SPECIAL CONTRACT
UNIT-6, NATURE OF PARTNERSHIP
SYNOPSIS
Introduction
Definition of partnership
Test of partnership
Essential elements of partnership
Kinds of partnership
Distinction between partnership and joint hindu family business
INTRODUCTION
Partnership is a form of business organization in which two or more persons
come together to carry out business.
When two or more people agrees to share losses and profits in Partnership firm
is Partnership.
In partnership, all the partners not have equal in profits and losses. There are
different types of partnership according to the extent of their liability and their
participation in the firm.
DEFINITION OD PARTNERSHIP
A partnership is a kind of business where a formal agreement between two or
more people is made who agree to be the co-owners, distribute responsibilities
for running an organization and share the income or losses that the business
generates.
In India, all the aspects and functions of the partnership are administered under
‘The Indian Partnership Act 1932’.
The partnership is also governed by the general provision of the Indian Contract
Act on such matters where the Partnership Act is silent.
TEST OF PARTNERSHIP
Section 6 of the Indian Partnership Act provides the mode of determining the
existence of a partnership. The following are the provisions in Section 6:
1. While determining whether an association of persons is a firm or if a
person is a partner to a firm, the real relation shown by relevant facts
between the parties must be examined.
2. Sharing profits from a property held by persons jointly does not
automatically qualify such persons as partners.
3. A person can hold a receipt of the share in profits or receipt of payment
that is contingent upon the profits, but that does not make him a partner.
The following are such persons:
Servant or agent who receives remuneration or commission.
Widow or child of a deceased partner who receives an annuity.
Moneylender to the partnership business.
The previous owner or part owner who has consideration for the sale of
the goodwill of the business or share of it.
It is clear from Section 6 that the sharing of profits is not the ultimate test for
determining whether a partnership exists. The existence of a partnership
depends on the actual intention of the parties and the contract drawn up by
them. In some cases, an alleged partner might have a share in the profits of the
business, but that does not by default make him a partner.
ESSENTIAL ELEMENTS OF PARTNERSHIP
It must be an association of two or more persons.
There must exist an agreement between the partners.
There must be a business undertaking or a commercial activity that is
lawful.
The motive must be to earn the profit and share between the partners.
The agreement must be to carry out the business jointly or by any of them
acting on the behalf of all i.e., there must be mutual agency.
1.Number of members: Any two or more persons may form a partnership. There
is no limit imposed on the minimum and the maximum number of partners
under the Partnership Act,1932. According to Companies Act 2013, the
maximum number of 100 must not exceed in case of partnership and minimum
is 2 partners.
2.Agreement: The partnership is an agreement in which two or more person has
decided to carry out business and share the profit and losses equally. To create a
legal relationship it is necessary to form a partnership agreement.
3. Business (Section 12): The partnership must be created for the purpose of
carrying the business which is legal in nature. Co-ownership of property does
not amount to the partnership
4. Mutual agency (Section 13): The business is to be carried by all of them or by
any one of them on behalf of all.
5. Sharing of profit: The agreement is to share profit and losses among the
partners.
6. Liability of partnership: All the partners are jointly liable for paying the debts
of the firm.
KINDS OF PARTNERSHIP
The various types of partnership are based on two different criteria.
With regard to the duration of the term of partnership:
1. Partnership at will
when no fixed period is prescribed for the expiration of partnership then it is a
partnership at will. According to Section 7 two conditions need to be fulfilled:
No agreement about the determination of the fixed period of partnership
No clause with respect to the determination of partnership.
2. Partnership for a fixed period
When the partners fixed the duration of the partnership firm then after the
expiration of the fixed period the partnership comes to an end. When the
partners decided to continue with the partnership even after the expiry of the
fixed period then it becomes a partnership at will.
On the basis of the extent of the business carried by a partnership.
3. Particular Partnership (Section 8)
When the partnership is created for completing any project or undertaking.
When such an undertaking or project have been completed then partnership
comes to an end. The partners have a choice to continue with the firm.
4. General Partnership
when the partnership is created for the purpose of carrying out the business.
There is no particular task that has to be completed. The task is general in
nature.
DISTINCTION BETWEEN PARTNERSHIP AND JOINT HINDU FAMILY
BUSINESS
1. Formation - The basis of Partnership firm is a contract between persons
whereas a Hindu undivided family is created by status i.e., a person becomes its
member by virtue of his being born in the particular family.
2. Addition of a new partner or member - When a new partner has to be
introduced into a partnership firm, consent of all the partners is needed for the
same whereas no such consent is needed for the addition of a member into the
joint Hindu family. A person becomes the member of the family on being born
in that family.
3. Mutual agency - There is mutual agency between the partners of a particular
firm, and the act done by any of the partners binds the firm whereas there is no
such mutual agency between the members of a joint Hindu family. The Karta of
the joint Hindu family has all the powers to act on the behalf of the family
and he is the only person who can represent the family.
4. Liability - The liability of a partner is not only joint liability or limited to
his share in the partnership business, the liability is several liability also.
Such liability is unlimited and even a partner’s personal property can be
attached for the partnership debts. On the other hand, the liability of the
coparceners, on the other hand, is limited only to the extent of their shares in the
family business.
5. Minor - A minor cannot become a partner in a firm, he can be admitted only
for the benefits whereas a person becomes a coparcener right from his birth.
6. Limit on number of persons - There is a limit on the number of partners in a
firm, i.e., 10 in banking business and 20 in any other business whereas there is
no limit on the number of coparceners in joint Hindu family.
7. Dissolution - In the absence of any agreement to the contrary, partnership is
dissolved on the death of any partner whereas joint Hindu family continues to
operate even after the death of a coparcener.
8. Governing Law - A partnership is governed by the provisions of the Indian
Partnership Act, 1932 whereas a joint Hindu family business is governed by
Hindu law.
