It is not quite easy to define the term ‘Partnership’. The definition given by Section 4 of the Act brings out very clearly the fundamental principle that each partner, when carrying on the business of the firm, is an agent as well as principal, and is probably the most business like definition of the term. The definition contains three elements which must be present before a group of persons can be held to be partners, namely;
(a) agreement among all the partners;
(b) agreement to share the profits of the business;
(c) the business must be carried on by all or any of them, acting for all. These three elements may appear to overlap, but they are nevertheless distinct.
The element of agreement in partnership distinguishes it from various other relations which arise by operation of law and not from agreement, such as, joint-owners, Hindu Undivided Family, etc.
TEST YOUR KNOWLEDGE
Multiple Choice Questions
1. The term ‘Partnership’ has been defined under ____ of the Partnership Act, 1932:
(a) Section 3
(b) Section 4
(c) Section 5
(d) Section 6
2. A partnership for which no period or duration is fixed under the Indian Partnership Act is known as:
(a) Unlimited partnership
(c) Particular partnership
(d) Partnership at will
3. The most important elements in partnership is:
(b) Sharing of profits
(d) Business to be carried on by all or any of them acting for all.
4. A firm is the name of:
(a) The partners
(b) The minors in the firm
(c) The business under which the firm carries on business
(d) The collective name under which it carries on business
5. A partnership formed for the purpose of carrying on particular venture or undertaking is known as:
(a) Limited partnership
(b) Special partnership
(c) Joint venture
(d) Particular partnership
6. In the absence of agreement to the contrary all partners are:
(a) Not entitled to share profits
(b) Entitled to share in capital ratio
(c) Entitled to share in proportion to their ages
(d) Entitled to share profits equally
7. A partnership at will is one:
(a) Which does not have any deed
(b) Which does not have any partner
(c) Which does not provide for how long the business will continue
(d) Which cannot be dissolved
8. What among the following is not an essential element of partnership:
(a) There must be an agreement entered into by all the persons concerned
(b) The agreement must be to share the profits of a business
(c) The business must start within six months from the date of agreement
(d) The business must be carried on by all or any one of them acting for all
Answers to MCQs
Question 1: Explain the provisions of the Indian Partnership Act, 1932 relating to the creation of Partnership by holding out.
Question 2: What is the true test of partnership?
Question 3: Enumerate the differences between Partnership and Joint Stock Company.
Answers to the Theoretical Questions
(i) Partnership by holding out is also known as partnership by estoppel. Where a man holds himself out as a partner, or allows others to do it, he is then stopped from denying the character he has assumed and upon the faith of which creditors may be presumed to have acted. A person may himself, by his words or conduct have induced others to believe that he is a partner or he may have allowed others to represent him as a partner. The result in both the cases is identical.
Example: X and Y are partners in a partnership firm. X introduced A, a manager, as his partner to Z. A remained silent. Z, a trader believing A as partner supplied 100 T.V sets to the firm on credit. After expiry of credit period, Z did not get amount of T.V sets sold to the partnership firm. Z filed a suit against X and A for the recovery of price. Here, in the given case, A, the Manager is also liable for the price because he becomes a partner by holding out (Section 28, Indian Partnership Act, 1932). It is only the person to whom the representation has been made and who has acted thereon that has right to enforce liability arising out of ‘holding out’.
(ii) Mode of determining existence of partnership (Section 6): In determining whether a group of persons is or is not a firm, or whether a person is or not a partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts taken together. For determining the existence of partnership, it must be proved.
1. There was an agreement between all the persons concerned
2. The agreement was to share the profits of a business and 3. the business was carried on by all or any of them acting for all.
1. Agreement: Partnership is created by agreement and by status (Section 5). The relation of partnership arises from contract and not from status; and in particular, the members of a Hindu Undivided family carrying on a family business as such, or a Burmese Buddhist husband and wife carrying on business as such are not partners in such business.
2. Sharing of Profit: Sharing of profits is an essential element to constitute a partnership. But, it is only a prima facie evidence and not conclusive evidence, in that regard. The sharing of profits or of gross returns accruing from property by persons holding joint or common interest in the property would not by itself make such persons partners. Although the right to participate in profits is a strong test of partnership, and there may be cases where, upon a simple participation in profits, there is a partnership, yet whether the relation does or does not exist must depend upon the whole contract between the parties.
Where there is an express agreement between partners to share the profit of a business and the business is being carried on by all or any of them acting for all, there will be no difficulty in the light of provisions of Section 4, in determining the existence or otherwise of partnership. But the task becomes difficult when either there is no specific agreement or the agreement is such as does not specifically speak of partnership. In such a case for testing the existence or otherwise of partnership relation, Section 6 has to be referred.
According to Section 6, regard must be had to the real relation between the parties as shown by all relevant facts taken together. The rule is easily stated and is clear but its application is difficult. Cumulative effect of all relevant facts such as written or verbal agreement, real intention and conduct of the parties, other surrounding circumstances etc., are to be considered while deciding the relationship between the parties and ascertaining the existence of partnership.
(iii) Agency: Existence of Mutual Agency which is the cardinal principle of partnership law, is very much helpful in reaching a conclusion in this regard. Each partner carrying on the business is the principal as well as an agent of other partners. So, the act of one partner done on behalf of firm, binds all the partners. If the elements of mutual agency relationship exist between the parties constituting a group formed with a view to earn profits by running a business, a partnership may be deemed to exist.
3. Partnership Vs. Joint Stock Company
|Basis of difference||Partnership||Joint Stock Company|
|Legal status||A firm is not legal entity i.e., it has no legal personality distinct from the personalities of its constituent members.||A company is a separate legal entity distinct from its members (Salomon v. Salomon).|
|Agency||In a firm, every partner is an agent of the other partners, as well as of the firm.||In a company, a member is not an agent of the other members or of the company, his actions do not bind either.|
|Distribution of profits||The profits of the firm must be distributed among the partners according to the terms of the partnership deed.||There is no such compulsion to distribute its profits among its members. Some portion of the profits, but generally not the entire profits, become distributable among the shareholders only when dividends are declared.|
|Extent of liability||In a partnership, the liability of the partners is unlimited. This means that each partner is liable for debts of a firm incurred in the course of the business of the firm and these debts can be recovered from his private property, if the joint estate is insufficient to meet them wholly.||In a company limited by shares, the liability of a shareholder is limited to the amount, if any, unpaid on his shares, but in the case of a guarantee company, the liability is limited to the amount for which he has agreed to be liable. However, there may be companies where the liability of members is unlimited.|
|Property||The firm’s property is that which is the “joint estate” of all the partners as distinguished from the ‘separate’ estate of any of them and it does not belong to a body distinct in law from its members.||In a company, its property is separate from that of its members who can receive it back only in the form of dividends or refund of capital.|
|Transfer of shares||A share in a partnership cannot be transferred without the consent of all the partners.||In a company a shareholder may transfer his shares, subject to the provisions contained in its Articles. In the case of public limited companies whose shares are quoted on the stock exchange, the transfer is usually unrestricted.|
|Management||In the absence of an express agreement to the contrary, all the partners are entitled to participate in the management.||Members of a company are not entitled to take part in the management unless they are appointed as directors, in which case they may participate. Members, however, enjoy the right of attending general meeting and voting where they can decide certain questions such as election of directors, appointment of auditors, etc.|
|Registration||Registration is not compulsory in the case of partnership.||A company cannot come into existence unless it is registered under the Companies Act, 2013.|
|Winding up||A partnership firm can be dissolved at any time if all the partners agree.||A company, being a legal person is either wind up by the National Company law tribunal or its name is struck of by the Registrar of Companies.|
|Number of membership||According to section 464 of the Companies Act, 2013, the number of partners in any association shall not exceed 100.|
However, the Rule given under the Companies (Miscellaneous) Rules, 2014 restrict the present limit to 50.
|A private company may have as many as 200 members but not less than two and a public company may have any number of members but not less than seven. A private Company can also be formed by one person known as one person Company.|
|Duration of existence||Unless there is a contract to the contrary, death, retirement or insolvency of a partner results in the dissolution of the firm.||A company enjoys a perpetual succession.|