Partnership / various characteristics
Definition
Under partnership organisation, two or more persons, who are competent, agree to carry on lawful business and share the profits thereof on agreed basis. The business may be carried on by all of them or any of them acting for all.
According to Haney, partnership is “the relations existing between persons competent to make contracts who agree to carry on a lawful business in common with a view to private gains.”
In this definition, partnership has been described as a relation between persons. But those persons must be competent to make contracts. The emphasis is upon the contracts to carry on lawful business. Further, they should agree about the prime motive also, i.e. to share profits. If the motive is not to share profits then that will not be a partnership.
According to Kimball,
“A partnership, or firm as it is often called, is, then, a group of men who have joined capital or service for the prosecuting of some enterprise.”
In this definition two essential elements of partnership. viz., contract to carry on business and motive of private gain, have not been mentioned clearly. This is neither very clear nor conveys the essence partnership.
In India, partnership organisations are governed by Indian Partnership Act, 1932. Section 4 of this Act defines partnership as “the relation between persons who have agreed to share profits of a business carried on by all or any of them acting for all.” Persons who enter into partnership are collectively known as “firm” but individually known as “partners.” It we analyse this definition carefully, the following points emerge as main elements of partnership:
(i) Partnership is the relation between persons, i.e. at least two persons must be there to constitute partnership.
(ii) There should be an agreement between them. This also means that persons should be legally competent to enter into contract.
(iii) They should carry on some business. It implies that an agreement to run charitable institution will not constitute partnership. Business here necessarily implies à lawful business.
(iv) Their motive for carrying on business should be to share the profits.
(v) The business must be carried on by all or any of them acting for all. Thus, one or some partners can represent the firm and bind it by his/their actions in the usual course of business.
Basic Features
The partnership organisation has some basic or fundamental features which have been discussed below, with special reference to the position of partnership in India :
1. Number of persons. There should be at least two persons to form the partnership organisation. The limit of maximum number differs from country to country. In India, there is no upper limit prescribed under the Partnership Act, but a limit has been put under the Companies Act indirectly. Under this Act, a partnership consisting of more than 20 persons for a general business and 10 persons for a banking business would be illegal. Thus, the upper limit of number of partners in a general business is 20 and in the banking business 10.
2. Contractual relationship. Partnership is the result of contractual relationship between two or more persons. There must be an agreement between persons who wish to form partnership. It is a fundamental feature of the partnership organisation. For example, a manager of a firm may get his remuneration which may be based on the profits of the firm, but on that account he cannot be taken as a partner as the element of agreement is not there. Similarly, two or more persons may be sharing the gains of a property jointly held and on that account alone there cannot be partnership between them. Further, as it is the result of contract, the law does not interfere with its formation or dissolution. On that very basis, no partners agree for the same Similarly, if a partner dies the firm is dissolved as one of the contracting parties is dead. Thus, it has been rightly said that partnership arises from contract and not from status.
3. No legal distinction between firm and partners. It has been mentioned earlier that persons entering into partnership are individually known as ‘partners’ and collectively as ‘firm’. Since partnership is merely an association of persons, no separate legal entity or fictitious person is created. This implies that the law does not make any distinction between the firm and the partners who compose it. Any partner can bind the firm with his acts on behalf of the firm. But, at the same time, a partner is free to undertake personal business or enter into personal contract.
4. Unlimited liability. Just like sole proprietorship, the liability of the owners of the firm is unlimited. But the difference between the two is that in case of the former all the risk is to be shouldered by one person alone but in case of partnership, it is to be borne by two or more persons. This means that a partner is not only liable to the extent of capital invested in the firm but he may be called upon to meet the liability out of his personal property also. If need be, the creditors of the firm can claim debt out of the personal property of the partners. In such eventuality, the partner loses the capital invested in the firm as well as his personal property.
5. Profit motive. The motive behind entering into agreement to carry on business should be to earn profit. If there is an agreement to carry on business but not with the objective of making profit then that will not constitute partnership. e.g., business of philanthropy or recreation centres will not amount to partnership. Further, the agreement should be to share profits.
6. Partner as principal as well as agent. Every partner acts as a principal of the firm as well as its agent. He carries on business on behalf of the firm and can enter into contract with outsiders on its behalf. Thus, he can bind the firm with his acts within the scope of the partnership business..
