Page 151 - DMGT407Corporate and Business Laws

Corporate and Business Laws

Notes 6.1 Meaning and Nature of Partnership

A partnership is defined as “the relationship between persons who have agreed to share profits
of a business carried on by all, or by any of them acting for all”. On analysis of the definition,
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 firm cannot be a partner of another partnership firm. As regards maximum
number of partners in a partnership firm, s.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). The partnership is not a product of status as in the case
of Hindu Undivided Family business (s.5). It also does not arise by operation of law as in
the case of co-ownership. Similarly, it cannot arise by mere joint acquisition of property.
Partnership can arise by contract only.
The members of a HUF (coparcenary) carrying on a family business cannot be regarded as
a partnership firm, because coparcener or members of the family get a share in the business
not by virtue of agreement but by virtue of status, i.e., by birth in the family. Of course,
this does not mean that there can be no partnership between members of a JHF to carry on
a family business in partnership. But where such a fact is alleged, it will have to be
established by proper evidence.

Like any other contract, an agreement to constitute partnership must fulfil all the essentials
of a valid contract. Also an agreement between the partners may be express or implied.
Further, the partnership agreement may be to execute a particular adventure or for a fixed
period.
3. The agreement must be to carry on some business. The term ‘business’ includes every
trade, occupation or profession [s. 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 (s. 8). Unless the person joins for the purpose of
carrying on a business, it will not amount to partnership. Thus, partnership does not exists
between members of a charitable society or a religious association or a building scheme.
Similarly, a club is not a 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. Thus,
a person may become a partner under a distinct understanding that he is not to share
losses, but to share only the profits. Though sharing of profits is an essential feature of
partnership, the mere fact that a person is given a share in the profits of the business does
not necessarily make him a partner.

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.

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