Partnership is a form of business organization in which two or more persons come
together to carry out business. A partnership can be thought of as the
development of a sole proprietorship in which a single individual carries on
his business with his personal resources, skills and efforts.
The major disadvantage of being a sole proprietor is that since just one person
is involved within the business, it's difficult for him to rearrange huge
resources and investments in the business. On the other hand, in a partnership,
several individuals are involved and they can pool their resources together to
build and manage a larger business. Further, if there is a loss in business, it
can be divided among the partners of the partnership firm.
When two or more people agrees to share losses and profits in Partnership firm
is Partnership .In partnership, all the partners not have equal in profits and
losses. There are different types of partnership according to the extent of
their liability and their participation in the firm.
The Indian Partnership Act, 1932
Once upon a time the level of trade and commerce in the society was different,
the needs of man were different. Only one person wont to produce something and
also sell it. Trade commerce was not so developed. With the passage of time, the
development of trade commerce went on, the needs of man kept on increasing, the
nature of business also changed. First of all, sole trade has been the prevalent
business in the forms of business, but sometimes partnership business also
started coming into existence. Considering the responsibilities of business
according to the needs of the society, partnership business started developing.
When the practice of partnership business started increasing in the society,
there was also a need for related laws and regulations because it is the duty of
a state to control any business. The State of India also compiled legislation
related to partnership and the Indian Partnership Act 1932 was enacted.
The Indian Partnership Act 1932 enacts all the provisions concerning
partnership. This act is useful act to control partnership business. Even today,
India's economy is being run by partnership industries because it is not so easy
to operate a company. In the Indian economy, either solo business is being done
or partnership business is being done. Most of the industries are operating on a
single or partnership basis. In order to operate such industries, the major
responsibility for conducting these trades also falls on the state. On this
basis the Indian Partnership Act 1932 becomes important which enacts the conduct
of business and the agreements between the partners to settle disputes between
The Act compiles the laws relating to partnership and provides certainty to the
trade and commerce of the partnership. Any business which is being carried on by
more than 1 person under a particular contract, this type of business is called
After studying the Indian Partnership Act 1932, some special things related to
partnership come out and which can also be called essential elements of
partnership. These elements are being mentioned in this assignment:
Partnership is born only after agreement. Under the Indian Contract Act, there
is an agreement first. Agreement related articles can be read under Contract Law
Series to know what is an agreement.
For partnership there should be an agreement of partnership between two or more
persons but it is not necessary that the agreement is written or expressed, it
can be created by conduct. The participation should be an agreement of a
voluntary nature. If the agreement is not made voluntarily, it cannot take the
form of partnership. Just as there are requirements under the contract law for
having an agreement, the same requirement is valid for partnership agreement
under the Partnership Act.
Only after an agreement is a partnership born. The Indian Partnership Act
stresses the need for an agreement for any partnership. Such an agreement could
also be oral or could also be by conduct. There is no need to have any written
agreement for such an agreement.
Any agreement under the Partnership Act is made for the purpose of carrying on
any business. The aim of any business is to form profit. If any work is being
done with the aim of earning profit then it is business. If such business is
being carried on under this partnership then it will be considered as
The definition of business has been given under section 2 (b) of the Indian
Partnership Act 1932, according to which every business is a profession. The
meaning of business is not clear from this definition, rather it is clearing the
quantitative nature of business. Actually defining business is a question of one
element, yet in working together, time, money, hard work, done and done with the
aim of getting profit, will be called business.
In the case of Vishwanath Namak Chand
AIR 1955, Judge Venkataraman in his
judgment held that partnership can exist where there is a business to be carried
on where there is no business to be done, the question of partnership does not
It has been held in Vicky Chandra Vs Harishchandra
AIR 1940 Nagpur 211 that two
persons together buy hundred bales of cotton and jointly enter into an agreement
to sell. This agreement is business and both are partners in the business, so
here it is partnership. Partnership requires business, partners establish a
partnership relationship to get a share of the profits of the business.
It can be said simply that where more than one person is doing a business or
commerce profession with the aim of making profit together, this type of
business is called partnership business.
Just as two owners can jointly own their property and form a partnership,
similarly two doctors or two lawyers can form a partnership to treat patients or
to litigate their clients. What is turnover is only a question of the element
which will be answered with reference to the specific elements of a case. Merely
a program or an act of lending money alone cannot be a business and does not
come under the business referred to in section 4 of the Partnership Act.
The purpose of any business is to get profit, all business activities are being
conducted with the aim of earning dividend. Any business, industry, commerce,
profession is conducted almost with the aim of making profit. It is the most
essential element of partnership that the share of profits should be received by
the partnership. Whatever profit is being received from trade commerce, there
should be some share of the partners in that profit. When the partners receive a
share in the profit received by the business, it is called a combination of
profits. The profit is called sharing among themselves.
Under the Partnership Act, it has not been mentioned that how much profit will
be taken, what will be the ratio of profit taking, but it has definitely been
mentioned that dividend will be received. Partners can receive the same in any
proportion and at any time. In the earlier times, this essential element was
given so much importance that in relation to running a business, if the share of
profits between two or more persons was divided among themselves, partnership
was considered as decisive, but today there has been a change. And it is said
that mere right to participate in or receive profits does not entitle a person
to be a participant.
Under the Partnership Act, one of the most important properties or elements
under any partnership is that the partners are agents among themselves. For
partnership to exist, it is necessary for the partners to be agents among
themselves. In partnership, all the partners are agents for each other.
For the general purpose of business, each partner is an agent of the other
partners. If two or more persons agree that they shall carry on business and
receive profit, each is an owner; Which gives full benefit to its owner.
In the case Pratibha Rani Vs Suraj Kumar
AIR 1985 AC 628, it has been said that
the partnership in the relation between the wife and the husband cannot be
contemplated for the appointment of wealth. Unless the wife has made a clear
legal act compulsorily indicating that the stridhan entrusted to the wife is to
be used for any participatory business.
It is an essential element of conducting any business, commerce, profession
under partnership. When these elements are found in any trade, commerce or
business, then partnership becomes trade, commerce, business and such business
is governed by the provisions given under the Indian Partnership Act 1932.
Definition Of Partners
As per Section 4 of the Indian Partnership Act, 1932, a partnership is defined
as a relation between two persons who mutually comply with share profits and
losses in business. Therefore, individuals who have entered into an agreement
with each other are individually referred to as partners
Furthermore, according to the Black Law Dictionary, a partner could also be a
member of a firm or co-partnership; One who has united with others to form a
partnership in business.
Common Types Of Companions
The following list covers the kinds of partners we encounter on a daily basis.
The following list of partners isn't exhaustive in nature, because the
Partnership Act, 1932 doesn't prohibit any sort of partnership that the partners
might need to define for themselves.
Active / Managing Partner
An active partner primarily participates in the day to day trading and also has
an active participation in the operation and management of the business firm. He
performs the day-to-day business activities on behalf of the other partners. He
may act in various capacities such as manager, advisor, organizer and controller
of the affairs of the firm. To be precise, he acts because the agent of all the
opposite partners to hold out the core functions associated with the business.
Further, subject to the clause in the partnership deed, the active partner can
withdraw the remuneration from the firm.
With regard to their role in the partnership, their role is of utmost
importance. Therefore, if he wishes to retire from the partnership company, he
must give public notice of his decision. He gives a public notice to absolve
himself of the liability and of the acts done by the other partner. If he does
not issue a public notice declaring his retirement, he will be held liable for
the acts done by other partners after retirement.
The sleeping partner is also known as the passive partner
. This partner does
not participate in the day to day working of the partnership firm. A person who
has sufficient funds or interest within the firm, but cannot devote his time to
the business, may act as a silent partner within the firm. However, he's bound
by all the acts of the opposite partners.
A silent partner like all other partner brings share capital to the firm. If a
dormant partner decides to retire from the partnership firm, it is not mandatory
for him to give public notice to him. Since a passive partner is not
participating in the day-to-day affairs of the business, he is not allowed to
withdraw the remuneration from the firm. If all the partnership deed is
providing remuneration to inactive partners, then it is not deductible under
Income Tax Act, 1961.
The nominal partner has no real or material interest in the partnership firm. In
simple words, he is only lending his name to the firm and does not have a voice
in the management of the firm. By virtue of its name, the firm can promote its
sales in the market or obtain more credit from the market.
For example: A partnership between a partner and a celebrity or a business
tycoon is executed for the added value of the firm and also to promote the
branding by using the fame and goodwill of the individual.
This partner does not share any profit and loss in the firm as he does not
contribute any capital in the firm. However, it's pertinent to notice that a
minor partner is susceptible to outsiders and for acts committed by other
partners of third parties.
Essay By Partner (Estopel)
A partner by estoppel is a partner who by his words, actions or conduct
demonstrates that he is a partner of the firm. In simple words, even though he
is not a partner in the firm, he has presented himself in such a way as to show
that he has become a partner by estoppel or partner. It is pertinent to note
that, though he contributes to the capital or management of the firm, he is
liable for the credits and loans received by the firm by virtue of his
representation in the firm.
There are two prerequisites for setting up a 'holding out':
- First, the person who is excluded must have represented by words,
actions or conduct that he is a partner in the firm.
- Secondly, the other party must prove that it had knowledge of such
representation and acted upon it
Partner In Profit Only
This partner of the firm will share only the profits of the firm and will not be
liable for any loss of the firm. Further, if a partner who is partner only in
profits deals with any third party or outsider, he shall be liable only for
acts of profit and not for any liability. He is not allowed to participate in
the management of the firm. Such partners are related to the firm for his or her
goodwill and money.
A minor may be a one that is yet to achieve the age of majority within the law
of the land. According to Section 3 of the Indian Adulthood Act, a person is
deemed to have attained the age of majority in 1875 on attaining the age of
1875. However, a minor also can be appointed to say the advantages of the
It is pertinent to note that, Section 11 of the Indian Contract Act, 1872
prohibits a minor from entering into an agreement, as the agreement entered into
by a minor is voidable. However, the Partnership Act, 1932 allows a minor to
enjoy the advantages of partnership when a group of rules and procedures are
complied with as per law. A minor will share the profits of the firm, however,
his liability for the losses is limited to his share of the firm only.
A minor after attaining the age of majority (i.e. 18 years of age) has to decide
within 6 months whether he is willing to become a partner for the firm. If all
the minor partners decide to continue as a partner or wish to retire, in both
cases they are required to make such declaration by public notice.
In a partnership, the position of the secret partner is located between the
active and the sleeping partner. The membership of a secret partner's firm is
kept secret from outsiders and third parties. His liability is unlimited as he
shares the profits and shares the liabilities for the losses in the business. He
may also participate in working for the business.
An outgoing partner is a partner who voluntarily retires without dissolution of
the firm. He leaves the existing firm, so he is called an outgoing or retiring
partner. Such partner is liable for all his debts and obligations incurred
before his retirement. However, he may be held liable for his future
obligations, if he fails to give public notice about his retirement from the
A limited partner is a partner whose liability is only to the extent of his
contribution to the capital of the partnership firm.
A sub-partner is a partner who adds someone else to his share of the firm. He
gives a part of his share to the person. It is pertinent to note that, the
relationship is not between the sub-partner and the partnership firm, but
between him and the partner. Therefore, a sub-partner is a non-entity of the
firm and does not bear any liability to the firm.
A sub-partner usually agrees to share profits that are received from third
parties. Such partner cannot represent himself as a partner in the parent firm.
Further, he does not hold any right in the parent firm nor is he liable for the
actions done by the partners of the firm. He can claim his agreed share on
profits only from the partner who has contracted him to be a sub-partner.
Types Of Partners In The Partnership Act
The types of partners under the Partnership Act, 1932 can be studied under the
- According to objectives
- According to tenure
- According to nature
- On the basis of registration
According To Purpose
When a partnership is formed, it is at the discretion of the partners that the
partnership exists for as long as they wish. Therefore, whenever a partnership
is formed without stipulation of any specific time limit, it is known as
partnership at will.
Such partnership is based on the will of the partners and can be brought so long
as any of the partners gives notice indicating the intention for the same. This
partnership is formed to conduct a lawful business for an indefinite period.
Further, the dissolution of partnership is not predetermined and is taken into
account when required. This is for deciding the expected time period of the
partnership between the partners.
The main objective behind forming a special partnership is to undertake a
specific undertaking. Such partnership is formed between partners for a
temporary contract-based work or only for the project of a specific business, it
is known as an exclusive partnership. In special partnerships, once the purpose
of the business partnership is achieved, the partnership is dissolved. In simple
words, this partnership is formed for the particular undertaking and it
automatically terminates after the completion of the functions involved in the
Nevertheless, the partners have the option of continuing the
partnership by coming to an agreement.
For example: partnership for the production of a film or for the construction of
According To Tenure
Partnership For A Fixed Period
In this type of partnership, the partnership is for a fixed period of 5 years, 2
years or for a specified period. After the expiry of the said period, the
partnership automatically terminates.
Partnerships which are neither for a fixed period nor for a particular
undertaking, are called flexible partnerships.
According To Nature
In a general partnership, each partner has the right to take decisions regarding
the working and management of the firm. It is pertinent to note that, in this
type of partnership the liability of the partner is unlimited. This means that
if there is any financial error or loss by one of the partners, the assets of
all the other partners will be taken into account to pay the liabilities due in
the form of debt.
If no agreement is reached, the provisions of the Indian Partnership Act, 1932
apply for general partnerships, in which the liability of each partner is
Limited Liability Partnership (LLP)
Unlike a general partnership, a limited liability partnership is a corporate
form of business organization. In this type of partnership, the liabilities for
each partner are limited according to the contribution made by them to the
business. Further, the personal property or assets of the partner cannot be
attached to pay the liability of the firm. It is pertinent to note that this
organization is not governed under the Partnership Act, 1932 but is governed
under the Limited Liability Partnership Act, 2008.
In a limited liability partnership, some or all except one partner have limited
liability as per the limit of the capital contributed by them. It is pertinent
to note that, in a partnership, not all partners may have limited liability.
According To Validity
When a partnership is formed in accordance with the provisions of the Indian
Contract Act, 1872 and the Indian Partnership Act, 1932, it shall be called a
A partnership may be invalid when it violates the provisions of any law of the
land or when the required number of partners is reduced beyond the time limit or
less than the time limit.
On The Basis Of Registration
Registration of a firm is not mandatory under the Partnership Act, 1932. Both a
registered firm and an unregistered firm are valid in the eyes of law.
Unregistered Partnership Firm
An unregistered firm is established when the agreement between the partners is
executed. The partnership firm, which is unregistered, allows the partners to
carry out the business activities provided for in the agreement.
Registered Partnership Firm
To register a partnership firm, it must be registered with the Register of Firms
(ROF) where the firm is carrying out its business activities. Application for
registration involves payment of registration fee to the ROF, which varies from
state to state as per state laws. In a partnership, registration of a firm is
preferred as it offers benefits such as filing a lawsuit in court.
The Indian Partnership Act, 1932 talks about the general form of partnership,
however, the general form of partnership has lost its charm due to its inherent
disadvantage somewhere. One of the major disadvantages is the unlimited
liability of all the partners in the partnership in terms of legal consequences
and debts in the firm, irrespective of their respective holdings. In addition,
general partners are held jointly and severally liable for acts committed by
Therefore, we will see that there's a shift towards indebtedness Partnership,
which provides more flexibility to the partners. Even the Government of India
has recognized the disadvantages of General Partnership and said that there is a
need to start LLP in India. The government also appointed a committee under the
chairmanship of Mr. Naresh Chandra to come up with a proper framework for LLP in
Written By: Abhijeet Ujjwal