Nature of Partnership or Partnership Firm

The below-mentioned article provides a full explanation of the Nature of Partnership or Partnership Firm…

“Partnership is the relation between two or more group of persons who have agreed to share the profits of a business and bear the losses equally to carried on by all or any of them acting for all”.

Nature of Partnership or Partnership Firm:-

The points are:-

1. Contract
2. Association of two or more persons
3. Carrying on of business
4. Sharing of Profits
5. Mutual Agency

All the above nature or elements must coexist in order to constitute a partnership. If any of these factor or function is not present, there cannot be a legal partnership. We now discuss these elements one by one:

1. Contract-

This is the first or primary nature and it means partnership is the result of a contract. It does not initiate from status, the operation of law or endowment. Thus at the death of the father, who was a partner in a firm, the son can claim a share in the partnership property but cannot become a partner unless he/she enters into a legal contract for the same with other or different persons concerned them.

Similarly, the members of Joint Hindu Family carrying on a family business cannot be called partners for their relation arises not from any contact but from status. To emphasize the element of the contract, Section 5 expressly provides that “the relation of partnership arises from contract and not from status.”

2. Association of two or more persons-

This is the second or secondary nature and it means partnership is the result of a contract, at least two persons are necessary to constitute of partnership. The combination of mixed persons (two or more) are formed the new business is called a partnership firm.

For the purpose of building the joint business, the two or more persons are very important. This Act does not mention anything about the maximum number of persons who can be partners in a firm but Section 11 of the Companies Act, 1956, lays down that a partnership consisting of more than 10 persons or individuals for banking sector or business and 20 persons for any other sector or business would be imposed or illegal.

Hence these factors should be regarded as the maximum limits to the number of individuals in a partnership or partnership firm.

3. Carrying on of business-

This is the third or territory nature and it means is that the parties must have agreed to carry on a business. The term ‘business’ is used in its widest sense and included every trade, occupation or profession.

If the purpose is to carry on some charitable activities, it will not be a partnership. Similarly, if a number of persons agree to share the income of a certain property or the divide the goods purchased in bulk amount amongst themselves, there is no partnership and such persons cannot be called partners because in neither case they are carrying on a business.

Business is a very complex thing because it has various social responsibilities towards different areas like customers, market, community, and so on.

4. Sharing of Profits-

This is the fourth nature and it means it provides the agreement to carry on business must be with the object of sharing profit amongst all the partners. Impliedly the partnership must aim to make profits because then only profits may be divided amongst the partners.

Thus, there would be no partnership where the business is carried on with a powerful motive and not for making a profit or where only one of the partners is eligible to the whole or full of the gaining profits of the business.

5. Mutual Agency-

This is the fifth nature and it means it provides that the business must be carried on by all the partners or any (one or more) of them acting for all, that is, there must be the mutual agency.

The importance or benefit of the function of mutual agency lies in the fact that it enables every partner to carry on the business on behalf of others. This element or function is very beneficial for any success or growth of any business.