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Nature And Essentials Of Partnership Under Indian Partnership Act,1932

The Indian Partnership Act came into force on 1st October 1932 except Section 69( Effect of non Registration) which came into force on 1st October 1933. The Partnership Act is applicable to whole of India. But wherever the situation is such that the Act doesn't specifically dictate any measures, the provisions under the Indian Contract Act continue to apply. As a partnership is the outcome of contract, therefore, the provisions of Indian Contract Act, 1872 are applicable to the partnership firm.The Indian Partnership Act is mainly based on the corresponding English Partnership Act ,1890.

Meaning of partnership:

Partnership is an association of persons with the object of jointly doing something to make a profit. The word partnership comes from a Latin word meaning' to part' that is to share. According to some jurist, partnership is a relation between persons, while for others it is an association between two or more persons for certain purposes.

Definition: Section 4 of the Indian Partnership Act, 1932 defines partnership as under. Partnership is the relation between persons who have agreed to share the profit of a business carried on by all or any of them acting for all. Person who have entered into a partnership with one another are called individual 'partners' and collectively a 'Firm' and the name under which their business is carried on is called the 'firm name'.

Kinds of partnership:

The distinction between partnership can be done on the basis of two criteria, that is either by duration or by liability.

Types of partnership on the basis of duration;
  1. Partnership at will
  2. Partnership for fixed term
  3. Particular partnership
Types of partnership on the basis of liability of partners:
  1. General partnership
  2. Limited partnership
  3. Limited liability partnership

General Partnership:

  • Partnership at Will: When no provision is made by contract between the partners for the duration of the partnership or for the determination of their partnership. The partnership is called partnership at will.
  • Partnership for Fixed Term: When provision is made by contract between the partners for the duration of their partnership, which means that the partnership was created for a fixed duration of time. Then such partnership is called partnership for fixed term, where after the expiration of such a duration, the partnership shall also end. However, there may be cases when the partners continue their business even after the expiration of the duration where they continue to share profit and there is an element of mutual agency, then in such case the partnership will now be a partnership at will.
  • Particular Partnership: If the partnership is formed only to carry out one business venture or to complete one undertaking, such as such partnership is known as particular partnership.

On The basis of liability of partnership:

  • General Partnership: When the purpose for the formation of the partnership is to carry out the business in general. It is said to be general partnership where rights and responsibilities are shared equally in terms of management and decision making.
  • Limited Partnership: This partnership includes both the general and limited partners where the general partner has unlimited liability, manages the business and other limited partners. Here limited partners have limited control over the business and in most cases they only invest and take a profit.

Limited Liability Partnership:

Here all partners have limited liability. Each partner is guarded against other partners' legal and financial mistakes.
Essential Elements Of Partnership; According To Section 4, The Following Essentials Are Necessary To Constitute A Partnership, Which We Will Discuss Briefly:
  • More than one person: Partnership needs a minimum of two persons because a single individual cannot be his own partner. So if in the future, the number of partners reduces to one, the partnership is automatically dissolved. The number of partners cannot be more than 50. If the number of partners reduces below the minimum of two and is more than 50, the partnership is declared as illegal.
  • Existence of business: The joining of two or more persons can be called partners only when they agree to run some business. It is very essential that the business should be legal in nature. For example, if A&B buy 100 tons of rice and divide among themselves, they cannot be called partners; they are only co-owners because the agreement between the two is not with the object of doing any business. But if both jointly decide to do trading in rice and share the profit or loss, they will be called 'partners'.
  • Contractual relationship: Partnership comes into existence only on the basis of a contract between the partners. Here it is important to have a contract between the partners. Therefore, those people who do not have the capacity to enter into a contract cannot become partners. For example, minors, mentally unsound persons, and persons declared ineligible by law cannot be taken as partners in a firm. It is true that a minor can be admitted as a partner under section 30, but his entry will not entitle him to be a full-fledged partner because he is a partner only in the profits.
  • Profit making and sharing of profit: The aim of partnership is not only to attempt to make a profit but also to share the profit. If the objective of the partner is not earning a profit, then it is not called a partnership. For example, if Ram and Sham, with the objective of helping the poor, make an agreement to sell food items to them on a non-profit basis, it will not be deemed as a partnership because their objective was not to make a profit but to help the poor.
  • Principal-agent relationship: Principal-agent relationship means that just as an owner is responsible for any contract entered into by his agent, operating within the limit of his authority. Similarly, a partner can bind all the partners with his activities. In this way, every partner plays a double role as an owner and an agent.
The partnership is an agreement between the persons who have agreed to share the profit of a business to be carried by all or any of them, acting for all of them. A partnership is not created by status, but arises from a contract. Sharing of profit is one of the tests but not conclusive evidence of the existence of partnership. But principles of mutual agency are the foundation of partnership.

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