all.”

‘Partners’ and ‘Firm’ are also defined under Section-4 of the Act:

Persons who have entered into a partnership with one another are called individually “partners” and collectively a “firm” and the name under which their business is carried on is called firm name.

Essentials of Partnership

According to Section-4 of The Indian Partnership Act,1932, the following essentials are necessary to constitute a 'partnership' :

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

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

3. The motive of the creation of a 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 called a mutual agency.

When these elements are present in a certain relationship, then it is known as a partnership.

Let’s know more about essentials, separately

1. An agreement

1. The agreement here means a valid contract.

2. It should be a voluntary contractual relation.

3. It may be either expressed or implied.

4. Persons capable of being partners must be competent to do so. (As per the law, they should have attained the age of majority and must be of sound mind).

2. Carrying on a business

1. Any type of lawful commercial activity that is aimed at earning profits is capable of being included.

For Example:

The business may be of a tailoring company, legal firm, film production, bank business, or purchasing and of selling goods.

3. To share the profits of a business

1. 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 profits are not partnerships.

For Example:

“A” may pay a share of profits to the manager of his business instead of paying him a fixed salary so that he may take more interest in the progress of the business. Such a person sharing the profits is simply A's servant or agent but not his partner.

It means every person sharing profits is not always a partner. 

2. Sharing of losses:

The definition of a partnership doesn't provide for sharing of losses. It only tells about sharing of profits, it means that sharing of losses is not an essential element of the partnership, but;

In Grace v. Smith in 1775

It was stated by the chief justice that every man who has a share of the profits of trade ought also to bear his share of the loss

4. Mutual Agency

Is defined in Section-2 (b) of The Indian Partnership Act, 1932

‘‘Business’’ includes every trade, occupation, and profession.”

Mutual Agency must be carried on by all or any of them acting for all.

According to Section-4 of The Indian Partnership Act, 1932

''Business must be carried on by all or any of them acting for all''.

1. It enables any partner to carry on the business on behalf of others.

2. Every partner can bind other partners by his act done on behalf of the firm. 

3. Every partner can be the agent of any other partner and that relationship is of mutual agency.

For example:

A and B are partners.

A may enter into a contract on behalf of the firm and thereby B will be bound by the agreement. In this transaction A is the agent and B the principal.

Duration of a partnership

Partners are free to decide as to how long the partnership between them shall continue.

For example:

1. It may be of fixed-term such as: of 2 years or 5 years

2. It may be until the completion of an undertaking.

3. It may be ended at any time in the case of partnership at will.

Kinds of partners

1. According to objectives

2. According to tenure

3. According to nature

4. According to legality

5. On the basis of registration

1. According to objectives

1) Partnership at will

Section-7 of The Indian Partnership Act, 1932 defines “Partnership at will”.

When no provision is made by contract between the partners.

1. For the duration of their partnership, or

2. For the determination of their partnership, the partnership is “partnership-at-will”

When partners haven't decided about the duration of the partnership, such a partnership is known as a partnership at will.

2) Particular partnership

According to Section-8 of The Indian Partnership Act, 1932

A person may become a partner with another person in particular adventures or undertakings.

For example:

The persons can be partners in the working of a coal mine or the production of a film. It may be a single adventure, but the same requires a series of transactions and continuous relationships.

2. According to tenure

Partners are free to decide as to how long the partnership between them shall continue.

1) Partnership for fixed terms

It may be of fixed-term such as; Partnership for 2 years or a Partnership for 5 years.

2) Flexible partnership

It may be until the completion of an undertaking.

3. According to nature 

1) General partnership

1. The liability of all partners is unlimited.

2. All partners have equal rights to take part in management.

3. One of the partners can represent all.

2) Limited liability partnership

In this type of partnership, one of the partners has unlimited liabilities while others have limited.

Partners having limited liability may or may not get the opportunity to participate in the management.

4. According to legality

1) Legal partnership

The partnership made under legal rules and regulations, not for any illegal work.

2) Illegal partnership

A partnership that is not enforceable under law or which is against laws.

For example:

The partnership made for committing any crime is an illegal partnership.

5. On the basis of registration

The Indian Partnership Act, 1932 provides for the registration of firms but doesn’t impose any penalty for non-registered firms. It is quite optional for the firm to get itself registered or not.

So, It can be a:

1. Unregistered partnership, or

2. Registered partnership

Can a Minor be the partner?

No, contracts by minor are void-ab-initio

[Held in the case of Mohori Bibi v. Dharmodas Ghosh]

According to The Indian Partnership Act, 1932

However, a minor can be admitted to the partnership for the benefits of the firm, but there are some conditions:

1. Before admission of the minor, there must be an existing partnership firm.

2. There must be a consent of all the partners.

3. Minor is liable to get benefits only, minor holds no liability for the losses.

Further Explanation:

1. Minor can not be a promisor but can be a beneficiary.

2. Minor can always exercise legal rights and claim assets and benefits.

3. Where performance, losses, and liabilities are concerned, a minor can never be liable.

4. He is not liable to give anything to the partnership.

The writer is pursuing a degree of BA.LL.B (Bachelors of legislative law)

From, Department Of Law, Maharshi Dayanand University (Rohtak) Haryana, INDIA.

Reach him at Instagram @shivaanshvermaa