What are the essential elements of partnership? Explain with illustration and distinguish a partnership from company.

Question: What are the essential elements of partnership? Explain with illustration and distinguish a partnership from company. [[HJS 1996, Punj JS 2010]

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Answer

The essential elements of a partnership, as defined under the Indian Partnership Act, 1932, include the following:

Agreement: A Partnership is formed by a voluntary agreement between two or more individuals (partners) who come together with the intention to carry on a business and share its profits. The agreement can be written or oral, although it is always advisable to have a written partnership agreement to avoid misunderstandings.

Illustration: A and B decide to start a bakery business together. They discuss and agree on the terms and conditions of their partnership, including the sharing of profits and responsibilities. They sign a written partnership agreement to document their understanding and formalize their partnership.

Business Activity: The partnership must be established with the purpose of carrying on a lawful business. The business can be any trade, occupation, or profession. It must involve some level of commercial activity with the aim of making a profit.

Illustration: A and B decide to open a restaurant where they will serve Italian cuisine. Their partnership is established to carry on the business of operating a restaurant and providing food services.

Sharing of Profits: One of the fundamental aspects of a partnership is the sharing of profits generated by the business among the partners. The sharing can be in equal proportions or as agreed upon among the partners.

Illustration: A and B agree to share the profits of their bakery business equally, with each partner entitled to a 50% share of the profits.

Mutual Agency: Partnerships involve mutual agency, which means each partner can act on behalf of the partnership and bind it legally. This principle allows partners to enter into contracts, make business decisions, and engage in activities within the scope of the partnership's business.

Illustration: A, as a partner in the bakery business, has the authority to purchase ingredients, hire employees, and sign contracts with suppliers on behalf of the partnership.

Joint Ownership and Control: Partnerships involve joint ownership and joint control of the business among the partners. Each partner has an equal right to participate in the management and decision-making of the partnership unless otherwise agreed upon.

Illustration: A and B jointly own and control the bakery business. They make decisions together regarding pricing, menu selection, marketing strategies, and other aspects of the business.

A Partnership and a Company are two distinct forms of business organizations with different characteristics and legal structures.

Here are some key distinctions between a Partnership and a Company:

Formation: A Partnership is formed by an agreement between two or more individuals, known as partners, who come together to carry on a business with a view to making a profit. On the other hand, a company is formed by incorporating a separate legal entity under the relevant company law, usually by registering with the government authorities.

Legal Status: In a Partnership, the partners are personally liable for the debts and obligations of the partnership. Partners have unlimited liability, which means their personal assets can be used to satisfy the partnership's debts. In a company, the liability of shareholders (owners) is generally limited to the amount unpaid on their shares. Shareholders' personal assets are not typically at risk for the company's obligations.

Separate Legal Entity: A Company is a separate legal entity distinct from its shareholders. It can own property, enter into contracts, sue, and be sued in its own name. In a Partnership, the partnership itself does not have a separate legal identity from the partners. The Partners individually own the partnership assets, and the partnership is not a separate legal entity.

Management and Control: In a Partnership, the partners usually have the right to participate in the management and decision-making of the business, unless otherwise specified in the partnership agreement. In a Company, the management and decision-making authority typically lie with the board of directors who are appointed or elected by the shareholders.

Transferability of Ownership: In a Partnership, the transfer of partnership interests to a third party requires the consent of all the partners. Partnerships are generally not freely transferable. In a company, shares can be transferred freely (subject to any restrictions mentioned in the company's articles of association) without the consent of other shareholders.

Regulation: Partnerships are generally governed by the provisions of the Indian Partnership Act, 1932, or relevant partnership laws, depending on the jurisdiction. Companies, on the other hand, are regulated by the Companies Act, 2013, or the applicable company law in the respective country.