A partnership is a relationship between individuals who have agreed to share the profits of a business carried on by all or any one of them acting for all as stated in Section 4 of the Indian Partnership Act. Therefore, a partnership consists of three essential elements.

• A partnership must be a result of an agreement between two or more individuals.
• The agreement must be built to share the profits obtained from the business.
• The business must be run by all or any of them representing the rest.

All these conditions must coexist before a partnership can come into existence.

Essential Elements of a Partnership

Some key elements are required for the formation of a Partnership. They are listed below with a brief explanation.

An Agreement

A partnership is the result of an agreement between two or more persons. It should be noted that this sort of deal can arise only from a contract and not from status. This is why a partnership is distinguishable from a Hindu Undivided Family carrying on the family business. The reason is that this kind of alliance is a creation only out of a mutual agreement. Thus, the nature of a partnership is voluntary and contractual.

An agreement from which a partnership relationship arises may be expressed. It may also be implied from the Partnership Act done by the partners and from a consistent course of conduct being followed, showing a mutual understanding between them. This agreement may be oral or in writing.

Sharing Profit of Business

When it comes to sharing the profits of the business, two propositions are to be considered.

Firstly, there must be a business that exists. For this purpose, the term ‘business’ would generally mean every trade, occupation, and profession. The existence of a company is crucial. The motive of a business is the “acquisition of gains” that leads to the formation of a partnership. So, there can be no partnership where there is no intention to carry on a business and to share the profits obtained from the same. For example, co-owners who share the rent derived from a piece of land are not considered partners as a business does not exist. Similarly, no charitable institution or club may be called a partnership. However, a Joint Stock Company may be floated as a partnership for non-economic purposes.

Secondly, there must be an agreement concerning the sharing of profits. For example, A and B buy certain bales of cotton which they agree to sell on their joint account and to share the benefits equally. In such a situation, A and B are partners concerning the business they have planned out. However, an agreement to share the losses is not an essential element that is considered. However, in the event of damages, unless agreed otherwise, these must be borne in a profit-sharing ratio.

Running the Business

The third requirement for a partnership is that the business must be carried on by all the partners or by one or more of the partners acting for all. This is the crucial principle of the partnership law. An act of one partner in the course of the business of the firm is, in fact, an act of all partners. A partner carrying on a business is the principal as well as the agent for all the other partners. Therefore, it should be noted that the real test of a partnership is a mutual agency rather than sharing of profits. If the element of interactive agency is absent, then there will be no partnership. Sharing of benefits is the only Prima Facie evidence that can be rebutted by stronger evidence. This prima facie evidence can be countered by proving that there is no mutual agency.

The distinction between Partnership and Firm

Individuals who have entered into a partnership with one another are called Partners individually. The partners may be called collectively as the name under which the business is carried on is called the name of the Firm. A partnership is merely an abstract legal relationship between the partners. A firm is a concrete object signifying the collective entity for all the partners. Thus, a partnership is an invisible bond that holds the partner together, and a firm is the visible form of this partnership which is, therefore, bound together.