Business Law

Characteristics Of Partnership Under Section 4 Of Partnership Act

Meaning of partnership – Partnership is an association of persons with the object of jointly doing something to make a profit. In other words, when two or more persons, with the object of making a profit, agree to do business jointly it is deemed that a partnership has come into existence.

Definitions of Partnership

  • “Partnership is an agreement between persons having contractual capacity to carry on a business in common with a view to private gain.” – L.H. Haney
  • According to John A. Shubin, “Two or more individuals may form a partnership by making a written or oral agreement that they will jointly assume full responsibility for the conduct of a business.”
  • The US Partnership Act defines partnership as “an association of two or more persons to carry on, as co-owners, a business for profit.”
  • According to Section 4 of the Indian Partnership Act, “Partnership is a relation between persons who have agreed to share the profits of a business carried on by all, or any of them acting for all.”

On the basis of the above definitions, it can said that a partnership is a group of two or more person who make a contract among themselves to do some activity, invest money and provide personal services and share the profit or loss resulting from such activity.

Characteristics Of Partnership

(1) Contractual relationship: A partnership is the result of a contract between the partners. It is essential for a contract to be the basis of partnership “because a partnership relation is created through a contract, not through status”. A written contract between the partners is always important.

(2) Association of two or more persons: A person cannot make a contract with himself, and it logically follows that a partnership, which essentially is born out of a contract, is an association of two or more persons. The Partnership Act does not specify the maximum number of partners; but section 11 of the Companies Act, 1956 lays down that a partnership carrying on banking business can have a maximum of 10 partners and business trading firm cannot have more than 20 partners. Accordingly, a partnership becomes illegal if the partners in a banking firm are more than 10, and in any trading or professional firm, the partners are more than 20. Likewise, if there is only person in a firm, it is not a partnership

(3) Existence of business: It is essential that there is a business for the partnership to exist. In other words, if two or more persons make an agreement, the object of which is not to run a business, such agreement is not deemed to be a partnership agreement. The term ‘business’ is, however, used in a very wide sense and covers all kinds of trading, occupational or professional activities that are done with the object making a profit. If A and B buy 100 tons of rice and divide it among themselves, they cannot be called ‘partners’-they are only co-owners because the agreement between the two is not with the object of doing any business. But if both jointly decide to do trading in rice and share the profit or loss, they will be called partners’. It is not essential that a partnership be a lasting or permanant association  between the parties-it may even be for only one business deal. Likewise, if two persons agree to produce a movie and sell the rights to screen the movie to distributors with the object of making a profit, it will be called a partnership.

(4) Earning and sharing of profits: The aim of a partnership is not only to attempt to make a profit but also to share the profit. Therefore, any act of philanthropy, or something which is done on humantarion grounds jointly by two or more persons, even if it involves a good deal of business, is not a partnership. For example, if Mohan and Sohan, with the object of helping the poor, make an agreement to sell food items to them on a no-profit basis, it will not be deemed to be a partnership because their objective is not to make a profit but to help the poor. Here, the term ‘profit’ is used in the sense of ‘clear profit or ‘profit after expenses’. A partnership need not include an agreement to share the loss, if any, because it is implied that any one or more partner(s) can be held liable to bear any loss in the partnership business.

(5) Business being carried on by all, or any partner acting for all: The business of partnership may be carried on by all partners, or by one or more of the partners acting on behalf of all. In partnership business, it is not essential that all the partners actively participate in the business; but it is essential that the business is done on behalf of all partners. Thus, the operation of a partnership can be by all partners, or by one or more partners with the consent of others.

(6) Object of business being lawful: The business of partnership must not violate the law of the land or go against the national interest. For example, there cannot be a partnership contract to commit a theft or dacioty and share the profits.

Besides what has been discussed above, there are some collateral’ or implied characteristics of a partnership which are discussed in what follows:

  • Joint and personal liability: Each partner, personally and jointly with the other  partners, is responsible for any act, or omission thereof, done by the partnership firm when he was a partner. If it is required to pay the debts of the firm, the personal property of a partner can be used to the extent of his share in the partnership to clear such debts.
  • Implied agency: Any partner of the firm can act in the conduct of partnership business on behalf of all the partners, and such act is deemed to be on behalf of the firm, i.e. a partner, besides being a co-owner, is also the agent of the firm.
  • No separate entity: From the point of view of law, a partner and the firm are one entity-not separate entities. All the rights and duties of the firm are the rights and duties of the partner in his personal capacity.
  • Good faith: The fundamental basis of a partnership is good faith. Each partner is deemed to have complete and absolute trust in the other. This implies that, if one partner has information or knowledge about any aspect of the firm’s business and such information or knowledge is vital for the other partners in their conduct of the firm’s business and is of help in decision-making, the partner having such information should provide the information to the other partners.
  • Individual as a partner: Only an individual can be a partner in a partnership firm Another firm or an organisation cannot be a partner.

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