Partnership

Partnership is a relationship between persons who have agreed to share the profits of a business carried on by any or all of them as stated in Section 4 of the Indian Partnership Act. Therefore, a partnership has three essential elements.

• A partnership must be an agreement between two or more persons.
• An agreement should be made to share the profits received from the business.
• The business must be run by all or one of them representing the rest.

All of these conditions must exist together before a partnership can exist.

Essential elements of partnership - Agreement

The partnership is the result of an agreement between two or more persons. It should be noted that this type of deal can only arise from a contract, not from a situation. This is why a partnership is considered different from a Hindu Undivided Family running a family business. The reason is that such an alliance is formed only with mutual consent. The nature of the partnership is voluntary and contractual.

An agreement by which a partnership relationship arises may be expressed. It can also refer to the partnership acts performed by the partners and the consistent course of conduct adopted reflecting the mutual understanding between them. The agreement could be oral or in writing.

Sharing business profits

When it comes to sharing business profits, two propositions should be considered. First, there must be a business that is in existence. For this purpose, the term 'business' shall generally mean every trade, business, and profession. The survival of a company is important. The purpose of a business is to "make profits" which is what forms a partnership. Therefore, there cannot be any partnership where there is no intention to run a business and share the profits derived from it. Any charitable organization or club cannot be called a partnership. However, a joint stock company can be started as a partnership for non-economic purposes.

Second, there should be an agreement regarding profit sharing. For example, A and B buy some bales of cotton which they agree to sell in their joint account and share the profit equally. In such a situation, A and B are partners in respect of the business which they have planned. However, a loss-sharing agreement is not an essential element that is considered. However, in the event of damage, unless otherwise agreed, these should be borne in the profit-sharing ratio.

Types of Partnership

There are two types of partnerships which are as follows.

• Partnership at will

A partnership by will is a partnership where no provision is made by contract between the partners for the duration of their partnership, or for the determination of their partnership.

• Special partnership

A special partnership is when a person becomes a partner with another person in a particular business enterprise or for a particular business enterprise or undertaking, such as building a road, laying a railway line, etc. It ends upon completion of the work for which it was initially created.