Partnership Firm

Author: V S Warrier
A partnership is the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting or all. In India it is governed by the Indian Partnership Act, 1932, which extends to the whole of India except the State of Jammu and Kashmir. It came into force on 1st October 1932.

Partnership is a form of business organisation, where two or more persons join together for jointly carrying on some business. 

It is an association of persons and the agreement by which a firm purports to enter into a partnership with an individual or another firm merely makes the partners of that firm individual partner of the larger partnership. A firm as such cannot enter into an agreement as a partner with another firm or individuals.
It is an improvement over the “Sole –trade businesses”, where one single individual with his own resources, skill and effort carries on his own business. Due to the limitation of resources of only a single person being involved in the sole-trade business, a larger business requiring more investments and resources than available to a sole-trader, cannot be thought of in such a form of business organisation.
A partnership agreement can be entered into between persons who are competent to contract. Every person who is of the age of majority according to the law to which he is subject and who is of sound mind and is not disqualified from contracting by any law to which he is subject can enter into a partnership. 
Therefore, when one partnership enters into a partnership agreement with another partnership firm, the partnership is in fact between all the partners of both the firms. 
The word ‘Person’ in section 4 of the Partnership Act contemplates only natural or artificial or legal person and a firm is not a person and as such not entitled to enter into a partnership with another firm or Hindu Undivided Family (H.U.F) or individual. In this view of the matter there can arise no question of registration of a partnership purporting to be between three parties’ viz. a firm, a H.U.F. and an individual as a firm.
Following can enter into a partnership

  • : An individual, who is competent to contract, can become a partner in the partnership firm. If there are more than two partners in a firm, an individual can be a partner in his individual capacity as well as in a representative capacity as Karta of the Hindu undivided family.
  • : A partnership firm is not a person and therefore a firm can not enter into partnership with any firm or individual. But a partner of the partnership firm can enter into partnership with other persons and he can share the profits of the said firm with his other co-partners of the parent firm.
  • : A Karta of the Hindu undivided family can become a partner in a partnership in his individual capacity, provided the member has contributed his self acquired or personal skill and labour.
  • : A company is a juristic person and therefore can become a partner in a partnership firm, if it is authorized to do so by its objects.
  • : Trustees: Trustees of private religious trust, family trust and trustees of Hindu mutts or other religious endowments are juristic persons and can therefore enter into partnership, unless their constitution or objects forbid.

Any two or more than two persons can join together for creating Partnership. Section 11 of the Companies Act, 1956 imposes limit as to maximum number of persons in a partnership for the purpose of carrying:

  • Banking Business – There can be a maximum of 10 persons.
  • Any other purpose – There can be a maximum of 20 persons.

 The number of partners in a firm shall not exceed 20 and a partnership having more than 20 persons is illegal. If the number of members in any association exceeds the above stated limit, that must be registered as a company under Companies Act, 1956 otherwise that will be considered to be an illegal association.
 When there is partnership between two firms, all the partners of each firm will be taken into account. If the partnership is between the Karta or member of Hindu undivided family the members of the joint Hindu family will not be taken into account.

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