What is the Test of Determining Whether a Partnership between Persons Exists or Not. Explain the Essentials of Partnership.

Partners, Firm and Firm Name: The persons who have entered into partnership are individually called ‘partners’ and collectively a ‘firm’. The name under which they carry on the business is called ‘the firm name’.

Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all Section 4. Partnership Act, 1932. In simple words, partnership is the business relationship between two or more persons who have agreed to share the profits of their joint business.

Essential elements of partnership:

The definition of partnership itself reveals certain characteristics of partnership. These are:

Association of two or more persons:

There must be at-least two persons to form a partnership. Regarding maximum number, Companies Act, 1956 provides that where the firm is carrying on banking business, the number of partners should not exceed 10 and where the firm is carrying on any other business, the number of persons should not exceed 20.

An Agreement or Contract:

Partnership is the result of a contract. It does not arise from status, operation of law or inheritance. This is an important feature that distinguishes it from various other relations which arise by operations of law and not from an agreement. For example, at the death of father, who was a partner in a firm, the son can claim share in the partnership property but cannot become a partner. All the essential elements of a valid contract must be present in a partnership agreement. Section 5 provides that ‘the relation of partnership arises from contract and not from status’. The agreement need not be a formal or written agreement.

Business: 

Partnership is formed to carry on some business. The term .`business’ includes every trade, occupation and profession [Section 2 (b)]. The idea behind the business is to secure gain. Thus, if the purpose is to carry on some charitable or religious work, it will not be partnership.

Sharing of profits: 

The division of profits of a business is an essential element for the existence of partnership. Sharing of profits involves sharing of losses also, But sharing need not be equal. Partners can mutually agree to share profits in any way they like. But sharing of profits only does not make anyone a partner. It is only prima facie evidence of the existence of a partnership. The conclusive test is that of mutual agency.Firm the above, it can be concluded that a servant or an agent who receive share of profit as his remuneration, a seller of goodwill of a business who is getting a share of profit as consideration for sale of goodwill is not by reason of such facts alone, partners.

Mutual agency:  

This is the most essential principle of partnership. The partnership business may be carried on by all the partners or any (one or more) of them acting for all. Each partner is the agent of the firm as well as other partners. He can bind the firm by his acts done in the usual course of business. Similarly, a partner may be bound by the act of the other partners.Thus, the question whether a person is or is not a partner depends on whether he can bind others by his act or be bound by the act of others. It’is not necessary that every partner must actively participate in the conduct of the business. The important point is that the business must be carried on behalf of all the partners.