Meaning, Definition and Essential Features of Partnership

1. Meaning, Definition and Essential Features of Partnership

Definition — Section 4, 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." Persons who have entered into partnership with one another are called individually "partners" and collectively "a firm", and the name under which their business is carried on is called the "firm name".

Notice what this definition is actually built on: partnership is not a separate legal entity in the way a company is — it is a relationship arising out of a contract between individuals. This is confirmed directly by Section 5, which states that partnership is created by CONTRACT and not by status — a Joint Hindu Family carrying on a family business is therefore never a partnership, however much its members share in the family business's profits, because membership of a Hindu joint family arises automatically by birth (status), never by agreement.

The five essential features, drawn straight out of Section 4:

1. Association of two or more persons — a single individual cannot form a partnership with themself. The Indian Partnership Act itself sets no upper limit, but the Companies Act, 2013 (Section 464, read with the Companies (Miscellaneous) Rules, 2014) caps the maximum number of partners in ANY partnership carrying on business for profit at 50 — a firm with more members than this is simply not a valid partnership and must instead incorporate as a company.
2. Agreement — the relationship must arise out of a contract (oral or written) between the parties, not out of status, inheritance, or operation of law.
3. Business — the parties must actually be carrying on some lawful business (Section 2(b) borrows the wide meaning of "business" from general usage — any trade, occupation or profession); an agreement to share the profits of a single isolated, non-recurring transaction, or of a charitable venture, does not by itself amount to partnership.
4. Sharing of profits — the partners must have agreed to share the profits of the business. Section 4 speaks only of sharing profits; as between the partners themselves, sharing of LOSSES is not an essential legal requirement of the definition, though in the ordinary case, and in the absence of any contrary agreement, Section 13(b) makes partners share losses equally too, exactly as they share profits.
5. Mutual agency — the business must be carried on by all the partners, or by any of them acting for all. This is the feature the syllabus and the Act itself treat as decisive, discussed next.

The real test of partnership — Section 6 and its Explanation. Sharing of profits is only prima facie evidence that a partnership exists — it is not conclusive proof by itself. The true, decisive test the courts and the Act apply is mutual agency: does each person carrying on the business act as both a PRINCIPAL (bound by what the others do) and an AGENT (able to bind the others) for the rest? If that mutual, two-way agency relationship exists, it is a partnership, no matter how the parties themselves choose to describe their arrangement; if it does not exist, sharing a slice of profit is not enough to create one.

The Explanation to Section 6 lists situations where a person receives a share of profits WITHOUT thereby becoming a partner, because there is no mutual agency:

• A person who has lent money to persons engaged in a business, and receives a share of the profits (or a rate of interest varying with the profits) in place of, or in addition to, interest on the loan.
• A servant or agent receiving a share of profits as remuneration (a profit-linked bonus does not make an employee a partner).
• A widow or child of a deceased partner receiving a portion of profits as an annuity.
• A person who has sold the goodwill of a business and receives a share of the profits of the business as part of the consideration for the sale. …