Partnership Definition, Characteristics and Essential Elements

Definition and Characteristics of Partnership

Section 4 of the Partnership Act defines a partnership as follows: “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.” A partnership, as defined in the Act, must have three essential elements:

  1. There must be an agreement entered into by two or more persons.
  2. The agreement must be to share the profits of a business.
  3. The business must be carried on by all or any of them acting for all.

Essential Elements of A Partnership

1. Voluntary Agreement

The first element shows the voluntary contractual nature of partnership. A partnership can only arise as a result of an agreement, express or implied, between two or more persons. Where there is no agreement there is no partnership. But a partnership cannot be formed with more than ten persons in banking and twenty persons in other types of business. A partnership with persons exceeding the above limits must be registered under a Companies Act.

Partnership is not created by status: Section 5 states that, “The relation of partnership arises from contract and not from status.” In particular the members of a Hindu undivided family carrying on a family business, as such, are not partners in such business.

Example:

The sole proprietor of a business dies leaving a number of heirs. The heirs inherit the stock in trade of the business including the goodwill of the business but do not become partners until there in an agreement, express or implied, to carry on the business as partners.

2 Sharing of Profits of a Business

The second element states the motive underlying the information of a partnership. It also lays down that the existence of a business is essential to a partnership. Business includes any trade, occupation or profession. If two or more persons join together to form a music club it is not a partnership because there is not business in this case. But if two or more persons join together to give musical performances to the public with a view to earning profit, there is a business and a partnership is formed.

3. Mutual Agency

The third element is most important features of partnership. It states that persons carrying on business in partnership are agents as well as principals. The business of a firm is carried on by all or by any one or more of them on behalf of all. Every partner has the authority to act on behalf of all and can, by his actions, bind all the partner of the firm, each partner is the agent of the others in all matters connected with the business of the partnership. The law of partnership has therefore been called a branch of the law of agency.