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Partnership- What Is a Partnership? Explained!

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A partnership is a form of business wherein two or more people share ownership, as well as the responsibility for managing the company, the income or losses that the business generates. That income is paid to partners so he can claim it on their tax returns; the business is not taxed separately, as the corporations are, on its profits or losses. The entity is collectively called ?Partnership Firm,? and all the individual members are the ?Partners.?

The Indian Partnership Act 1932-

The act defines a partnership as ?the relation between two or more persons who have agreed to share the profits generated from a business carried on by either all of them or any of them on behalf of/acting for all.?

Partnership Deed-

An agreement between partners of the firm can be in written or can even be oral. However, it is strongly advised for legal and practical purposes that such an agreement or contract between the partners be in the written form. And this written agreement between partners to form a partnership firm is called ?Partnership Deed.?

Registration of Partnership-

According to the Partnership Act 1932, it is not compulsory to register a partnership firm. However, registration is the definite proof of the existence of the firm and its legality. Non-registration of a firm has some real legal consequences for the partners and the firm itself.

Therefore, it is always advisable to draw up a written partnership deed and register the firm with the Registrar of Firms.

Features of a Partnership-

  • Formation/Contract
    A partnership firm is not considered as a separate legal entity. But according to the act, a firm must be formed via a legal agreement only between all the partners. So a contract must be entered into to form a partnership firm.
  • Unlimited Liability
    In a unique feature, all partners have unlimited liability in the business. The partners are all individually and jointly liable for the firm and the payment of all debts. It means that even the personal assets of a partner can be liquidated to meet the debts of the firm.
  • Continuity
    The death, retirement, bankruptcy, or insolvency and insanity of a partner will dissolve the partnership. The remaining partners may continue the partnership if they wish to, but a new contract must be drawn between them. Also, the partnership of a father cannot be inherited by his son. If all the other partners mutually agree to do so, he can be added as a new partner.
  • Number of Members
    There should be a minimum of two members for a partnership. For a banking business, the number of partners should not exceed ten. For a business of any other nature, the maximum twenty partners. If the number of partners increases, it will become an illegal entity or association.
  • Mutual Agency
    In a partnership, the business must be carried out by all the partners together. Alternatively, it can be carried out by any of the partners signally or severally acting for all of them or on behalf of all of them. So this means every partner is an agent as well as the principal of the partnership. He represents the other partners in some cases, so he is their agent.

Types of Partners-

  • Active Partner: As the name suggests, he takes active participation in the business of the firm. He is responsible for the management of the business.
  • Dormant Partner: Also known as a sleeping partner, he will not participate in the daily functioning of the business. But he will still have to make his share of contribution to the capital.
  • Secret Partner: Here, the partner?s association with the firm is not public knowledge. He will not represent the firm to outside agents or parties.
  • Nominal Partner: This partner is only a partner in the name. He allows the firm to use the name of his firm, and the attached to the goodwill of the firm.


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