Individual partners in a partnership are called ” Partners “; a partnership firm, collectively, is called a ” Partnership Firm “; and the name under which their business is conducted is called ” Firm Name ” ”
An individual that makes up a partnership firm deed does not form a separate legal entity. It is merely the collective name of the individuals who make up that firm. As a result, a firm cannot possess property or employ servants, nor can it be a debtor or creditor, nor can it sue or be sued by others, unlike a company, which has a distinct legal entity separate from its members.
The use of terms such as “firm’s property”, “employee of the firm”, “suit against the firm” and so on in commercial usage is only for convenience, but in law, all of these terms refer to “the property of the partners”, “the employees of the partners”, and “suit against the partners”.
It is important to emphasize that a partnership firm agreement is an entity that is distinct from the partners composing it, and it can be accessed separately for tax purposes. As a result of the fact that a partnership firm does not have a separate legal entity of its own, they are treated the same under all other laws.
Indian Partnership Act, 1932 governs partnership firms. Section 4 of the Act states:
“ A partnership is a relationship between two or more persons who have agreed to share the profits of a business that’s conducted by them all or by any of them acting for them all”
Thus, as per the above definition, a partnership consists of five elements, namely: (1) a contract; (2) a relationship between two or more individuals; (3) an agreement to run a business; (4) a profit-sharing agreement; and (5) the business must be conducted by all or any of them acting on their behalf.
Partnership Firms: 5 Essential Elements
It is essential for all 5 elements of a partnership firm deed to exist in order for a partnership to exist. If any of the 5 elements is not present, there can not be a partnership. The 5 elements of a partnership firm deed are explained in more detail below.
1. Partnership Agreement
Unlike status, operation of law or inheritance, partnership firm results from a contract. At the death of the father, who was a partner in the partnership firm, the son is entitled to the partnership estate, but cannot become a partner until the other partners agree to make him a partner.
HUFs engaged in family businesses cannot be regarded as partners since their relationship does not arise from a contract, but rather from their status. Thus, a “contract” is the very foundation of partnership.
2. A partnership can have a maximum of 20 partners
As a result of a contract, at least two people are required to constitute a partnership. The Indian Partnership Act, 1932 does not specify a maximum number of partners. However, a partnership containing more than ten partners in a banking business or more than twenty in any other business would be illegal under the Companies Act. As a result, these are the maximum numbers of partners for a partnership firm.
It is only competent individuals who can enter into a partnership contract. Persons can be either natural or artificial. Companies, as artificial legal entities, may enter into partnerships if they are permitted to do so by their Memorandum of Association. It is also possible for 2 companies to form a partnership (Steel Bros. v. Commissioner of Income Tax).
A The partnership firm cannot enter into a partnership contract with another partnership firm or individual, as it is not recognized as a legal person with a separate legal entity from that of its partners (Duli Chand vs Commissioner of Income Tax).
It is the law that the members of a partnership firm (under a firm name) are considered partners in their individual capacity when they enter into a contract of partnership with another partnership firm or individual (Jadavji Narsidas & Co. Vs Commissioner of Income Tax).
3. Having a partnership carry on business
Having agreed to carry on a business is the third element of a partnership. The term “business” is used broadly to refer to all trades, occupations and professions. As a result, if the purpose of the partnership is to conduct charitable work, it is not a partnership.
In the same way, even if a group of individuals decides to share the income from a particular property or divide the bulk goods purchased amongst themselves, there isn’t a partnership, and such individuals cannot be called business partners since in neither case are they carrying on a business.
As a result, where A and B purchased a tea shop together and incurred additional expenses for pottery and utensils, contributed equally to it, and then leased the shop out on a rent basis, it was held that they were only co-owners of the shop and not partners, since they had never carried on business together.
4. Profits are shared
An essential element of the business agreement is that profits must be shared by all partners as part of the business agreement. In other words, there would be no partnership if the business was run for philanthropic purposes instead of profit making or if only one partner was entitled to the entire profits of the business. Profits may, however, be shared in any ratio agreed upon by the partners.
Losses should not be shared
For a partnership to form, it is not necessary that the partners share losses. It is possible for one or more partners to agree to bear all losses of the business (Raghunandan vs Harmasjee).
Additionally, the partnership deed should specify exactly how profits/losses will be shared. This would be the case if the partnership deed did not mention it, as the Partnership Act, 1932 stipulates that profits and losses must be equally distributed among all partners.
While a partner may not share in a business’s losses, his liability to outsiders remains unlimited even though he cannot share in its losses. A new form of partnership, the Limited Liability Partnership, has been introduced in India for those partners who wish to limit their liability towards outsiders. Limited Liability Partnerships limit the liability of partners towards outsiders.
5. Partnerships based on mutual agency
During a partnership, all or some of the partners must carry out the business together, i.e. there must be a mutual agency between them.
Partners are both agents and principals for themselves as well as their other partners, that is, they can bind other partners by their acts and be bound by their acts. In addition to enabling every partner to carry on the business on behalf of others, the element of mutual agency is also important.