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Partnership Firm | Company Vakil

Business refers to an individual or a group of individuals engaged in economic activities like production, distribution or exchange of Goods and services. A firm is an organization created with a view to obtaining profits by providing goods and services to the consumers. There are various types of business firms such as Sole proprietorship, Partnership, Limited Liability Company, Joint Stock Company, etc.

In this, we will be talking in-depth about Partnership Firm.

The Indian Partnership Act, 1932, governs the rights and duties of the partnership firm and partners and has laid down guidelines for the proceedings of the partnership firm.    

  • Meaning of Partnership: 

Section 4 of the Indian Partnership Act, 1932 has given the definition of Partnership and Partners. As per Section 4: 

‘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.”  

Partnership is a form of business where two or more people come together for jointly carrying out a business with a view to make profit. This joint firm thus created by the people is called as a Partnership Firm and the people who are involved in the creation of the firm are called as Partners. Thus the Partnership is a relation between the Partners who by creating a contract or agreement agree to share the profits of the business. 

What are the Essentials of Partnership?

A firm to be considered as a Partnership Firm is required to fulfil certain conditions. The following essentials are necessary to constitute a Partnership:  

  1. An agreement:

Partnership requires two or more persons to agree to create a relation between them. Agreement here means a contract which is binding to all the Partners. There should be an indication of mutual agreement between the Partners. It should be contractual and voluntary in nature. It may either be in an oral or written form. The contract made between the Partners should be 

The formation of the organisation should be to conduct lawful activities only. The partnership should not be carrying out illegal activities. If it deals with illegal activities, the contract shall become void.  

2.Carrying on of Business:

The purpose of the partners of any Business should be to carry on a business. It may be any lawful business but the partners should agree to continue the business and share profits and losses amongst themselves. Carrying on a business is operating on a series of transaction and not just a single transaction of purchase or sale of goods and services. If two or more people come together to carry on a charitable work then it would not be considered as Partnership.

3.Sharing of Profits:

Partnership is formed with a view to gaining profits. Each partner should have same profit-motive mind-set. Thus firms that do not aim at procuring profits are therefore not considered as Partnership. Sharing of profits is an essential element in Partnership. At the time of agreement, the partners decide and fix the ratio or share of profit which each partner would receive. 

4.Mutual Agency:

A Partnership business can be carried by all the partners or a single partner acting on behalf of the other partners. There is mutual agency that is every partner acts as an Agent and Principal, as they can be bound by the other partners’ action. Thus there should be good faith and trust amongst the partners.

Types of Partnership:

There are two types of Partnership namely Particular Partnership and Partnership at Will.

  1. Particular Partnership:

As per Section 8 of the Indian Partnership Act, 

Particular partnership— A person may become a partner with another person in particular adventures or undertakings. 

If people wish to come together to carry out a particular business activity or venture then it is called as a Particular Partnership. For e.g. production a movie. It is a continuous relationship which requires series of transactions till the completion of the project. After the completion of the undertaking the partnership shall come to an end. 

2.Partnership at Will:

Section 7 of the Indian Partnership Act defines Partnership at will as,

Partnership at will.—Where no provision is made by contract between the partners for the duration of their partnership, or for the determination of their partnership, the partnership is ‘partnership at will’.

If in a partnership agreement, the duration of the partnership is expressly provided or if provision is made for determination of partnership then it is not a Partnership at will.

If there is no fixed duration mentioned in the agreement and the partnership is to be continued thereafter without any specific duration then it is a partnership at will. 

Types of Partners: 

  1. Active Partner-

An active partner is the partner who actually participates in the workings of the firm. He is mainly responsible in the activities of the firm and plays a crucial role. 

2.Dormant or Sleeping Partner

A dormant partner is the partner who does not engage in the proceedings of the firm. He works in the background.

3.Nominal Partner-

A nominal partner is not an actual partner. He only lends his name to the firm to be used as a partner. He is not concerned with the proceedings of the firm and does not share profits like the actual partners.

4.Partner in Profits only

This Partner is only entitled to the profits of the firm. He does not share the losses like the  other partners. 

5.Minor Partner

A person who is below eighteen years of age is considered as a minor. A minor partner is not involved in the workings of the firm. He is only entitled to the benefits.

6.Secret or Silent Partner

A secret or silent partner is the partner who is known to the public. He just works silently in the background without revealing his identity. 

In a partnership firm, the Companies Act, 2013 has set the maximum and minimum limit of the partners. The minimum limit is 2 and maximum is 10 and in case of banking business, the maximum limit is 20.

In India, registration of a partnership firm is not mandatory. You may or may not register but it is safer and advisable to register the firm. 

The formation of a Partnership firm is easy and there are a lot of benefits in creating a partnership firm. There is more capital generation and in case of losses, they are dividedly incurred by all the partners. As there are many people, there is a mixture of skills and talents which increases creativity in the firm. Thus due to its various merits many people opt for the partnership firm. 


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