Introduction of Elements of Partnership
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.
A Partnership Firm's 5 Essential Elements
All the five essential elements of the partnership must be present to form a partnership. There can't be a partnership if any of these are missing. Listed below are the 5 elements:
Partnership Agreement: A contract results in a partnership. Social standing, the rule of law, or inheritance has nothing to do with the partnership agreement.
A Partnership can have a Maximum of 20 Partners: Because a partnership is the product of a contract, at least two people are required to form one.
Operation of Business in a Partnership: The parties must have agreed to carry on a business as the third necessary ingredient of a partnership. "Business" is the term that is used broadly to refer to any trade, occupation, or profession. As a result, if the goal is to do some charity work, it isn't a partnership.
Profits Sharing in Partners: one of the main elements of partnership is to show that the agreement to do business must have as its goal the distribution of profits among all partners. Therefore, if a business is carried for the sake of charity and no profit sharing is there between partners then there will be no partnership.
Mutual Agency between Partners: Another important aspect of the definition of a partnership is that the business must be carried on by all the partners or by any (one or more) acting on their behalf of them, i.e. joint agency.