“Partnership” is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.
To explain partnership in simple words, it is a mutual agreement between two persons who comes together for achievement of mutual goal of profits from business activities. Similar to any business formation, partnership firm registration also needs fulfilling the pre-requisites.
Pre-requisites of Partnership:
A Register or unregistered partnership, both are legal and valid under the Indian Partnership Act, 1932. Any two or more persons who work and start business can also be called a Partnership. However, a business must have passed following tests for formation and registration of partnership firm.
Object of profit:
The definition of the partnership firm itself prescribes that the partners shall come together with the aim of profit only i.e. business activities. An object of charitable or not for profit cannot be carried on under this organisation. However, the loss in the business does not fail the structure as partnership as loss is accidental to business activities and also part of it. The main aim to come together should be earning profit through commercial and business activities. The profit earned under the business is shared between the partners in the ratio decided under the agreement entered into. In case, the clause of profit sharing ratio is absent, the profit or loss earned will be distributed equally.
Requirement of members (individual):
At least two persons must come together to form a partnership firm. The persons who have entered into the agreement of partnership are referred as partners together. A partner under this firm can be an individual only. A company or other legal entity cannot be included as a partner under this form of organisation. Further, the individual must be eligible to become a partner as per the Contract Act and any other condition prescribed. The partner to be added shall be the person eligible to enter in to contract.
A person may be eligible to be partner of the firm when he is a major and mentally stable. A minor can also become a partner only with the approval of all the members of the partnership. Anyways the minor partner is generally not considered as a working partner, and he/she would be entitled for the benefits/profits of the partnership. (Refer more here)
Types of Partners:
- Managing Partner: This partner can also be known as Working Partner/ Active Partner. This partner is involved in the activities of running the business.
- Sleeping Partner: The partner who does not actively participate in business is called a sleeping partner. Such kind of partners is normally part of firm for investment purpose and shares the profit or loss from the business activities. They are mostly on the backend without much attention.
- Nominal Partner: As the name represents, this partner is included or participates for the sake of the name. They usually do not participate either in workings of the business nor share the profits of the business.
- Partner for Profit: These are the most partners receiving most benefit as they share only the profits but not the losses. The partner of this type can only be appointed by consent of all the partners.
Based on the type of the partnership and mutual agreement of the partners the share of the profit is decided, making each partner entitled for a certain percentage of profit.
Agency between partners:
The definition of the partnership gives clear indication of the contract of agency by including words “a business carried on by all or any of them acting for all.” This can be explained as example here. E.g. Partner X can work on behalf of or represent all the other partners for business purpose of this firm. This describes that the business can be carried on either with the participation of all the partners or few of the partners or one of the partners representing all the partners. The act needs to be initially decided and mentioned clearly in the draft partnership deed, which enables the business to carry smoothly without any mutual conflicts.
Agreement between Partners:
A Partnership Firm is completely based and regulated by the partnership agreement made by the partners mutually. The agreement can either be oral or written. However, a written contract is always preferred by the executors to avoid the future conflicts and decide upon the actual terms of agreement. To execute an agreement, the consent of all the partners is obtained by way of signature on the written contract.
Further, the written agreement, known as Partnership Deed, can be registered with the Registrar of Firm (RoF) or can be unregistered also. Both types of firms and deeds are valid and legal to run a partnership firm.
On the concluding note, the above factors need to be implanted and followed by every business to run without any mutual conflicts at a certain point in time. The factors i.e. pre-requisites mentioned above are the test of partnership. If any of the pre-requisites is absent in business carried on by two or more persons, it cannot be considered as the business under this business structure.