The Indian Partnership Act of 1932 provides the legal framework for partnership firms in India. The Act outlines the rights and duties of partners between themselves and other legal relations that arise from partnerships. It also establishes the position of partners and partnership firms vis-à-vis third parties in legal and contractual relationships that arise from the course of a partnership business. In this comprehensive guide, we will delve into the various aspects of running a partnership firm in India.

Partnership

A partnership is a relationship between two or more individuals who have agreed to share the profits of a business carried on by all or any one of them acting for all. According to Section 4 of the Indian Partnership Act, a partnership consists of three essential elements:

1. An agreement between two or more individuals
2. The agreement must be built to share the profits obtained from the business.
3. The business must be run by all or any of them representing the rest.

These three conditions must coexist before a partnership can come into existence.

Essential Elements of a Partnership

To form a partnership, certain key elements must be present. Let’s look at each element in detail:

    1. An Agreement

A partnership arises from an agreement between two or more persons. It is important to note that such an agreement can only arise from a contract and not from status. Therefore, a partnership is distinguishable from a Hindu Undivided Family carrying on a family business because this kind of alliance arises only from mutual agreement. Thus, the nature of a partnership is voluntary and contractual.

The agreement that gives rise to a partnership may be express or implied from the Partnership Act done by the partners and from a consistent course of conduct being followed, showing a mutual understanding between them. This agreement may be in oral or in writing.

     2. Sharing Profit of Business

Two propositions must be considered when it comes to sharing profits of a business:

a. There must be a business that exists. For this purpose, the term ‘business’ would generally mean every trade, occupation, and profession. The motive of a business is the “acquisition of gains” that leads to the formation of a partnership. So, there can be no partnership where there is no intention to carry on a business and to share the profits obtained from the same. For example, co-owners who share the rent derived from a piece of land are not considered partners as a business does not exist. Similarly, no charitable institution or club may be called a partnership. However, a Joint Stock Company may be floated as a partnership for non-economic purposes.

b. There must be an agreement concerning the sharing of profits. For example, A and B buy certain bales of cotton which they agree to sell on their joint account and to share the benefits equally. In such a situation, A and B are partners in respect to the business they have planned out. However, an agreement to share the losses is not an essential element that is considered. However, in the event of damages, unless agreed otherwise, these must be borne in a profit-sharing ratio.

    3. Running the Business

The third requirement for a partnership is that the business must be carried on by all the partners or by one or more of the partners acting for all. This is the crucial principle of partnership law. An act of one partner in the course of the business of the firm is, in fact, an act of all partners. A partner carrying on a business is the principal as well as the agent for all the other partners. Therefore, it should be noted that the real test of a partnership is mutual agency rather than sharing profits. If the element of interactive agency is absent, then there will be no partnership. Sharing of benefits is the only Prima Facie evidence which partners have a duty to act in good faith towards each other and towards the partnership. This duty arises from the fiduciary relationship that exists between partners. Partners must not use the partnership’s property or information for their personal benefit, must not compete with the partnership, and must disclose any conflicts of interest.

Running a successful partnership requires effective communication, trust, and a shared vision for the business. Partners must be able to work together and make decisions collectively, while also respecting each other’s individual expertise and perspectives. It is important to establish clear roles and responsibilities, as well as processes for resolving disputes and making major decisions.