What is Partnership?

A partnership is a kind of business where a formal agreement between two or more people is
made who agree to be the co-owners, distribute responsibilities for running an organization and
share the income or losses that the business generates.

In India, all the aspects and functions of the partnership are administered under ‘The Indian
Partnership Act 1932’. This specific law explains that partnership is an association between
two or more individuals or parties who have accepted to share the profits generated from the
business under the supervision of all the members or behalf of other members.

Features of Partnership:
Following are the few features of a partnership:

1. Agreement between Partners: It is an association of two or more individuals, and a

partnership arises from an agreement or a contract. The agreement (accord) becomes the
basis of the association between the partners. Such an agreement is in the written form. An
oral agreement is even-handedly legitimate. In order to avoid controversies, it is always
good, if the partners have a copy of the written agreement.
2. Two or More Persons: In order to manifest a partnership, there should be at least two (2)
persons possessing a common goal. To put it in other words, the minimal number of partners
in an enterprise can be two (2). However, there is a constraint on their maximum number of
people.
3. Sharing of Profit: Another significant component of the partnership is, the accord between
partners has to share gains and losses of a trading concern. However, the definition held in
the Partnership Act elucidates – partnership as an association between people who have
consented to share the gains of a business, the sharing of loss is implicit. Hence, sharing of
gains and losses is vital.
4. Business Motive: It is important for a firm to carry some kind of business and should have
a profit gaining motive.
5. Mutual Business: The partners are the owners as well as the agent of their firm. Any act
performed by one partner can affect other partners and the firm. It can be concluded that this
point acts as a test of partnership for all the partners.
6. Unlimited Liability: Every partner in a partnership has unlimited liability.
Types of Partnerships
A partnership is divided into different types depending on the state and where the business
operates. Here are some general aspects of the three most common types of partnerships.

• General Partnership

A general partnership comprises two or more owners to run a business. In this partnership, each
partner represents the firm with equal right. All partners can participate in management
activities, decision making, and have the right to control the business. Similarly, profits, debts,
and liabilities are equally shared and divided equally.

In other words, the general partnership definition can be stated as those partnerships where
rights and responsibilities are shared equally in terms of management and decision
making. Each partner should take full responsibility for the debts and liability incurred by the
other partner. If one partner is sued, all the other partners are considered accountable. The
creditor or court will hold the partner’s personal assets. Therefore, most of the partners do not
opt for this partnership.

• Limited Partnership

In this partnership, includes both the general and limited partners. The general partner has
unlimited liability, manages the business and the other limited partners. Limited partners have
limited control over the business (limited to his investment). They are not associated with the
everyday operations of the firm.

In most of the cases, the limited partners only invest and take a profit share. They do not have
any interest in participating in management or decision making. This non-involvement means
they do not

• Limited Liability Partnership

In Limited Liability Partnership (LLP), all the partners have limited liability. Each partner is
guarded against other partners legal and financial mistakes. A limited liability partnership is
almost similar to a Limited Liability Company (LLC) but different from a limited partnership
or a general partnership.
 • Partnership at Will

Partnership at Will can be defined as when there is no clause mentioned about the expiration
of a partnership firm. Under section 7 of the Indian Partnership Act 1932, the two conditions
that have to be fulfilled by a firm to become a Partnership at Will are:

• The partnership agreement should have not any fixed expiration date.

• No particular determination of the partnership should be mentioned.

Therefore, if the duration and determination are mentioned in the agreement, then it is not a
partnership at will. Also, initially, if the firm had a fixed expiration date, but the operation of
the firm continues beyond the mentioned date that it will be considered as a partnership at will.

Advantages of Partnership:
• Easy Formation – An agreement can be made oral or printed as an agreement to enter
as a partner and establish a firm.

• Large Resources – Unlike sole proprietor where every contribution is made by one
person, in partnership, partners of the firm can contribute more capital and other
resources as required.

• Flexibility – The partners can initiate any changes if they think it is required to meet
the desired result or change circumstances.

• Sharing Risk – All loss incurred by the firm is equally distributed amongst each
partner.

• Combination of different skills – The partnership firm has the advantage of

knowledge, skill, experience and talents of different partners.
Types of Partners
Here we will look at six types of partners we come across on a regular basis. This list is not
exhaustive, the Partnership Act does not restrict any unique kind of partnership that the
partners want to define for themselves. Let us take a look at some of the important types of
partners.

• Active Partner/Managing Partner

An active partner is also known as Ostensible Partner. As the name suggests he takes active
participation in the firm and the running of the business. He carries on the daily business on
behalf of all the partners. This means he acts as an agent of all the other partners on a day to
day basis and with regards to all ordinary business of the firm.

Hence when an active partner wishes to retire from the firm he must give a public notice about
the same. This will absolve him of the acts done by other partners after his retirement. Unless
he gives a public notice he will be liable for all acts even after his retirement.

• Dormant/Sleeping Partner

This is a partner that does not participate in the daily functioning of the partnership firm, i.e. he
does not take an active part in the daily activities of the firm. He is however bound by the action
of all the other partners.

He will continue to share the profits and losses of the firm and even bring in his share
of capital like any other partner. If such a dormant partner retires, he need not give a public
notice of the same.

• Nominal Partner

This is a partner that does not have any real or significant interest in the partnership. So, in
essence, he is only lending his name to the partnership. He will not make any capital
contributions to the firm, and so he will not have a share in the profits either. But the nominal
partner will be liable to outsiders and third parties for acts done by any other partners.

• Partner by Estoppel

A partner by estoppel is a person who gives an impression to others that he/she is a partner of
the firm through his/her own initiative, conduct or behaviour. This basically means that even
though such a person is not a partner he has represented himself as such, and so he becomes
partner by estoppel or partner by holding out.

• Partner in Profits Only

This partner will only share the profits of the firm, he will not be liable for any liabilities. Even
when dealing with third parties he will be liable for all acts of profit only, he will share none of
the liabilities.

• Minor Partner

A minor cannot be a partner of a firm according to the Contract Act. However, a partner can be
admitted to the benefits of a partnership if all partner gives their consent for the same. He will
share profits of the firm but his liability for the losses will be limited to his share in the firm.

Such a minor partner on attaining majority (becoming 18 years of age) has six months to decide
if he wishes to become a partner of the firm. He must then declare his decision via a public
notice. So, whether he continues as a partner or decides to retire, in both cases he will have to
issue a public notice.
Frequently Asked Questions on Partnership

Q1 What are the 3 types of partnership

The three different types of partnership are:

1. General partnership
2. Limited partnership
3. Limited liability partnerships

Q2 What are 5 characteristics of a partnership?

The following are the five characteristics of a partnership:

1. Sharing of profits and losses

2. Mutual agency
3. Unlimited liability
4. Lawful business
5. Contractual relationship

Q3 What are 3 disadvantages of a partnership?

The following are the disadvantages of a partnership:

1. Unlimited liability
2. Risk of disagreement between partners
3. Instability of the partnership

Q4 What is the most important element of partnership?

The most important element in a partnership is the mutual agency, which states that every
partner must be an agent and principal of himself and other partners. It says that business must
be carried on by any or all of the partners.