LAW OF PARTNERSHIP

Sl.
No.
Partnership Joint Stock Compan
1. Minimum number is 2 and maximum
number is 10 in banking business and 20
in any other business.
Minimum 2 in private company and
7 in public company but maximum
number is 50 in private company
but no limit in public company.
2. It arises out of an agreement. It is created by procedure of la.
!. It is not a legal entity. "ompany is a legal entity.
#. $artners are personally liable for the
losses of the firm.
%hare&holders are not liable for the
losses in a company.
5. 'egistration is not mandatory except in
the state of Maharashtra.
'egistration is compulsory.
(. $artners are )ointly the oners of the
property of the firm.
$roperty of the company is not the
property of the shareholders.
7. It may be dissolved by agreement beteen
the partners.
It is ound up through legal
procedure.
*. +ll the partners are entitled to take part in
the management of the firm.
%hare&holders do not take part in the
management.
,. -very partner is an agent of the other
partners and of the firm.
+ member is not an agent of the
other members or of the company.
.is actions do not bind either.
10. + share in a partnership cannot be
transferred ithout the consent of all the
partners.
+ shareholder may transfer his
shares sub)ect to the provisions
contained in the +rticles. In the case
of $ublic /imited "ompanies the
shares of hich are 0uoted in the
stock exchange1 the transfer is
usually restricted.
11. 2he profits of the firm must be distributed
among the partners according to the terms
of the partnership deed.
3o such compulsion to distribute its
profits among its members. %ome
portion of the profits become
distributable among the
shareholders only hen dividends
are declared.

!e"inition #$
%ection # of the $artnership +ct11,!21 defines partnership 45$artnership is the relation
beteen persons ho have agreed to share the profits of business carried on by all or any
of them acting for all5.
2hough partnership may be implied from the conduct or course of dealing of the parties1
it is advisable to form a partnership by an agreement in riting. 2his agreement is called
a partnership deed hich should be ade0uately stamped as re0uired by the Indian %tamp
+ct1 1**,. 2he partnership deed contains names and addresses of the partners1 name and
address of the firm1 duration of the firm1 profit sharing1 management1 accounts1 etc.
Who ma %e partners&
+s stated above parties to the partnership must be competent to contract as provided by
%ection 11 of the Indian "ontract +ct. 2herefore1 every person ho is of age of ma)ority
according to the la to hich he is sub)ect to and ho is of sound mind and is not
dis0ualified from contracting by any la to hich he is sub)ect1 is competent to contract
and therefore may be a partner. %ome specific cases are as follos 4&
1. Minor 4 + minor cannot become a partner. .e may be ith the consent of the other
partners entered into the benefits of partnership.
2. /unatic 4 + person of unsound mind is not competent to contract and therefore cannot
become a partner.
!. +lien enemy 4 +n alien enemy cannot enter into a contract of partnership though an
alien friend can do so.
#. "orporation 4 + corporation being an artificial person can neither become a partner
nor can it enter into a partnership agreement.
5. + 6irm 4 + firm cannot be a partner of another firm though its partners can be in their
individual capacity 7Mahabir "old %torage v. ".I.2. $atna 8 1,,1 7%up719 %""&#029
Who are not partners&
1. 2he members of a .indu :ndivided 6amily carrying on a family business. .oever1
partnership contract inter se beteen undivided members of family is permissible.
:ndivided member of .:6 can enter into partnership ith the ;arta 7"handrakant
Manilal %hah v. "ommissioner of Income 2ax1 <ombay&+I' 1,,2 %" ((9
2. + <urmese <uddhist husband and ife carrying on business.
!. /ender of money to persons engaged or about to be engaged in any business1
receiving a rate of interest.
#. %ervant or agent engaged in a business and receiving remuneration.
5. =ido or child of a deceased partner1 receiving a portion of the profits as annuity.
(. + previous oner 7or part&oner9 of the business selling his business along ith the
goodill and receiving a portion of the profits in consideration of sale.
7. >oint or co&oners of property sharing profits arising from the property.
Characteristics or elements o" partnership #$
'. Association o" t(o or more persons #
+t least to persons should )oin together to constitute a partnership. $ersons
ho have entered into partnership ith one another are individually ?partners.
"ollectively1 they are called firm. + firm is distinct from its members but is not an entity
under the Indian $artnership +ct1 though under the Income 2ax +ct it has an independent
separate tax legal entity. 2he name under hich their business is carried on is called the
?firm name. $ersons ay carry on business under any name and style they may choose to
adopt provided that it is not misleading.
). A*reement #$
2he second important characteristic to determine the existence of partnership is there
must be an agreement entered into by all the persons ho come together to form a
partnership. 2he agreement may be express or implied.
+. ,-siness #$
<usiness is another essential feature of the partnership. =here a fe persons )oin
together for some charitable purpose1 the association cannot be termed as partnership.
2he term ?business@ includes every trade1 occupation and profession. For example, a
polyclinic can be started by to or more doctors on the basis of partnership.
.. Share pro"its o" the %-siness #$
+n agreement may not mention anything regarding sharing of losses as an agreement to
share the losses is not essential. -very man ho has a share in profits of a trade1 ought
also to bear his share of losses. 2hough sharing of profits impliedly involves sharing of
losses1 the partners beteen themselves may agree that one or more of them shall not be
liable for losses. 6urther1 partners may agree to share the profits in different proportions.
/. The %-siness m-st %e carrie0 on % all or an o" them actin* "or all$1-t-al
a*enc #
2he last and most important fundamental characteristic of the partnership is that the
business hich the partners agree to carry on must be carried on by all or any of them
acting for all. $ersons ho carry on the business1 do so as Aagents5 for all the persons in
the partnership. 2hey are ?agents@ for each other and ?principals@ for themselves. 2heir
relationship is governed by the ?la of agency@. 2he business is conducted by the active
partners under an implied authorityB to bind the other partners.
Test o" partnership
1-t-al A*enc #$
2he true test of partnership is mutual agency rather than sharing of profits. If this
element of mutual agency is absent1 then there ill be no partnership. 2he prima
facie evidence of partnership is mutual agency. -very partner carrying on the business
is the principal as ell as the agent of the other partners. %o1 the act of one partner
done on behalf of the firm1 binds all partners. %ection # of the Indian $artnership +ct1
1,!2 says is the relation beteen persons ho have agreed to share profits of the
business carried on by all or any of them acting for all. 2hus an implied agency flos
from their relationship as partners ith the result that every person ho conducts the
business of the firm is1 in doing so1 deemed in la to be the agent of all the partners.
7%ection 1*9