PARTNERSHIP ACT

Module 3
Definition Of Partnership
The first part of section 4 of the Indian partnership act, 1932 defines partnership as follows:
"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. The second part of section 4 states that "persons who
have entered into partnership with one another are called individually "partners" and collectively "a firm",
and the name under which their business is carried on is called the "firm name". "Partnership" has not
been found easy to define. Eminent jurists and the definition of partnership adopted in section 4 of the
Indian partnership act. 1932 is that suggested by Pollock with only a slight change. it brings out very
clearly the fundamental principle of mutual agency, e.g., the partners, when carrying on the business of
the firm, are agents as well as principals. Thus it is probably the most business-like definition of the term
"partnership." it also suggests that partnership is not an agreement itself or an association of persons but is
the relation arising out of an agreement.

Partnership is the relationpartnership is regarded differently by different persons either a contract

between persons or an association of persons or as a combination of capital, labour or skill by two or
more persons or as a relation between persons. it cannot be regarded as a contract between persons
because partnership arises out of contract and it is not the contract itself. Although association is the
result of partnership it .is better to use the word relation because association denotes many other forms of
unions and combinations of persons. as said earlier it is not necessarily combination of capital, labour or
skill or some or all of them because every partner need not contribute capital, labour or skill or some or
all of them. therefore, partnership is the relation arising out of contract and not the contract itself.

Essentials Of Partnership
An analysis of the definition gives the following essentials of partnership:
1. There must be two or more persons as principals carrying on a business.
2. Partnership is the result of an agreement.
3. It is organized to carry on a business.
4. The persons agree to share the profits of the business.
5. The business is carried on by all or any one of them acting for all

These essentials are discussed below:

1. Two or more persons :-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. thus for a partnership to exist there
must be two or more persons as principals carrying on the business.

2. Agreement:- the definition of the partnership stresses that 'partnership is the relation between
persons who have agreed......." therefore, there must be an agreement entered by two or more
persons to share the profits of a business. This element relates to the voluntary contractual nature
of partnership. The partnership is not created by status. The term "agreement" will have to be
taken in the sense in which it is defined in section 2 of the contract act. it must satisfy the
requirements of a valid contract as stated in section 10 of the contract act.
3. Carrying on of business:-a partnership for the purposes of the partnership act means a business
partnership in order that an agreement to share the profit may constitute partnership such profit
must arise out of a business. Thus there must be an agreement to share the profits of a business
and for this purpose business 'includes every trade, occupation and profession' (section 2). Thus
the word business has been used in a very wide and extensive sense.
4. Sharing of Profits:-The word "partnership" is derived from the word "to part, which means "to
divide". The division of profits is an essential condition for partnership. A person can claim
himself to be a partner in a business only when he has a right to a share in the profits of the
business. Thus an agreement to share the profits of a business in the sense of the net gain
resulting after payment of all outgoings is an essential element of partnership.

5. Mutual Agency :-The last words in the definition of partnership in section 4 stress that the
business may be carried on by all or any of them acting for all. It means that partners when
carrying on the business of the firm are agents as well as principals. A 4 agent' is a person
employed to do any act for another or to represent another in dealings with third persons. The
person for whom such act is done, and who is so represented, is called the "principal".This
element of mutual agency is the most important factor in determining the true relationship
between persons carrying on any business common between them.

TYPES OF PARTNERS

1. Active or managing partner:

2. Sleeping or dormant partner
3. Nominal or ostensible partner
4. Sleeping partner
5. Partner by estoppel or holding out
6. Partner in profits only
7. Minor as a partner

1. Active or managing partner: - A person who takes active interest in the conduct and
management of the business of the firm is known as active or managing partner.
2. Sleeping or dormant partner: - A sleeping partner is a partner who sleeps, that is, he
does not take active part in the management of the business. Such a partner only
contributes to the share capital of the firm, is bound by the activities of other partners,
and shares the profits and losses of the business.
3. Nominal or ostensible partner:-A nominal partner is one who does not have any real
interest in the business but lends his name to the firm, without any capital contributions,
and doesnt share the profits of the business.
4. Partner by estoppel or holding out:-If a person, by his words or conduct, holds out to
another that he is a partner, he will be stopped from denying that he is not a partner. The
 person who thus becomes liable to third parties to pay the debts of the firm is known as a
holding out partner.
5. Partner in profits only: - When a partner agrees with the others that he would only share
the profits of the firm and would not be liable for its losses, he is in own as partner in
profits only.
6. Minor as a partner:- Partnership is created by an agreement. And if a partner is incapable
of entering into a contract, he cannot become a partner. Thus, at the time of creation of a
firm a minor cannot be one of the parties to the contract. But under section 30 of the
Indian Partnership Act, 1932, a minor can be admitted to the benefits of partnership,
with the consent of all partners. A minor partner is entitled to his share of profits and to
have access to the accounts of the firm for purposes of inspection and copy.

Retirement of a partner
Under the Partnership Act no person can be admitted into partnership without the consent of the other
partner or partners unless there is any contract to the contrary (s. 31).
Any partner may. with the consent of all the other partners or in terms of the deed of partnership
where the partnership is at will, by giving notice in writing to all other partners, to that effect,
dissolve the partnership or retire from partnership.
A retiring partner, however, continues to be liable to third parties even If the liability Is taken
over by the remaining partners (s. 32) Therefore in a deed of retirement it is necessary to provide
that In the event of the retiring partner being held liable by a third party, the remaining partners
shall indemnify him to that extent, when the liabilities are taken over by the remaining partners.
Insolvency of a partner also causes compulsory retirement of an insolvent partner (s. 35). It is,
therefore, generally provided in a deed of partnership when there are more than two partners that
the insolvency of any partner will not dissolve the partnership. If a partner retires, unless there is
contract. to the contrary, the retiring partner cannot use the firm name, represent himself as
carrying on the business of the firm or solicit the customers of the Firm. (s. 36).
Therefore, in a deed of retirement It is generally not necessary to make explicit that the
retiring partner shall not do any of these things. But if he is to be restrained from carrying on
similar business for a specified period or in a specified area, such condition can be provided in
she deed of retirement and it is legal (s. 36(2)).