People entering into an agreement to start and run a business are partners and the firm they thus form is called a partnership firm, and the name of such a company is called the firm name.
A partnership is an agreement between two or more persons to work together on certain terms and conditions. It is not a legal entity. Whereas a company (private or public limited) is an artificial person, a partnership is merely a name given to a group of people working together (even if it is a registered partnership).
Therefore, whenever terms such as ‘firm’s property’ or ‘suit against the firm’ are used, it basically means ‘partner’s property’ or ‘suit against the partners’.
A partnership firm is governed by the Indian Partnership Act of 1932. As per section 4, a Partnership is the relation between persons who have agreed to share profits of a business carried on by all or any one of them acting for all.
The above statement brings us to the five elements that make up a partnership:
1. There must be a contract
2. It is made of two or more persons
3. There is agreement to carry on with a business
4. The object is sharing profits
5. Either one does the business activity or it is done by someone who has appointed by all partners
Let’s now look at the aforementioned elements of a partnership
Contract of Partnership
A partnership is the result of a contract and does not happen because of a certain status, operation, law or any sort of inheritance. To explain this, let’s say a father (who is also a partner in a firm) dies. In such a case, his son/daughter can stake claim to a share in the partnership property, but can only become a partner once he/she enters into a contract with the other existing partners.
A contract is the core of a partnership firm (read about Partnership Agreement).
Members of a Partnership Firm
The maximum number of partners that such a firm can have are 20. Now, it is imperative to know that the India Partnership Act does not define the maximum limit, but according to the Companies Act, a partnership can have a maximum of 20 partners. Above this number, the business would be deemed illegal.
It is imperative to know that a partnership firm cannot enter into a partnership with another partnership firm or individuals. Similarly, keep in mind that if a partnership firm, under a firm name, does enter into a contract with another firm or individual, then the members of the firm become partners under law.
Business activity under partnership
The parties concerned must have agreed to carry on a business activity. This includes the broadest definition possible, entailing every trade, occupation, profession. Hence, if its charity work, then it will not be considered as a partnership firm.
Now say a group of individuals decide to share the income from a certain property or divide certain goods that have been purchased, the people involved cannot be called partners since there is no business involved.
The objective of carrying out a partnership firm must be to share profits among the partners involved. As mentioned above, any philanthropic work which involves no profits will not be considered as a partnership. The sharing of profits, however, can be decided in whichever ratio that the partners concerned prefer.
As much as sharing profits is the objective, it is not necessary for the partners to share losses too. Losses can be borne by one person too. However, one must know that his/her share in losses might be negligible, but his/her liability to an outsider shall remain unlimited.
The sharing of profits and losses, however, must be clearly stated in the contract. In case such a clause is absent, then under law, it means that all profits and losses are to be shared equally among the partners.
The partnership can be carried out by all or any one partner who has been nominated by all partners. There has to be a mutual agreement in this regard.
This primarily means that ever partner is an agent and a principal both. This means he/she can be bound by acts of others or be bound by his/her actions.