Partnership Firm — Meaning, Features, and the Partnership Deed

(b) Partnership Firm — Meaning, Features, and the Partnership Deed

When a business needs more capital or a wider range of skill than one person can supply alone,

but its owners still want to avoid the cost and formality of forming a company, a Partnership Firm is the natural next step. Partnership in India is governed by the Indian Partnership Act, 1932, the real statute this entire topic is grounded in.

Meaning (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 individually

called "partners" and collectively a "firm", and the name under which the business is

carried on is called the "firm name."

Essential features, drawn directly from this definition:

1. Two or more persons — a partnership needs at least two partners; the Act itself does not fix a maximum, but the Companies Act caps the maximum number of partners a partnership firm may have (currently 50, as prescribed under the Companies Act rules).
2. Agreement — a partnership always arises out of an agreement between the partners, not from status or inheritance (this is exactly what distinguishes it from a Joint Hindu Family Business — see sub-topic (d)). The agreement may be oral or written, though a written agreement (the Partnership Deed) is always advisable.
3. Lawful business — the partners must be carrying on a business (Section 2 defines "business" broadly to include every trade, occupation, and profession), and that business must be lawful; an agreement to share the gains of an unlawful activity is not a partnership in law.
4. Sharing of profits — the partners must have agreed to share the profits of the business; sharing losses is not separately essential in the statutory definition, but is standard practice and is usually written into the deed.
5. Mutual agency — the business must be carried on by all partners, or by any of them acting for all. This is the feature courts treat as the real test of partnership: each partner is both a principal (bound by what the other partners do on the firm's behalf) and an agent (able to bind the firm and the other partners by their own acts done in the ordinary course of the firm's business).
6. Unlimited liability — exactly as in a sole proprietorship, partners have unlimited personal liability for the firm's debts; further, this liability is also joint and several — a creditor of the firm can recover the full amount owed from any one partner personally, who may then seek contribution from the others.
7. No separate legal entity — in Indian law, a partnership firm is not a legal person distinct from its partners (unlike a registered company); the firm and the partners are, for most legal purposes, treated as the same thing.

The Partnership Deed: a written document containing the terms and conditions agreed

between the partners, governing how the firm is to be run. While an oral agreement is legally

sufficient, a written and (ideally) registered deed is always recommended, since it becomes the

first reference point for settling any future dispute between partners. A typical Partnership

Deed contains:

• Name and address of the firm and of each partner.
• Nature and place of the business.
• Date of commencement and duration of the partnership (if fixed).
• Amount of capital contributed by each partner.
• The agreed profit-and-loss sharing ratio.
• Interest (if any) to be allowed on capital, and charged on drawings.
• Salary or commission (if any) payable to working partners.
• Rights, duties, and powers of each partner. …