Introduction of Elements of Partnership
When two or more people agree to a specific clause and enter upon a business agreement, they are called business partners. They share the profit as well as other liabilities of a firm. As per the Indian Partnership Act of 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.” This act also mentions vital elements of a partnership which form an essential part of an agreement.
A Partnership Firm's 5 Essential Elements
All the five essential elements of the partnership must be present to form a partnership. There can't be a partnership if any of these are missing. Listed below are the 5 elements:
Partnership Agreement: A contract results in a partnership. Social standing, the rule of law, or inheritance has nothing to do with the partnership agreement.
A Partnership can have a Maximum of 20 Partners: Because a partnership is the product of a contract, at least two people are required to form one.
Operation of Business in a Partnership: The parties must have agreed to carry on a business as the third necessary ingredient of a partnership. "Business" is the term that is used broadly to refer to any trade, occupation, or profession. As a result, if the goal is to do some charity work, it isn't a partnership.
Profits Sharing in Partners: one of the main elements of partnership is to show that the agreement to do business must have as its goal the distribution of profits among all partners. Therefore, if a business is carried for the sake of charity and no profit sharing is there between partners then there will be no partnership.
Mutual Agency between Partners: Another important aspect of the definition of a partnership is that the business must be carried on by all the partners or by any (one or more) acting on their behalf of them, i.e. joint agency.
FAQs on Elements of Partnership: Explained
1. What are the essential elements of a partnership as defined by the Indian Partnership Act, 1932?
According to the Indian Partnership Act, 1932, for a business relationship to be considered a partnership, it must include five essential elements. The absence of any one of these elements means a legal partnership does not exist. These elements are:
- Agreement: A partnership is formed by an agreement between two or more persons, not by status or inheritance. This agreement can be oral or written.
- Number of Persons: There must be at least two persons to form a partnership.
- Business: The agreement must be to carry on a lawful business. The term 'business' includes any trade, occupation, or profession.
- Sharing of Profits: The primary motive must be to share the profits of the business among all partners. Sharing of losses is implied.
- Mutual Agency: The business must be carried on by all partners or by any one of them acting for all. This means each partner is both an agent and a principal for the firm.
2. What is the minimum and maximum number of partners allowed in a partnership firm?
To form a partnership, a minimum of two partners is required. While the Indian Partnership Act, 1932, does not specify a maximum limit, the Companies Act, 2013 (Section 464) and the Companies (Miscellaneous) Rules, 2014, restrict the maximum number of partners in a firm to 50. If the number of partners exceeds 50, the association becomes illegal.
3. What is the difference between the 'Elements of Partnership' and a 'Partnership Deed'?
The 'Elements of Partnership' and the 'Partnership Deed' are related but distinct concepts. The Elements of Partnership are the five fundamental conditions (agreement, business, profit sharing, etc.) that must be met for a business to be legally recognised as a partnership. In contrast, a Partnership Deed is the formal written document that outlines the terms and conditions of this agreement, such as profit/loss ratios, salaries, and capital contributions. While the elements are mandatory for a partnership to exist, a written deed is not legally required but is highly recommended to avoid disputes.
4. Can a partnership exist if its purpose is charitable work instead of earning a profit?
No, a partnership cannot be formed for charitable purposes. A key element of a partnership is the agreement to share profits from a business. If the primary objective of an association is charity, philanthropy, or social welfare and not to conduct a business for profit, it cannot be legally considered a partnership under the Indian Partnership Act, 1932. Such an organisation would be classified as a non-profit entity or a trust.
5. What does the principle of 'mutual agency' mean in a partnership with a real-world example?
Mutual agency is the core principle that establishes the relationship between partners. It means every partner is both an agent (who can bind the firm with their actions) and a principal (who is bound by the actions of other partners). For example, if a partner in a textile firm places an order for raw cotton from a supplier, the firm is legally bound to pay for it, as the partner acted as an agent for the firm and all other partners.
6. What happens if one of the essential elements of a partnership is missing from an agreement?
If even one of the five essential elements is missing, the relationship will not be legally considered a partnership. The legal status of the association would change, and it would not be governed by the Indian Partnership Act, 1932. For instance, if a group of individuals jointly own a property and share its rental income, it is considered co-ownership, not a partnership, because the element of a 'business' being carried on is absent. This has significant implications for liability, authority, and the transfer of interest.
7. Is a written agreement absolutely necessary to form a partnership?
No, a written agreement is not mandatory. The essential element is the 'agreement' itself, which can be oral or even implied by the conduct of the parties. However, relying on an oral agreement is risky as it can lead to misunderstandings and disputes regarding profit sharing, roles, and responsibilities. Therefore, while not legally compulsory, a written agreement, known as a Partnership Deed, is always advisable for clarity and as legal proof of the terms of the partnership.
