True Test of Partnership

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The partnership is a phenomenon of maintaining business by two or more persons with the sharing of profit, work, responsibilities, etc. All the norms are to be decided in the business entry-level itself, and everyone should commit to these terms and conditions. So, let us discuss what a partnership is and what is the test of partnership to be performed to understand it's reliability.

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Test of Partnership

According to section 6 of the Indian partnership act, before starting the business, all the partners need to be aware of all the duties and the position in that particular business and should commit to those duties willingly. Here it is important to have a common opinion for all the partners, which helps to maintain a healthy relationship in the business as well as in personal life. The conduct and intention of both parties will decide the duration of a relationship.


Essentials for the Test of Partnership

According to the supreme court judgment in a particular case, every partner should consider the following essentials are parameters to test the reliability of the partnership. The agreement and profit sharing will play a significant role in the partnership contract. So let us discuss each parameter elaborately. 

  1. Mutual agency: The mutual agency is the major parameter for the true test of partnership. Because the equal ratio of profit sharing and delegation of duties will be assigned with mutual consent. All the legal bodies accept it. It includes the payment of interest for the capital like 6%, ownership is not specific to a single partner, and also while diminishing the form both the partners should be agreed and implemented. It should not be favourable to any of the partners. Every movement in the business should be transparent to all the partners.

  2. Profit-sharing: Profit sharing is the key essential component for a true test of partnership. Due to the majority of the partners were dispersed and got clashes because of this profit sharing. In England, It is proved that profit sharing is a perfect test for the partnership act. None of the partners should deny the share percentage of profit even in the presence of legal bodies or any other. It doesn't change the position of either of the partners.

  3. Capital: Capital is the major source of any kind of business. For that capital, there is no restriction for the partners to contribute all of them equally. Based on their mutual concern, the contribution of capital may or may not be required. There is no particular rule for the contribution of capital for a business.

  4. Agreement: An agreement is physical documentation of all the rules and obligations and activities which all the partners need to follow properly. It is tangible proof during the case of solving disputes if any occurs. As the agreement consists of all issues involved in the business, it plays a significant role in the test of partnership.

Besides these parameters, we also have some additional elements for the test of partnership,  which play their role in specific situations. They are as follows-

  • Salary: salaries and another important factor used for the test of partnership. As we already knew that all the partners should not contribute the capital, some of the partner's may render their services and will take an amount of salary in return, but it becomes difficult to share the profit along with the salary during the fluctuations of business. In this case, the true test of partnership has been done by the salary parameter.

  • Sub-partnership: support partnership is a phenomenon of sharing the share of profit to his subordinates. Some people may like to invest in multiple businesses, but it is difficult to look after all of them, so they may assign or share their profit percentage to their subordinates or sub-partners.

  • Subletting: it is another distinct factor for the true test of partnership. Easily, we can say that it is the substitution of and a good one in the place of the original partner. But it is completely prohibited by the Supreme Court, and the contract can be avoided.


Conclusion

Hence partnership is beneficial if all the norms are perfectly followed without any malpractices. Every factor has its own identity in performing the true test of partnership. As it has a vast scope, the Indian partnership act 1932 will give a complete idea to the new businessman.

FAQ (Frequently Asked Questions)

1. What is Partnership and What are its Features?

Ans. The partnership is a process of making a formal arrangement to run a business by joining with others. The partners need to share both assets and liabilities, duties, Capital if necessary, etc. The partners can operate all the activities of a business with mutual concern.  The attributes are as given below - 

  • It should help the mutual contribution of both assets and liabilities.

  • It involves both limited partners and general partners. 

  • The division of profits is essential.

  • It consists of a specific locking period.

  • all the rules should not violate the Indian Partnership act 1932.

2. What are the types of Partnerships?

Ans. It is of three types. They are as follows - 

  • General Partnership:- As the name itself says that it is a general partnership, which means a business handled by two or more partners with equal sharing of profit and liabilities, work, and other activities. They act as co-owners also. It is easy to establish, flexible to operate.

  • Limited Partnership:- It has a slight difference to the general partnership. In this, we have one general partner and one limited partner at least. The limited partner will not look after all the activities; he only invests the major capital of the business and takes the profit in return. They don't have any right to modify or take decisions.

  • Limited Liability Partnership:- LLP easily different categories which vary from one state to another. Generally, it has more limited partners who don't make any decisions. They provide capital to the business.

3. What are the pros and cons of a Business Partnership?

Ans. The Business Partnership has both merits and demerits. If one can understand properly and can make an agreement without violating any single rule, he can operate the business jointly for a long time.

A few of the advantages of Business Partnership are -

  • It doesn't have more formalities.

  • It has very few obligations.

  • It helps to share the burdens of business.

  • It gives a chance to utilize multiple resources and various skills on a single platform.

  • The decision-making process becomes as simple as it is shared.

  • The increase in partners gives rise to an increase in the capital as well as a decrease in work.

The Limitations of a Partnership are - 

  • It doesn't have individuality.

  • There is no privacy to make decisions.

  • High level of risk chances like various conflicts.

  • The profit must be shared, and we can attain less profit with an increase in partners.