What is Partnership? What are the special features of a partnership?

What is Partnership? Briefly state special features of a partnership on the basis of which its existence can be determined under the Indian Partnership Act?

Answer:

A partnership is a type of business entity in which partners (owners) share with each other the profits or losses of the business.

Special features of a partnership

1. Partnership is an association of two or more than two persons:-

There must be at least two persons who should join together to constitute a partnership, because one person cannot become a partner with himself. These persons must be natural persons having legal capacity to contract. Thus, a company (which is an artificial person) cannot be a partner. Similarly, a partnership firm cannot be a partner of another partnership firm. As regards maximum number of partners in a partnership firm, Sec.11 of the Companies Act, 1956, puts the limit at 10 in case of banking business and 20 in case of any other business.

2. Partnership must be the result of an agreement between two or more persons:-

An agreement presupposes a minimum number of two persons. As mentioned above, a partnership to arise, at least two persons must make an agreement. Partnership is the result of an agreement between two or more persons (who are known as partners after the partnership comes into existence).

3. The agreement must be to carry on some business:-

The term business includes every trade, occupation or profession [Sec.2(b)].Though the word business generally conveys the idea of numerous transactions, a person may become a partner with another even in a particular adventure or undertaking (Sec.8). Unless the person joins for the purpose of carrying on a business, it will not amount to partnership.

4. The agreement must be to share 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 so agreed, sharing of profits also involves sharing of losses. But whereas the sharing of profits is an essential element of partnership, sharing of losses is not.

Example: A, a trader, owed money to several creditors. He agreed to pay his creditors out of the profits of his business (run under the creditors ‟supervision) what he owed to them. Held, the arrangement did not make creditors partners with A in business [Cox v. Hickman,(1860) 8 H.L.C., 268]. 

Formation of business partnerships

All the essential elements of a valid contract must be present in a partnership as it is based on an agreement. Therefore, while constituting a partnership. 

The following points must be kept in mind:

1. The Act provides that a minor may be admitted to be benefits of partnership.

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

3. The partnership agreement may be express (i.e., oral or writing) or implied and the latter may be inferred from the conduct or the 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.

4. An alien friend can enter into partnership, an alien enemy cannot.

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

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