The Essential Elements of a Partnership. The law relating to partnership is contained in the ‘The Partnership Act 1932.
Definition and characteristics:
Section 4 of the Partnership Act defines: ‘Partnership is 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.’ Persons who have entered into a partnership with one another are individually called ‘partners’ and collectively firm – and the name under which their business is carried on is called the firm name.
As defined in the Act a partnership must have three essential elements:
- There must be an agreement entered into by two or more persons
- The agreement must be to share the profits of a business.
- The business must be carried on by all or any of them acting for all.
- Voluntary Agreement: The first element shows the voluntary contractual nature of the partnership. A partnership can only arise as a result of an agreement, express or implied, between two or more persons. Where there is no agreement, there is no partnership. But partnership can not be formed with more than 10 persons in banking and twenty persons in other types of business.
- The partnership is not created by status: The relation of partnership arises from contract and not from status
The sole proprietor of a business dies leaving a number of heirs. The heirs inherit the stock in trade of the business including the goodwill of the business but do not become partners until there is an agreement express or implied to carry on the business as partners.
Sharing of profits of a business:
The second element states the motive underlying the formation of a partnership. The existence of a business is also an essential element of the partnership. Business includes any trade, occupation, or profession. If two or more persons join together to form a music club it is not a partnership because there is no business in the case. But if two or more persons join together to give a musical performance to the public with a view to earning a profit, there is a business and a partnership is formed.
The third element is the most important feature of partnership. Persons carrying on business in the partnership are agents as well as principals. The business of a firm is carried on by all or by any one or more of them on behalf of all. Every partner has the authority to act on behalf of all and can, by his action, bind all the partners of the firm. Each partner is the agent of the others in all matters connected with the business of the partnership. The law of partnership has therefore been called a branch of the law of agency.
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