Nature of Partnership


The sole proprietorship has its limitations such as limited capital, limited managerial ability and limited risk-bearing capacity. Hence, when a business expands or when it is to be set up on a scale, which needs more capital and involves more risk, two or more persons join hands to run it. They agree to share the capital, the management, the risk and profits of the business. Such mutual economic relationship based on a written or an oral agreement amongst these persons is termed as ‘partnership’. The persons who have entered into partnership are individually known as ‘partners’ and collectively as ‘firm’. The Indian Partnership Act, 1932 defines 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”. Based on this definition, the essential features of partnership are as follows:


Two or more persons : To form a partnership, there must be at least two persons. There is, however, a limit on the maximum number of persons who constitute a partnership firm. It should not exceed 10 if the firm is carrying on a banking business and 20 if it is engaged in any other business.


 Agreement between the partners : A partnership is created by an agreement. It is neither created by operation of law as in the case of Hindu Undivided Family nor by status. The agreement forms the basis of economic relationship amongst the partners. The agreement can be written or oral.


 Business : The agreement should be for carrying on some legal business. A joint ownership of some property by itself does not constitute partnership. However, the joint ownership of the property may be used for forming the partnership in order to pursue the business objectives for which the partnership is formed.


 Sharing of profits : The agreement should be to share the profits of the business. If some persons join hands to carry on some charitable activity, it will not be termed as partnership. Of course, the ratio in which the

partners will share the profits is determined by the agreement or in the absence of the agreement; it is shared equally amongst the partners.


 Business carried on by all or any of them acting for all : The firm’s business may be carried on by all the partners or any one of them acting for all. This means that partnership is based on the concept of mutual agency relationship. A partner is both an agent (he can, by his acts, bind /partners). The implication of this is that partner binds others and others bind him in the same way. Further implication of this is that each partner is entitled to participate in the conduct of business affairs and act for and on behalf of the firm.











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