ESSENTIALS OF PARTNERSHIP
(Indian Partnership Act, 1932)
I. Agreement (Section 5)
Partnership is a contractual relationship based on an agreement between partners.
The agreement may be written or oral, but it must be legally enforceable.
The agreement should clearly specify:
o Capital contribution
o Profit-sharing ratio
o Rights and obligations of partners
o Duration of the partnership
Case Law:
Gokuldas Gopaldas v. Purshottam Umedbhai & Co.
The Supreme Court held that a partnership agreement need not be in writing and can be
implied from the conduct of the parties.
II. Sharing of Profits (Section 13)
Sharing of profits is the essence of partnership.
Partners must agree on the ratio of profit sharing.
The profit-sharing ratio may be equal or unequal, depending on the agreement.
Case Law:
Mohd. Haneef & Anr. v. Mohd. Iqbal & Ors.
The court held that in the absence of an express agreement, profits must be divided equally
among partners.
III. Business (Section 6)
Partnership must be formed to carry on a lawful business.
The business must be conducted with a view to earning profit.
Partners cannot engage in illegal or immoral activities.
Case Law:
Nandkishore v. Mst. S. Sowani
The court held that a partnership formed for an illegal business is void ab initio and
unenforceable.
IV. Number of Partners (Section 4)
A partnership must have a minimum of two partners.
The maximum number of partners: 20
Case Law:
National Bank of India Ltd. v. R. Laxman & Sons
The court held that a partnership with more than 20 partners cannot carry on banking
business, as prohibited by the Banking Regulation Act, 1949.
V. Mutual Agency (Section 18)
Each partner is an agent of the firm and other partners.
Acts done by a partner in the ordinary course of business bind the firm and all partners.
Even acts beyond authority may bind the firm if done to carry on the business of the
firm.
Case Law:
Ashoka Marketing Ltd. v. Punjab National Bank
The court held that a partner, even without express authority to sign cheques, could bind the
firm if such action was necessary for business operations.
VI. Unlimited Liability (Section 25)
Partners are jointly and severally liable for the debts of the firm.
Creditors may recover the entire amount from any one partner, irrespective of profit-
sharing ratio.
Case Law:
K.L. Johar & Co. v. Deputy Commercial Tax Officer
The court held that partners’ liability is joint and several, giving creditors the option to recover
dues from any or all partners.
Kinds of Partners
1. Active or Actual Partner
An active partner takes part in the day-to-day management of the business.
He contributes capital and/or skill.
He shares profits and losses.
He is liable to third parties for acts of the firm.
Also called a working partner.
2. Sleeping Partner (Dormant Partner)
A sleeping partner does not take part in the management of the business.
He contributes capital and shares profits and losses.
His connection with the firm is not disclosed to the public.
He is still liable to third parties for firm’s debts.
3. Silent Partner
A silent partner does not take part in management, similar to a sleeping partner.
His association with the firm is known to the public.
He contributes capital and shares profits and losses.
He is liable for the acts of the firm.
4. Partner in Profits Only
This partner is entitled to share only in profits, not losses.
He is not liable for losses internally, but
To third parties, he is liable like other partners.
Usually admitted by agreement to encourage investment or skill.
5. Sub-Partner
A sub-partner is a person who shares the profit of a partner, not of the firm.
He has no rights against the firm.
He is not liable for the debts of the firm.
Relationship exists only between the partner and the sub-partner.
6. Partner by Estoppel (or Holding Out)
A person who represents himself, or knowingly allows others to represent him, as a
partner.
He is not a real partner, but
He becomes liable to third parties who give credit believing him to be a partner.
Liability arises due to conduct or representation.
Difference Between Types of Partners
Basis Active / Sleeping Silent Partner in Sub- Partner by
Actual Partner Partner Profits Only Partner Estoppel
Partner
Participation Actively Does not Does Usually does No role in No real
in business manages take part not take not take part firm role
business part
Capital Yes Yes Yes May or may No (invests No
contribution not in
partner’s
share)
Sharing of Yes Yes Yes Yes Yes (from No
profits partner)
Sharing of Yes Yes Yes No (as per No No
losses agreement)
Public Known to Not Known May or may Not known Appears to
knowledge public disclosed to public not be be partner
to public known
Relationship Direct Direct Direct Direct No direct No real
with firm relation relation
Liability to Fully liable Fully Fully Fully liable Not liable Liable due
third parties liable liable to holding
out
Agent of the Yes Yes Yes Yes No Not
firm actually,
but
treated as
liable
Minor as partner:
Section 30: Minors admitted to the benefits of partnership
1. Minor cannot be a full partner
A minor cannot become a partner because he cannot make a contract.
But with the consent of all partners, he can be admitted to the benefits of
partnership.
2. Rights of the Minor
He has the right to share profits as agreed.
He has a right to inspect and copy the books of accounts.
He has a share in the property of the firm.
3. Liability of the Minor
The minor is not personally liable for the firm’s debts.
Only his share in the firm is liable.
4. Right to Sue
A minor cannot sue the partners for accounts or profits.
He can sue only when he wants to leave the firm.
His share will be calculated according to Section 48.
The court may dissolve the firm if partners request.
5. Position on Attaining Majority
Within 6 months of becoming major (or knowing about admission, whichever is later),
the minor must decide:
o To become a partner, or
o Not to become a partner
He must give public notice.
If he does not give notice, he automatically becomes a partner after 6 months.
6. Burden of Proof
If it is claimed that the minor did not know about his admission, the burden of proof
lies on the person making the claim.
7. If He Becomes a Partner
His rights and liabilities as a minor continue till that date.
He becomes personally liable for all acts of the firm done since admission.
His profit share remains the same as before.
8. If He Does NOT Become a Partner
His rights and liabilities as a minor continue till public notice.
His share is not liable for acts done after notice.
He can sue for his share of profits and property.
Note:
1. There cannot be a partnership consisting of all minors. (Shriram Didwani vs
Gourishanker, (1961) AIR Bom 136
2. If a minor becomes a full-fledged partner, the partnership deed shall be invalid. It cannot
be enforced even against the adults. (Dharam Vis vs Jagan Nath, (1968) AIR Punj 84