When two or more people agree to a specific clause and enter upon a business agreement, they are called business partners. They share the profit as well as other liabilities of a firm. As per the Indian Partnership Act of 1932, “Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.” This act also mentions vital elements of a partnership which form an essential part of an agreement.
What are the Essential Elements of Partnership?
The Indian Partnership Act, 1932 talks about five necessary elements included in a partnership deal. Without these, an agreement to partnership is incomplete. The five elements of a partnership are as follows.
1. Contract for Partnership
Partnership in business is contractual in nature. Thus, a contract is the most critical point in partnership and its essential elements. When two people mutually agree on several partnership norms, it is supposed to be validated through an official contract. Since partnership is not an act of law, statute, or inheritance, it has to be voluntarily agreed upon by the parties in the form of a contract. This is why even inheritors of a partner have to get into a contractual agreement before they take over the partnership rights of the deceased.
In case of any dispute between the partners, the partnership contract is to be referred upon. The partnership contract can be settled either in a written document form or an oral agreement. In some cases, the agreement is implied by mutual trust and continued actions of partners.
2. Association of Two or More People
This is one of the characteristics elements of the partnership. It determines the total number of participants in a business partnership. The Indian Partnership Act does not specify any restrictions on the maximum number of partners in a business firm. However, the Companies Act of 2013 mentions the maximum number of partners which a business firm can hold. In the case of banking firms, the number cannot exceed 10. While for other firms, the maximum number of partners could go up to 20.
The Partnership Act prohibits minors from participating in business partnerships. Minors can only become partners in business when other partners agree upon it.
3. Carrying on of Business in a Partnership
This element of a partnership determines the functioning of day to day activities in a firm. This element has two aspects to it. The first is which kind of business the firm is running, and the second is its goals. Partnership firms can include any business related to trade, occupation, or profession, but it has to have some profit motives. A firm indulging in charitable work cannot be termed as a partnership.
Co-partners of the firm mutually decide on how the daily functioning of the business will be dealt with. Partners might have an equal say in this aspect, or the managing partner might have a greater say in it.
4. Sharing of Profits Between the Business Partners
Profit-sharing is one of the most crucial elements of a partnership. The profit-sharing ratio or system of sharing profits might vary from one firm to another. However, the fact that a single partner cannot be entitled to the entire profit of a firm is certain. The sharing of losses in a partnership is also relative. It depends on what the partners had previously agreed upon. In some firms, losses are shared in the same ratio as that of profit.
Among the Uniform Partnership Act three key elements, various norms, and rules regarding profit sharing are explained. It was first drafted in the year 1914. There have been few amendments in the Act to modify partnership norms and structure.
5. Mutual Agency in a Partnership Deal
This is an essential element of partnership which states that the business can either be carried out by partners themselves or any other party acting for all of them. This, too, is decided on a contractual basis by partners.
Mutual agency in a firm suggests that each partner is a principal as well as an agent for all the other partners in that business. A step taken or act done by any of the partners is binding on all other partners. This makes every partner bound by the acts of all other partners in a firm. This is an important element of a partnership and can be referred to as a true test of partnership.