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Partnership – Meaning & Essential Features

Introduction

In sole proprietorship, a single person manages everything. But when capital requirements increase or more managerial skill is needed, two or more persons join hands to form a Partnership. It is the most common form of business for small and medium enterprises (Legal firms, CA firms, Traders).

1. Definition

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

"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."

Key Terms:

  • Partners: Persons who have entered into partnership.
  • Firm: The collective name of all partners.
  • Firm Name: The name under which business is carried on.

2. Essential Features (Characteristics)

For an association to be a valid partnership, it must satisfy these 5 tests:

1. Two or More Persons

  • Minimum: 2 persons.
  • Maximum: 50 persons (As per Companies Act, 2013 rules).
  • Note: Minors cannot be full partners (can only be admitted for benefits).

2. Agreement

  • Partnership is the result of an agreement (contract), not status (like HUF).
  • It can be Oral or Written. (Written is preferred to avoid disputes).

3. Business

  • The association must be formed to carry on a legal business.
  • Co-ownership of property (e.g., two brothers owning a house jointly) is NOT partnership because there is no business.

4. Profit Sharing

  • The agreement must be to share profits (and losses).
  • Charitable activities are not partnerships.

5. Mutual Agency (The True Test)

  • "Carried on by all or any of them acting for all."
  • Every partner is both a Principal and an Agent.
    • Agent: He can bind other partners by his acts.
    • Principal: He is bound by the acts of other partners.
  • Exam Note: Mutual Agency is the most conclusive proof of partnership.

3. Limited Liability Partnership (LLP)

A modern form of partnership is LLP (under LLP Act, 2008).

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4. Rights of a Partner

Unless the Deed says otherwise, every partner has the right to:

  1. Participate in the conduct of business.
  2. Be consulted in key matters.
  3. Inspect the books of accounts.
  4. Share profits equally (if ratio is not specified).
  5. Receive interest on Loan given to firm @ 6% p.a. (even if there is loss).

Exam Notes: Writing the Answer

Question: "Define Partnership. Explain its essential features." (10 Marks)

Model Answer:

Definition: As per Sec 4 of the Partnership Act 1932, 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.

Essential Features:

  1. Plurality of Persons: Minimum 2, Maximum 50.
  2. Agreement: It arises from a contract (oral/written).
  3. Profit Motive: Must be a legal business aimed at profit.
  4. Mutual Agency: This is the cardinal principle. Each partner binds and is bound by others. Thus, there is a Principal-Agent relationship.
  5. Unlimited Liability: In traditional partnerships, partners are jointly and severally liable for the firm's debts.

Summary

  • Act: 1932.
  • Core: Mutual Agency.
  • Max Partners: 50.
  • Liability: Unlimited (Private assets can be sold to pay firm's debt).
  • Loan Interest: 6% p.a. (Default if silent).

Quiz Time! 🎯

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