The Essential Elements of Partnership

The essential elements of Partnership

Sec 4 of the Partnership act defines a partnership as follows :

“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”

A partnership as defined in the act must have three elements :

There must be an agreement entered into by two or more persons.

The agreement must be to share the profits of a business

The business must be carried on by all or any of them acting for all.

• Voluntary agreement-voluntary contractual naturearise as a result of agreement expressed or impliedcannot be formed with more then 10 persons in banking and 20 in other types of business

• Partnership not created by status :HUF

Eg: Sole proprietor

• Sharing of profit- motive behind partnership

Mutual agency – Persons carrying on business in partnership are agents as well as principals

• Registration of firmsThe formalities of registration sec 56-71. Sending a statement to the registrar of firms in prescribed

form and accompanied by the fees and stating the following:

The name of firm,the place or principal place of business, the names of any other places where the firm carries on business,the date when each partner joined the firm,the names in full and permanent addresses and the duration.The statement must be signed and verified by all partners.On receipt of registration the registrar records an entry of the statement in the register of firm and the firm is thereupon considered to be registered.

• Consequences of non registration-Cannot file suit against the firm or any

partner for the purpose of enforcing a right arising from the contract.

No suit can be filed on behalf of an unregistered firm against any third party

• Exceptions-• A partner of an unregistered firm can file a suit

for the dissolution of the firm and for account.• Suits can be filed for the realization of the

properties of an insolvent partner of an unregistered firm

• The official assignee or receiver can realise the properties of an insolvent partner of an unregistered firm

• Who can be a partner?Person : Has the capacity to enter into a contractMinor:A minor cannot be a partner.But in an existing

partnership a minor can be admitted if all the partners agree.

Person of unsound mind : cannotWoman: A woman can be partner married or unmarriedCompany: In a company the capacity to enter into contract

is determined by the memorandum and articles of association.The liability of the members of a firm under the partnership act for the debts of the firms is unlimited. But a company cannot incur unlimited liability.

• Classes of partners-• Active Partner – An active partner is one who

actually participates in the business• Dormant,sleeping or nominal partner- these

partners join the firm by agreement but do not take any active part in the business. Their liabilities are same as of active partners.

• Sub-partner- The transferee of a share of a partner’s interest in a firm is called a sub-partner.