Definition of Partnership
Due to the expansion in the need of capital and managerial ability, sole proprietorship proved to be an unsuitable form of business organization and in order to supplement business with more capital and ability, partnership form of business organization appeared where more than 2 people contribute their abilities and capitals.
According to Prof.Haney, “Partnership is the relation existing between persons competent to contracts who agree to carry on a lawful business in common with a view to private gain”.
Partnership Act 1932 defines partnership as under:
“Partnership is the relationship between persons who have agreed to share profits of the business carried on by all or any of them acting for all”.
Essential Features or Characteristics of Partnership
A close analysis of the definition of partnership given in Partnership Act brings out clearly the following essential elements of partnership:
- Association of Persons:
There must be at least two persons to form a partnership. Thus one person cannot make a partnership. Company Ordinance 1984 defines the maximum limit of the partners that is 10 in the case of banking business and 20 in case of any other business. - Agreement:
Partnership must result from an agreement between persons desirous of forming partnership. The agreement between the partners may be oral or written. If the agreement is in written form, it is called Partnership Deed or Articles of Partnership.
3. Sharing of Profits:
The agreement which gives birth to partnership must be to earn and share profits. Agreement to share profits implies an agreement to share losses also. Agreement to share profits is essential but agreement to share losses is not essential.
4. Existence of Business:
Profits which are agreed to be shared by the partners must come from a business and not from any other source. A partnership exists in business and business only.
5. Mutual Agency:
The fundamental principle of partnership is that partners carrying on business of the firm are agents as well as principals. Mutual agency means that every partner has the authority to act for those who are his partners and all his partners have the authority to act for them.