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Unit 2: Meaning and Nature of a Company

2.4 Company Distinguished from Partnership Notes

Section 4 of the Indian Partnership Act, 1932 defines a 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’. Persons who enter into a partnership are individually called ‘Partners’ and collectively
a ‘Firm’, and the name under which the business is carried on is called the ‘Firm’s Name’.
The essential characteristics of a partnership organisation are:
1. A partnership is an association of two or more than two persons. However, a limit is
placed by s.11 of the Companies Act, 1956 on the maximum number of partners – at ten in
case of banking business and twenty in case of any other business.
2. A partnership must be the result of an agreement between two or more persons.

3. The agreement must be to carry on some business.
4. The agreement must be to share profits of the firm.
5. The business must be carried on by all or any of them acting for all. The partnership is
based upon the idea of mutual agency. Every partner assumes a dual role – that of a
principal and an agent.
6. The liability of each partner of the firm is unlimited in respect of the firm’s debts.

7. A partnership firm has no independent legal existence apart from the persons who
constitute it.
8. A partnership agreement is based on mutual confidence and trust of the partners.

9. No partner can transfer his share in a partnership to an outsider without the consent of all
the other partners.
10. No change can be made in the nature of the partnership business without the consent of all
the partners.
A partnership firm may be distinguished from a company in the following ways:
1. Legal Status: A partnership firm has no existence apart from its members. A company is
a separate legal entity distinct from its members.
2. Mutual Agency: A partnership is founded on the idea of mutual agency – every partner is
an agent of the rest of the partners. A member of a company is not an agent of the other
members.
3. Liability of Members: The liability of a partner is unlimited, i.e., even his own personal
assets are liable for the debts of the firm. The liability of a member of a limited company
is limited to the extent of the amount remaining unpaid on shares held by him or the
amount of guarantee, as mentioned in the memorandum of association of the company.
4. Transfer of Interest: A partner cannot transfer his interest in the partnership without the
consent of all other partners. A member, subject to the restrictions contained in the articles,
can freely transfer his shares in the company.
5. Duration of Existence: Unless there is a contract to the contrary, the death, retirement, or
insolvency of a partner results in the dissolution of the firm. In contrast, a company enjoys
a perpetual succession. Death or retirement or insolvency of a member of a company does
not affect the existence of the company.

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