True Test of Partnership – Explanation
A partnership is a term that leads to two people or a group of people signing a bond to share the profits, shares, responsibilities, losses, etc., with each other in a certain percentage of the overall figure.
There is a partnership act that states all the facts and rules about any partnership and everyone is expected to be aware of those and are obliged to follow them. All the rules and regulations are decided on the business front, and whoever is wanting to be a part of it must agree to all the terms and conditions applied. Partners are also expected to have common views and backgrounds, as it helps in maintaining a healthy relationship.
Important Factors in the Test of Partnership
The supreme court of justice has given out a set of essentials that the parties should consider before signing in for the partnership deed. Those essentials are listed below:
1. Mutual Agency - All the legal deeds and percentage decisions are supposed to be mutual and nobody is allowed to have a fair trade deal. Nobody is allowed to be treated favourably, the shares and percentages are decided mutually with everybody's consent.
2. Profit Sharing - Neither of the partners is allowed to deny the offered percentage share, even when they hire any kind of legal party.
3. Agreement - It is a tangible document that has to be signed by both parties and is treated as the final paperwork to do any kind of business. It includes all the rules, issues, and concerns of the company.
4. Capital - Without the capital, a business partnership cannot even take place. The partners are not bound to put in an equal amount of capital, it is up to the parties and they get to decide the final percentage. But a certain amount of capital is compulsory.
5. Sub partnership - This phenomenon is helpful for people who like to invest in more than one company.
6. Subletting - This contract doesn't hold much power because it is not considered by the Supreme Court.
7. Salary - The salary also plays an important role in a partnership. When the business fluctuates, the right amount of salary is to be decided as per the capital invested in the business.
This is all about how a partnership is formed and works. All these elements are the pillars for a successful and healthy partnership. The Indian partnership act 1932 may also help you get a detailed idea about the partnership.
FAQs on The True Test of Partnership: Key Indicators
1. What is considered the 'true test' of a partnership according to the Indian Partnership Act, 1932?
The true test of a partnership, as established by law and court judgements, is mutual agency. This means that each partner acts as both an agent and a principal for all other partners. An act done by one partner on behalf of the firm binds all other partners. While profit sharing is a key feature, it is only prima facie evidence (i.e., evidence at first sight) and not the conclusive test. The existence of mutual agency is the definitive indicator of a true partnership.
2. What are the essential features or characteristics of a partnership firm?
A partnership firm is defined by several key characteristics that must be present. The most important features include:
- Agreement: There must be an agreement, which can be oral or written, between two or more persons.
- Business: The agreement must be to carry on a lawful business. A joint ownership of property does not constitute a partnership.
- Profit Sharing: The objective must be to share the profits of the business. 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 is the cardinal principle and the true test of partnership.
3. Why is mutual agency considered a more conclusive test for a partnership than profit sharing?
Mutual agency is a more conclusive test because sharing profits can occur in various situations that are not partnerships. For example, a lender who receives a share of profits for a loan, or an employee who gets a share as a performance bonus, are not partners. They do not have the authority to act on behalf of the business and bind others. In a true partnership, every partner has this authority, making mutual agency the core element that legally distinguishes a partnership from other forms of business association where profits might be shared.
4. What are the main types of partnership recognized in business?
Partnerships can be classified based on liability and duration. The main types include:
- General Partnership: All partners have unlimited liability and typically have the right to participate in management.
- Limited Liability Partnership (LLP): A separate legal entity where partners have limited liability, protecting their personal assets from business debts.
- Partnership at Will: Formed for an indefinite period, and can be dissolved by any partner by giving notice to others.
- Particular Partnership: Formed to carry out a specific project or venture. It dissolves automatically upon the completion of that venture.
5. How does a partnership differ from a Joint Hindu Family (HUF) business?
A partnership is fundamentally different from a Joint Hindu Family (HUF) business. A partnership is created by an agreement between partners, whereas an HUF business arises by operation of law and membership is by birth. In a partnership, all partners typically have mutual agency. In an HUF, only the 'Karta' (the head of the family) has the authority to manage the business and bind the other members (coparceners).
6. Can a partner demand a salary or interest on the capital they have invested?
According to the Indian Partnership Act, 1932, if there is no partnership deed or the deed is silent on these matters, then no partner is entitled to receive a salary or any remuneration for taking part in the business. Similarly, no interest on capital is payable to any partner. These payments can only be made if they are expressly provided for in the partnership agreement.
7. What is the meaning of a 'sub-partnership' and is it recognised by the main firm?
A sub-partnership is an arrangement where a partner in a firm agrees to share their portion of the profits with an outsider. This creates a new partnership between the original partner and the third party. However, this sub-partner has no rights against the main firm. They cannot inspect the firm's books, interfere in its business, or claim any assets. The relationship exists only between the partner and the sub-partner, not with the firm itself.
