by Indian Partnership Act, 1932 governs the formation, management, and dissolution of partnership firms in India. It defines the legal relationship between persons who agree to carry on a business together and share its profits. This Act applies to partnerships across India (except Jammu & Kashmir at the time of its enactment) and came into effect on 1st October 1932. It was originally part of the Indian Contract Act, 1872, but was later codified as a separate Act for clarity.
Definition of Partnership (Section 4):
According to Section 4 of the Indian Partnership Act, 1932:
“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.”
This definition clearly indicates that a partnership is a mutual agreement to do business and share profits. It creates a legal relationship among partners, based on trust, mutual benefit, and cooperation.
Key Elements of Partnership:
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Association of Two or More Persons
A partnership must involve at least two persons. There is no partnership if there is only one person. The maximum limit is:
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50 for general businesses (as per Companies Act, 2013).
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No such limit is specified in the Partnership Act itself.
2. Agreement Between Partners
Partnership arises from an agreement, which may be oral or written (often called a Partnership Deed). It must fulfill all essentials of a valid contract under the Indian Contract Act, 1872, such as free consent, lawful object, and capacity to contract.
3. Business Must Be Carried On
The partnership must be formed to carry on a business—which includes trade, occupation, or profession. If there is no business activity (for example, a joint ownership of property without commercial motive), it is not a partnership.
4. Sharing of Profits
Partners must agree to share profits. The intention to share losses is not mandatory under the Act, but if not agreed otherwise, losses are shared like profits. Sharing of profits is prima facie evidence of partnership, but not conclusive.
5. Mutual Agency
This is the true test of partnership. Each partner is an agent of the firm and the other partners, meaning any act done by one partner in the course of business binds the entire firm. If this element is missing, the relationship is not a partnership.
Nature of Partnership:
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Voluntary and Contractual
Partnership is formed by a voluntary agreement. It cannot arise by operation of law or inheritance. Even if family members inherit a business, unless they enter into an agreement, it is not a partnership.
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Relationship of Mutual Trust
Since every partner has the power to act on behalf of the firm, the relationship must be based on mutual confidence, honesty, and good faith (also known as “uberrimae fidei”). Every partner must act in the best interest of the firm.
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Unlimited Liability
Partners have unlimited liability for the debts of the firm. If the firm’s assets are insufficient, personal assets of partners can be used to settle dues. Each partner is jointly and severally liable.
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Non-Separate Legal Entity
Unlike a company, a partnership firm does not have a separate legal identity from its partners. The firm and the partners are considered the same in the eyes of law. A firm cannot sue or be sued separately from its partners (except in special cases).
- Flexible and Simple Structure
Partnerships are easier to form, manage, and dissolve. They are governed by mutual agreement, which allows flexibility in day-to-day operations. However, the lack of limited liability and continuity can be a drawback.
