Page 140 - DMGT102_MERCANTILE_LAWS_I

Mercantile Laws-I

Notes Introduction

In the earlier units, you came to know about the contract of agency. In this unit you will study
about the law of partnership. An individual or a group of persons may decide to start business.
One of the first steps to be taken is to determine what kind of business organisation it will be. If

only one person starts the business, we call that business sole proprietorship and if a group of
persons start the business that can be either partnership business, or a company or a cooperative

form of organisation. This unit begins by defining a sole proprietorship. The essential features of
this form of organisation are enumerated.
10.1 Meaning and Nature of Partnership

A partnership is defined as “the relationship between persons who have agreed to share profi ts
of a business carried on by all, or by any of them acting for all”. On analysis of the defi nition,
certain essential elements of partnership emerge. These elements must be present so as to form a
partnership and are discussed below.
1. Partnership is an association of two or more than two persons. There must be at least
two persons who should join together to constitute a partnership, because one person
cannot become a partner with himself. These persons must be natural persons having legal
capacity to contract. Thus, a company (which is an artificial person) cannot be a partner.

Similarly, a partnership fi rm cannot be a partner of another partnership fi rm. As regards
maximum number of partners in a partnership firm, Sec.11 of the Companies Act, 1956,

puts the limit at 10 in case of banking business and 20 in case of any other business.
2. Partnership must be the result of an agreement between two or more persons. An agreement
presupposes a minimum number of two persons. As mentioned above, a partnership
to arise, at least two persons must make an agreement. Partnership is the result of an
agreement between two or more persons (who are known as partners after the partnership
comes into existence).
3. The agreement must be to carry on some business. The term ‘business’ includes every trade,
occupation or profession [Sec.2(b)]. Though the word ‘business’ generally conveys the idea
of numerous transactions, a person may become a partner with another even in a particular
adventure or undertaking (Sec.8). Unless the person joins for the purpose of carrying on a
business, it will not amount to partnership.
4. The agreement must be to share profits of the business. The joint carrying on of a business

alone is not enough; there must be an agreement to share profits arising from the business.

Unless otherwise so agreed, sharing of profits also involves sharing of losses. But whereas

the sharing of profits is an essential element of partnership, sharing of losses is not.
Example: A, a trader, owed money to several creditors. He agreed to pay his creditors

out of the profits of his business (run under the creditors’ supervision) what he owed to them.
Held, the arrangement did not make creditors partners with A in business [Cox v. Hickman, (1860)
8 H.L.C., 268].

10.1.1 Formation of Partnerships

All the essential elements of a valid contract must be present in a partnership as it is based on
an agreement. Therefore, while constituting a partnership. The following points must be kept in
mind:

1. The Act provides that a minor may be admitted to be benefits of partnership.

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