Page 154 - DMGT407Corporate and Business Laws

Unit 6: Partnership Act and Limited Liability Act

6.1.4 Test of Partnerships Notes

The question whether a particular group of persons constitutes a partnership or not, is often a
difficult one to decide. Section 6, in this regard, lays down that in determining whether a
particular group of persons constitutes a partnership, regard is to be had to the real relations
between the parties as shown by all relevant facts taken together. Thus, the use of the word
‘partner’ does not make a partnership, when there is none. If all the relevant facts taken together
show that all the essentials of partnership are present, the group of persons will be called
partnership, otherwise not. Of the essentials of partnership, sharing of profits is an important
criterion but is not conclusive. Section 6 has categorically laid down that receipt by a person of
a share of the profits of a business does not of itself make him a partner with the persons
carrying on the business. In particular, the receipt of share or payment by the following does not
of itself make the receiver a partner with the persons carrying on the business. (i) a lender of
money to persons engaged or about to engage in any business; (ii) a servant or agent as
remuneration; (iii) the widow or child of a deceased partner, as annuity; or (iv) a previous owner
or part-owner of the business, as consideration for the sale of the goodwill or share thereof.
In all the above cases, the element of agency, so necessary to constitute partnership, is absent. A
creditor or the widow and children of deceased partners cannot bind the firm by any act done on
behalf of the firm. Similarly, where two persons, who jointly own a house, let out the same to a
tenant and divide the rents among themselves, they are only co-owners but not partners with
respect to the house or rent, because the idea of representation of one person by the other is
absent. Thus, the true test of partnership is agency and not sharing of profits.

6.1.5 Partnership Distinguished from some other Organisations

Partnership and co-ownership: Co-ownership means joint ownership. A and B jointly purchase
a house, they are co-owners but not necessarily partners. The following points of distinction
between the two may be noted.

Partnership Co-ownership
1. It arises from contract. It may, besides contract, arise by status, e.g., A
and B inherit a house from their father.
2. It always implies a business. It may exist without any business.
3. It involves sharing of profits and losses. It does not always involve the sharing of
profits or losses because it may exist without
any business.
4. Each partner is the agent of other. A co-owner is not the agent of the other co-
owners.
5. A partner cannot transfer his interest A co-owner may transfer his interest to a third
without the consent of all other partners. party without the consent of other co-owners.
6. A partner can claim a share in the surplus A co-owner can claim division of the joint
assets of the firm, but not a share in the property in specie.
properties of the firm in specie.

Partnership and Company

Distinction between partnership and the company incorporated under the Companies Act, 1959,
is as follows:

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