Section 4 of the Act defines a partnership as the relationship between persons who have agreed to share profits of a business

carried on by all, or by any of them acting for all .

Essential Ingredients of a Partnership

(a) It is an association of two or more persons. (b) (i) Partnership agreement must also comply with all the conditions specified for a valid and legally enforceable contract - either expressed or implied (ii) A minor cannot become a partner in a new partnership firm, because, he is not competent to enter into a valid contract. He may be admitted into an existing partnership firm, but only to its benefits, and not for any losses. (iii)Particular Partnership i. e. for a fixed period; or for a particular project or job (Section 8) Thus, it is usually automatically dissolved on completion of the specified project, adventure or job, e.g. a team of two or more auditors, engaged in the audit of the accounts of a particular company.

Essential Ingredients of a Partnership

(b) (iv)A Hindu Undivided Family (HUF) business concern, which carries on the family business (inherited from the ancestors), by the members of the Joint Hindu Family (known as coparceners), cannot be deemed to be a partnership, because it does not emerge out of an agreement between the coparceners, but by virtue of their status, i.e. by virtue of their being born in that family. However, the members of a JHF may constitute a partnership by entering into an agreement amongst the coparceners, for carrying on the business as a partnership firm. Similarly, it cannot emerge by way of the operation of law either, like in the case of co-ownership or joint acquisition of a property.

Essential Ingredients of a Partnership

(c) Partnership agreement must be to carry on some business, like trade, occupation or profession [Section 2, Clause (b)], and that too, for earning some profit as also for sharing it (profit). Accordingly, a charitable society, a religious association, a club, etc., cannot be deemed to be a partnership (d) While sharing of the profit of the business (in equal proportion or in the specified percentage of the profit), is compulsory, the sharing of loss of the business among the partners is optional, and, it does not adversely affect the constitution of a partnership. But if, no provision has been made in the partnership agreement (partnership deed) in regard to the sharing of the firms profit, all the partners of the firm will share it in equal proportions.

The Terms, PARTNERS and NAME OF THE FIRM Defined

Two or more persons, involved in the agreement of partnership, in their respective individual capacity, are referred to as partners. Further, these persons collectively constitute a partnership. The name under which a partnership firm carries on its business is referred to as partnership firms name. But such name should not infringe upon the trade name and/or goodwill of any other existing firm or company having the same or very similar name, so as to mislead and confuse the members of the public.

The Terms, PARTNERS and NAME OF THE FIRM Defined Contd

The name of a firm should not contain any of the words like Crown, Emperor, Empress, Empire, Imperial, King Queen, Royal or such other words, which may express or imply the sanction, approval or patronage of the government. Section 58 (3). This can be done in exceptional cases, but with the written and specific consent of the government.

A partnership has no legal significance or existence. It is not a legal entity (unlike a joint stock company) Further, all the persons sharing the firms profit are not necessarily its partners (Section 6). For example, (a) The creditors, who supply goods to the firm on credit, or the bankers, who lend money to the firm; (b) The employees, officers, servants or agents, who receive their remunerations out of a share in its profit; (c) The widow or child of a deceased partner; who is paid as an annuity, out of its profit;; and (d) The previous owner, or part-owner of the firms business, who is paid out of its profit, in consideration of the sale of goodwill, or share thereof, to the firm.

Main Features on Which Some Similar Organsiations Differ from Partnership

(a) Hindu Undivided Family (HUF) Business [Section 5] (i) A Hindu Undivided Family (HUF) business concern, is not a partnership, because, a HUF business venture does not emerge out of an agreement, but by virtue of their status, i.e. by being born in that family. (ii) All the male minor members of the family, including a baby boy right from his birth, automatically become members of the HUF business. (iii)Thus, all the male minor members of the family, including a baby boy right from his birth, automatically become members of the HUF business. (iv)But, a female child, born in the same family, cannot become a member of the HUF business.

Main Features on Which Some Similar Organsiations Differ from Partnership

Contd

(a) Hindu Undivided Family (HUF) Business [Section 5] (v) HUF firm does not get dissolved, and remains unaffected, even after the death of any of its members. (vi) Here, usually only the Karta of the HUF firm is authorised to enter into any agreement on behalf of the HUF firm, so as to bind it by his acts. That is, here the arrangement of a mutual agency does not operate amongst the members of the HUF firm. (vii) The liability of the Karta of the HUF firm alone is unlimited. That is, the liabilities of the other members of the HUF firm are limited only to the extent of their share in the profit of the business of the HUF firm.

Main Features on Which Some Similar Organsiations Differ from Partnership

(b) Co-ownership or Joint ownership

Contd

(i) Co-ownership or joint ownership of a particular property, like a house property, though arising out of a contract between two or more persons, cannot constitute a partnership, because the element of agency (i.e. the representation of one co-owner by another) is missing in such arrangement. (ii) Similarly, two or more real brothers may inherit a house after the death of their father. They are thus, co-owners of the house property, not out of any contract but by virtue of being born as brothers in the same family.

Main Features on Which Some Similar Organsiations Differ from Partnership

(b) Co-ownership or Joint ownership

Contd

(iii)Here, the joint owners and co-owners may or even may not carry on some business. Accordingly, the element of sharing of profit and losses may or even may not be present in such cases. (iv)No co-owner or joint owners can operate as an agent on behalf of the other co-owner(s).or joint owners. (v) Every co-owner or joint owners can transfer his interest in the property to any third party, even without the consent of any of the remaining co-owner(s) or joint owner(s). A co-owner can even claim division of the joint property in specie.

Main Features on Which Some Similar Organsiations Differ from Partnership

(c) Club

Contd

(i) A club is an association of persons, who join together, not for carrying on any gainful business for earning any profit, but with the objective of promotion of some beneficial or social services. (ii)Further, a member of the club is not liable to the creditors of the club, except to the extent of his being a party to a particular contract, which gave rise to such liability.

Main Features on Which Some Similar Organsiations Differ from Partnership

(d) Joint Stock Company

Contd

(i) A company is a separate legal entity, distinct from its shareholders. (ii) The shareholders of a company do not act as an agent to the other shareholders. (iii)The liabilities of the shareholders of a limited (liability) company are limited to the extent of their own holding of the shares in the company, or to the extent of the amount which remains unpaid on the holding of their own shares in the company, or to the extent of the amount of guarantee, as stated in the Memorandum of Association of the company. However, in the case of an unlimited (liability) company, the liabilities of its shareholders are unlimited.

Main Features on Which Some Similar Organsiations Differ from Partnership

(d) Joint Stock Company

Contd

(iv) A shareholder can freely transfer his own shares in favour of any other person, in the stock exchanges through a broker, or even privately to his relatives or friends, and so on. But such transfer will be subject to the restrictions specified in the Article of Association of the company concerned. But then, the shares of a private limited company cannot be transferred without a specific approval of the remaining shareholders thereof. (v) A company does not necessarily get dissolved with the death of any of its members or shareholders, nor in the event of any of its members or shareholders retiring or being declared insolvent, because, a company is a separate legal entity, distinct from its shareholders.

Main Features on Which Some Similar Organsiations Differ from Partnership

(d) Joint Stock Company

Contd

(vi) (a)A private company can be constituted with a minimum number of its shareholders as 2. (b)A public company can be constituted with a minimum number of its shareholders as 7. (vii) (a)A private company can have the maximum number of its shareholders as 50. (b)A public company, however, has no limit (ceiling) on the number of its shareholders.

Main Features on Which Some Similar Organsiations Differ from Partnership

(d) Joint Stock Company

Contd

(viii)It is a statutory obligation on the part of a company to gets its account audited at least annually, by a certified Chartered Account, or by a team of certified Chartered Accounts. Besides, the companies are also required to publish, in some daily newspapers of repute, their unaudited Balance Sheets at quarterly intervals (earlier it was at half-yearly intervals). (ix) All the companies are compulsorily required to get themselves registered with the Registrar of Company of the State where their head office happens to be located.