What is Partnership? Meaning, Importance, Formations, Types, Deeds

What is Sole Partnership?

Sole proprietorship refers to the type of business entity wherein an individual starts a business with his own capital and manages all the operations on his own. The profits and risks are also managed by the owner only.

Features of Sole Partnership

Some essential features of sole proprietorship are as follows:

  • The business is owned singly by an individual.

  • The business is controlled by a single person.

  • The individual assumes all the risks to which the business is exposed.

  • The individual’s liability is unlimited, i.e., his personal assets can be used for the payment of business liabilities.

  • The business has no separate legal entity distinct from the sole proprietor.

  • No legal formalities are necessary to set up the business as such, but there may be legal restrictions on a particular type of business.

  • The individual derives all benefits as he bears the entire risk.

  • He enjoys almost unlimited freedom of action and decides everything for the business without fear of opposition, but at his own risk. The proprietor is his own master in this form of organization.

  • Having employees makes no difference. The proprietor may instead take the help of the members of his family.

A sole proprietorship is the best option for a business in which the investment and risks associated with it are few, the nature of the business is simple, decision-making is simple, and customers are in direct contact with the business. Some examples of a sole proprietorship are retail shops, professional firms, households, and personal services.

What is Partnership?

A partnership is a legal relationship between persons who have agreed to work together to perform certain business activities. The persons in a partnership have agreed to share the profits in the desired ratio of the business carried on by all or by some of them.

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”.

Characteristics of Partnership

The following are some important characteristics of a partnership:

Partnership is Association of Two or More Persons

There should be at least two people in a partnership firm. They should join to constitute a partnership. A partnership firm cannot be the partner of another partnership firm. The maximum number of partners in a partnership firm is 10 in the case of the banking business and 20 in the case of other businesses.

Partnership Should Be the Result of an Agreement Between Two or More Persons

In a partnership firm, there should be a legal agreement between the two parties or partners involved. A partnership can neither arise as a product of status (as in the case of the Hindu Undivided Family business) nor can it arise by operation of law (as in the case of co-ownership). In addition, it cannot arise by a simple joint acquisition of property. It can only arise by a contract.

The members of a HUF carrying on a family business cannot be regarded as a partnership firm as the members of the family get a share in the business not by virtue of an 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 the members of a HUF to carry on a family business partnership. But where such a fact is alleged, it will have to be established by proper evidence.

The Agreement Must Be to Carry on Some Business

The term ‘business’ includes every trade, occupation, or profession. Though the word ‘business’ generally conveys the idea of numerous transactions, a person may become a partner with another even in a particular venture or undertaking.

Unless the person joins for the purpose of carrying on a business, it will not amount to a partnership. Thus, a partnership does not exist between members of a charitable society or a religious association, or a building scheme. Similarly, a club is not a partnership.

Agreement Must Be to Share the 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 agreed, sharing of profits also involves the sharing of losses. But whereas the sharing of profits is an essential element of a 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 a partnership, the mere fact that a person is given a share in the profits of the business does not necessarily make him a partner

Business Must Be Carried on by All or Any of Them Acting for All

A partnership is based on the idea of mutual agency. Every partner assumes a dual role that of a principal and of an agent. The foundation of the law of partnership is an agency, and it is therefore said that “the law of partnership is a branch of the law of principal and agent”.

Each partner is an agent binding the other partners who are his principals, and each partner is again a principal, who in turn, is bound by the acts of the other partners.

Legal Characteristics of Partnership Firm

In addition to the above elements, there are certainly other important legal characteristics of the partnership firm.

Unlimited Liability

In the case of a partnership firm, the liability of each partner is unlimited with respect to the firm’s debts. The liability of the firm is shared by all the partners, and thus even one of the partners can be called upon to pay the debts of the firm in case the firm’s assets are insufficient.

No Separate Legal Entity

The partnership firm has no independent legal existence apart from the persons who constitute it.

Utmost Good Faith

A partnership agreement is based on the mutual confidence and trust of the partners. The partners must therefore be just and honest toward the other partners. They must disclose all facts and render true accounts relating to the business of the firm and not make any secret profits.

Restriction on Transfer of Interest

No partner can transfer his share to an outsider without the consent of all other partners.

Unanimity of Consent

No change may be made in the nature of the business without the consent of all partners.

Formation of Partnerships

A partnership firm agreement should include all the elements of a valid contract. While forming a partnership firm, the following points must be kept in mind:

  • The Partnership Act provides that a minor may be admitted to be a beneficiary of a partnership.

  • No consideration is required to create a partnership. A partnership is an extension of an agency for which no consideration is necessary.

  • The partnership agreement may be expressed (i.e., oral or in writing) or implied, and the latter may be inferred from the conduct or course of dealings of the parties or from the circumstances of the case. However, it is always advisable to have the partnership agreement in writing.

  • An alien friend can enter into a partnership, but an alien enemy cannot.

  • A person of unsound mind is not competent to enter into a partnership.

  • A company incorporated under the Companies Act, of 1956 can enter into a contract of partnership.

  • According to Section 5 of the Partnership Act, the following persons cannot be treated as partners:

    • The members of a HUF carrying on a family business.
    • A Burmese Buddhist husband and wife carrying on a business.

Duration of Partnership

A partnership made for a particular period is known as a partnership for a period. The period may be decided by the partners by mutual understanding. The term of this kind of partnership may be one year, two years, or a forced period.

Rules for Determining the Existence of Partnership

There are certain rules for determining the existence of a partnership, which are as follows:

  • Partnerships arise from a contract and not from status.

  • The members of a Hindu undivided family carrying on the family business cannot form a partnership.

  • The members of a Hindu undivided family carrying on the family business cannot form a partnership

  • The sharing of profits or gross returns arising from property by persons holding a joint or common interest in that property does not, in itself, make such person partners.

  • The receipt of any share of the profits or any other contingent receivables by a lender, as a servant, or an agent as remuneration by a widow or child of a deceased partner or by a previous owner of the business as consideration for the sale of the goodwill, does not in itself make the receiver a partner with the persons carrying on the business.

What is Partnership Deed?

A partnership between persons can be established through an agreement, which can be written or can be oral. But an oral agreement may cause disputes in the future period. So it is better to have a written agreement between the partners.

A partnership deed is a written agreement made between the partners which contain all the rights and duties of the partners, the name and objective of the partnership business, address, and other details. This partnership deed is then the basis of the functioning of the partnership business.

Main Content of Partnership Deed

  • Name and Address of the Firm: The partnership deed consists of the name of the business and the place where it is being operated.

  • Name and Address of the Partners: The deed also includes the names of the partners in the business. It also includes their addresses and age.

  • Nature of Partnership Business: A partnership is a type of business in which two or more people come together with their resources to invest in a common business with the purpose of sharing the profits of the business.

  • Commencement and Duration of Partnership: The deed also specifies the commencement and duration for which the partnership is valid.

  • Partner’s Capital: The next point in the deed is the capital contribution made by the partners in the firm.

  • Interest on Capital: The deed also decides the amount of interest that should be paid on the capital invested in the firm. The tax laws of a partnership firm do not recognize distribution by way of interest above 12% p.a. on the amount invested by the partner.

  • Drawings: The deed also consists of the maximum amount that can be withdrawn by any partner at one time.

  • Profit and Loss Sharing Ratio: The utmost important point written in the deed is the sharing ratio of the profits and losses of the firm between the partners. If it is not mentioned in the agreement, then the profit and losses are to be distributed equally between the partners.

  • Admission and Retirement of Partners: Another clause that exists in the agreement is the admission and retirement of the partners. It includes the rights and duties of both the retiring partner and the admitting partner along with the responsibilities and rights of existing partners.

  • Accounts and Audit: The deed of partnership also includes the preparation of books of accounts and the need for auditing them. The procedure of bookkeeping and their audit must be explained in the deed.

  • Dissolution of the Partnership: The clause of dissolution states the method and the reason of the dissolution of the partnership.

  • Conduct and management of business

  • Arrangement in case a partner becomes insolvent

  • Dispute resolution or arbitration in matters of dispute

  • The methods of revaluation of assets and liabilities on admission or retirement or death of a partner

  • Settlement in the case of the dissolution of a partnership.

Types of Partnerships

A partnership can be of various types, as shown in Figure:

Partnership at Will

As per Section 7 of the Partnership Act, when there is no duration specified for a particular partnership, the partnership is made at will. Such a type of partnership can be dissolved at any time by any partner after giving prior notice to the firm. Any partner on his will can give notice and retire from the partnership. The partnership is not bound or limited by period or time.

Particular Partnership

This refers to a partnership made for a particular purpose and gets dissolved on the completion of that purpose. For example, if one person gets into a partnership with another person for the construction of a bridge, then it is said to be a particular partnership. In this case, the partnership gets dissolved on the completion of the bridge.

Partnership for a Fixed Period of Time

A partnership made for a particular period is known as a partnership for a period. The period may be decided by the partners by mutual understanding. The term of this kind of partnership may be one year, two years, or any fixed period.

Legal Position of a Minor and His Rights and Liability

We shall now discuss the role of a minor in a partnership firm. The minor’s role, duties, and rights are not similar to these of the other partners. They are different also before the date of maturity and after the date of maturity of the contract.

You may recall in the previous chapter that a minor cannot contract. Such a contract is void in the terms of the law. Though a minor cannot enter into a contract in the partnership, he can be admitted to the benefits of the partnership.

The rights and duties of the minor are summarised in the following section:

Duties or Liability of Minior

  • Before Attaining Majority

    • The liability of the minor is limited to the share of the profit which he had in the partnership firm.

    • There is no personal obligation on the partners to pay the debts of the firm.

    • If the firm is insolvent, then the minor cannot be declared insolvent, although his share has to be vested in the assignee.
  • After Attaining Majority

    • After attaining the age of maturity, the minor has to decide whether he wants to work as a partner in the firm or not. If the minor becomes a partner, then he will be liable for the debts personally just as the other partners.

    • After becoming a partner, his share of remuneration and profit and the property remains the same as when he was a minor.

    • If the minor does not become a partner, then his duties are fixed as that of a minor, only till he gives public notice.

    • He shall not be liable for any acts done by the firm after he gives the notice.

Rights of Minor

The following are the rights of a minor:

  • A minor has a right to take his share of the profit from the business as agreed upon in the partnership deed.

  • He has full right to inspect the books of accounts of the firm.

  • He can sue the partners for the payment which he has the right to get.

  • He has full right to become a partner within a period of six months of attaining the age of majority.

Difference Between Partnership and Joint Stock Company

A partnership is not a separate legal entity from the partners.A joint stock company is a separate legal entity.
In a partnership firm, every individual partner is an agent of the other partner.In a joint stock company, a member does not act as an agent of another member.
The profits are distributed as per the profit-sharing ratio in the partnership deed.In this case, profit is distributed in the form of a dividend.
In this case of a partnership, the liabilities of the partners are unlimited.In joint stock companies, the liabilities of the members are limited to the shares held by them
A share in a partnership cannot be changed or sold out to another person.In the case of a joint stock company, the shares of the company are transferable.
The audit of a partnership firm is not compulsory.The audit of the joint stock company is compulsory.
Difference Between Partnership and Joint Stock Company

Difference Between a Partnership and Hindu Undivided Family (HUF)

The partnership is created by an agreement.HUF members get their rights from birth itself.
The death of a partner may lead to the dissolution of the partnership deedThe death of any member does not lead to the dissolution of the HUF.
All partners take equal participation in the partnership and its functioning.The male members of the Karta takes the charge of the HUF.
In the case of a partnership, every partner can act on his own in the
In the case of the Hindu Undivided Family, the Karta is the main person who can act on his own for the other
members of the family.
In this case of a partnership, the liabilities of the partners are unlimited.In HUF, the liabilities of the Karta are unlimited but the liabilities of the other partners are limited.
Difference Between a Partnership and Hindu Undivided Family (HUF)

Difference Between Partnership and Co-ownership

Table 4.3: Difference between Partnership and Co-ownership
A partnership arises from an agreement, whether implied or expressed.It can arise through an agreement or can be inherent.
In a partnership firm, every individual partner is an agent of the other partner.In co-ownership, a member does not act as an agent of another member.
Difference Between Partnership and Co-ownership

Limited Liability Partnership Act, 2008

The limited liability partnership is an innovative type of corporate structure that has the advantage and flexibility of a partnership. In addition, the cost of developing an LLP and the compliance costs of the LLP are relatively lower. Limited liability partnerships are governed by the Limited Liability Partnership Act, of 2008;

Features of the Limited Liability Partnership

The salient features of the limited liability partnership can be summarised in the following manner:

  • The LLP is a corporate body that has a separate legal entity, and any two or more persons can incorporate an LLP. The partners can carry on business by subscribing their names in the incorporation document of the limited liability partnership.

  • The mutual rights and liabilities of the LLP are governed by the LLP agreement entered between the partners, which are subject to the provisions of the Limited Liability Partnership Act, 2008.

  • LLP is a separate legal entity and is liable to the extent of all the assets which the partners have agreed as the contribution between the partners.

  • LLP shall have at least two designated partners and out of which one should be resident in India.

  • LLP, under the provisions of the LLP Act, 2008 will be required to maintain the annual accounts reflecting the true and fair position and statement of accounts, and solvency will be filed by every LLP with the registrar every year. The annual accounts will be audited as per the notification issued by the government in the budget.

  • There are provisions in the LLP Act that allows a company or partnership to convert into an LLP, and there are also provisions wherein LLPs can be converted into a company. There are provisions in the LLP Act that allow a company or partnership to convert into an LLP, and there are also provisions wherein LLPs can be converted into a company.

  • The winding up of an LLP will be either voluntary or by a tribunal established under the Companies Act, of 1956, and till the tribunal is not established, the powers are vested in the hands of the high court.

  • The LLP Act, 2008 confers the right to the Government of India, to issue necessary notification from time to time as may be deemed fit for making changes in the Act.

  • The Indian Partnership Act, of 1932 is not applicable to LLPs.

An LLP firm has all the features of a corporate entity, i.e. all the benefits of a private/public limited company are available to the LLP firm.

  • Clarkson, K., Miller, R., Jentz, G., & Cross, F. (2014). Business law: Text and cases (11th ed.).

  • Keenan, D., & Riches, S. (2007). Business law. Harlow: Pearson Longman.

  • Bhandari, M. (2004). Law of partnership. New Delhi: Ashok Law House.

  • Gupta, H. (1954). The Indian partnership act, 1932 (act IX of 1932). Allahabad: Law Pub. House.

  • (2014). Retrieved 28 February 2023, from

  • Mca.gov.in,. (2014). Ministry Of Corporate Affairs – The Limited Liability Partnership Act, 2008. Retrieved 28 February 2023, from http://www.mca.gov.in/MinistryV2/llpact.html

Leave a Reply