Explain the characteristics of the partnership firm.
Answers
Some of the essential characteristics of partnership firm are as follows:
1. Existence of an agreement:
Partnership is the outcome of an agreement between two or more persons to carry on business. This agreement may be oral or in writing. The Partnership Act, 1932 (Section 5) clearly states that “the relation of partnership arises from contract and not from status.”
2. Existence of business:
Partnership is formed to carry on a business. As stated earlier, the Partnership Act, 1932 [Section 2 (6)] states that a “Business” includes every trade, occupation, and profession. Business, of course, must be lawful.
3. Sharing of profits:
The purpose of partnership should be to earn profits and to share it. In the absence of any agreement, the partner should share profits (and losses as well) in equal proportions.
Here it is pertinent to quote the Act (Section 6) which talks of the ‘mode of determining existence of partnership’. It says that sharing of profits is as essential condition, but not a conclusive proof, of the existence of partnership between partners. In the following cases, persons do share profits, but are not the partners:
(a) By a lender of money to person engaged or about to engage in any business.
(b) By a servant or agent as remuneration.
(c) By the widow or child of a deceased partner, as annuity {i.e., fixed periodical payment), or
(d) By a previous owner or part-owner of the business as consideration for the sale of the goodwill or share thereof, does not of itself make the receiver a partner with the persons carrying on the business. Thus, in determining whether a group of persons is or is not a firm, whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties as shown by all relevant facts taken together, and not by profit sharing alone.
4. Agency relationship:
The partnership business may be carried on by all or any of them acting for all. Thus, the law of partnership is a branch of the law of Agency. To the outside public, each partner is a principal, while to the other partners he is an agent. It must, however, be noted that a partner must function within the limits of authority conferred on him.
5. Membership:
The minimum number of persons required to constitute a partnership is two. The Act, however, does not mention the upper limit. For this a recourse has to be taken to the Companies Act, 1956 [Section 11 (1) & (2)]. It states that the maximum number of persons is ten, in case of a banking business and twenty, in case of any other business.
6. Nature of liability:
The nature of liability of partners is the same as in case of sole proprietorship. The liability of partners is both individual and collective. The creditors have a right to recover the firm’s debts from the private property of one or all partners, where firm’s assets are insufficient.
7. Fusion of ownership and control:
In the eyes of law, the identity of partners is not different from the identity of partnership firm. As such, the right of management and control vests with the owners (i.e., partners).
8. Non-transferability of interest:
No partner can assign or transfer his partnership share to any other person so as to make him a partner in the business without the consent of all other partners.
9. Registration of firm:
Registration of a partnership firm is not compulsory under the Act. The only document or even an oral agreement among partners required is the ‘partnership deed’ to bring the partnership into existence.
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