Meaning, Definition and Features of Partnership

Individual, sole-proprietorship businesses often reach a point where more capital, more skill, or simply more hands are needed than one owner alone can provide. When two or more such persons agree to come together, contribute capital and/or skill, and run a business jointly for mutual profit, the resulting form of business organisation is called a Partnership. This chapter — the opening chapter of the Maharashtra HSC (MSBSHSE) Book-Keeping and Accountancy syllabus for Class 12 Commerce — studies how a partnership firm is formed and governed, and — most importantly for this subject — how its year-end final accounts are prepared.

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

Essential features of Partnership

1. Two or more persons — a partnership needs at least two persons. The Indian Partnership Act, 1932 itself does not fix a maximum, but under the Companies Act, 2013 (read with the Companies (Miscellaneous) Rules, 2014), the number of partners in any partnership carrying on business for profit cannot exceed 50.
2. Agreement — a partnership arises only out of an agreement between the partners (oral or written); it never arises out of status, inheritance, or operation of law. This is why members of a Hindu Undivided Family carrying on a family business are not, on that basis alone, partners.
3. Lawful business — the persons must agree to carry on a business, and that business must be lawful. Two people jointly owning a house that they do not let out, for instance, are co-owners, not partners.
4. Sharing of profits — the business must be carried on with the object of sharing profits among the partners. Sharing of profits is essential, though — as the definition itself makes clear — it is not, by itself, conclusive proof of partnership.
5. Mutual agency — each partner is both a principal and an agent for the others; a partner acting within the scope of the firm's business binds every other partner. This is regarded as the real, conclusive test of the existence of a partnership.
6. Unlimited liability — every partner's liability for the debts of the firm is unlimited, and, in law, joint and several — a partner's personal (private) assets can be used to pay off firm debts if the firm's own assets fall short.
7. No separate legal entity — unlike a company, a partnership firm has no legal existence distinct from its partners. For accounting and tax purposes, however, the firm IS treated as a separate business entity from its partners' private affairs — the Business Entity concept already familiar from Class 11.
8. Voluntary registration — registering a partnership firm under the Indian Partnership Act, 1932 is not compulsory, though an unregistered firm suffers certain legal disabilities (for example, it cannot sue a third party to enforce a contract), so registration is generally advisable.

These features, together with the Indian Partnership Act, 1932's default rules covered later in this chapter, are exactly the kind of theory that appears alongside the practical problems in HSC 12th Book-Keeping and Accountancy questions and answers every year.