Nature of Partnership Firm : Definition of Partnership, Partners, Essentials of Partnership (Indian Partnership Act, 1932)

If you are looking for the notes on NATURE OF PARTNERSHIP FIRM ( INDIAN  PARTNERSHIP ACT, 1932 ), then you are right spot for sure 🙂 This article covers the following topics : 

  • Definitions of Partnership, Partner, Firm and Firm Name
  • Essential elements of Partnership / Features of Partnership
  • Mutual Agency as a True Test of Partnership

Nature of Partnership Firm

The Term Partnership, Partner, Firm, and Firm Name are defined under section 4 of Indian Partnership Act, 1932 :

Partnership is the relation between persons who have agreed to share the profits of a business carried by all or any of them acting for all.
Persons who have entered into partnership with one another are called individually, as Partners and collectively as Firm & the name under which their business is carried on is called Firm Name.

Therefore, Partnership is a form of business in which two or more persons come together with their resources to invest in a common business with the purpose of sharing the profits of the business.

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Essential Elements of Partnership :

Essentials of Partnership or Features of Partnership

Essential elements of Partnership or Features of Partnership ( Nature of Partnership Firm )

The essentials elements of partnership are the features that much be present to validate a partnership :

1. Association of two or more persons

There must be at least two persons to form a partnership. All the partners must be competent to contract. Therefore, If in a firm, the number of partners are reduced to one, the firm is said to be dissolved.

Indian Partnership Act, 1932 has put no limitations on maximum numbers of partners in a firm. But however, Indian Companies Act, 2013 puts a limit on number of partner in a firm as follow :

  • For Banking Business, Partners must be less than equal to 10.
  • For Any Other Business, Partners must be less than equal to 20.
  • If the number of partners exceeds the limits, the partnership becomes illegal.

2. Agreement among the Partners

Under section 5 of Indian Partnership Act, 1932 : ” The relation of partnership arises from contract and not by status or operation of law “.

The relation between the partners are created by an agreement,i.e., Partnership Deed between two or more persons. An agreement may be express (oral or written) or implied (by conduct). Hence, a partnership exists due to agreement and not by status ( like in HUF).
Rights and Duties of partners are defined as per agreement.

3. Existence of Business Activity

Business must be continuous in nature and must be legal. The main motto of partnership is to carry on business and earn profits.
Hence, persons joining together for social or charitable work won’t be considered as partnership.

4. Sharing of Profits

The main objective of a firm is to earn profit. These profits are shared among partners in pre-decided ratio. However, if no such ration is decided, it will be considered that the partners have equal ratio in profit sharing.
If a person doesn’t have a right to share profits, he can not be called partner. But, as per agreement, a partner may not be liable to share the losses.

5. Mutual Agency

Mutual Agency relation means that the business of the firm must be carried out by all or any of the partner. A Partner is the agent of the other partner and therefore can bind other partner by his acts. Also a partner is a principal who can be made liable for the acts of other partners of the firm.

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True Test Of Partnership :

Mutual Agency as a True Test of PARTNERSHIP

Mutual Agency as a True Test of PARTNERSHIP ( Nature of Partnership Firm )

  • Prime Facie Evidence : Sharing of Profits.
    Sharing of profits is the very first thing that comes to the mind while we think of business activities in partnership but it could not considered as a conclusive test.
  • Conclusive Evidence : Mutual Agency is known as the conclusive test of partnership as along with sharing of profits, partners are bound by the acts of each other and this feature of mutual agency is a sure shot test to check whether there exists the partnership among two persons or not.

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