Formation of Partnership

by Sree Rama Rao on February 10, 2011

Partnership may be expressed (in writing or oral) or may be implied i.e. it may be inferred from the conduct of the parties, it is based on an agreement between two or more persons joining hands together to a share the profits of the business carried on by all or any one of them acting for all. Partnership agreements should comply with the essentials of an ordinary contract. Parties to partnerships must be competent to contract. However, a minor may be admitted to the benefits of partnership with the consent of all the other partners. Partnership business and objects must be lawful. As the relationship of partners to one another is that of agency, no consideration is required to create the partnership.
Though partnership may be implied from the conduct or course of dealing of the parties, it is advisable to form partnerships by an agreement in writing. This agreement is called a partnership deed which should be adequately stamped as required by the Indian stamp act 1889. The partnership deed contains names and addresses of the partners, name and address of the firm, duration of the firm, profit sharing management accounts etc.
Who may be partners?
As stated above parties to the partnership must be competent to contract as provided by Section 11 of the Indian contract act. Therefore every person who is of the age of majority according to the law to which he is subject to and who is of sound mind and is not disqualified from contracting by any law to which he is subject, is competent to contract and therefore may be a partner. Let us examine some specific cases.
1) Minor: A minor cannot become a partner. He may with the consent of the other partners enter into the benefits of partnerships
2) Lunatic: A person of unsound mind is not competent to contract and therefore, cannot become a partner.
3) Alien enemy: An alien enemy cannot enter into a contract of partnership though an alien friend can do so.
4) Corporation: A corporation being an artificial person can neither become a partner nor can it enter into a partnership agreement.
5) A firm: A firm cannot be a partner of another firm though its partner can be in their individual capacity.
Who are not partners?
1) The members of a Hindu Undivided family carrying on a family business. However, partnership contract between undivided members of a family is permissible. Undivided member of HUF can enter into a partnership with Karta.
2) A Burmese Buddhist husband and wife carrying on business
3) Lender of money to persons engaged or about to be engaged in any business receiving a rate of interest.
4) Servant or agent engaged in a business and receiving remuneration.
5) Widow or child of a deceased partner, receiving a portion of the profits as annuity
6) A previous owner (or part owner) of the business selling his business along with the goodwill and receiving a portion of the profits in consideration of the sale.
7) Joint or co-owners of property sharing profits arising from the property
Firm name:
The name under which the partners carry on their business is called the firm name. The firm name shall not contain words like King, Crown, Empress , Imperial, Emperor Queen Royal or words expressing or implying the sanction, approval or patronage of Government except when the State Government signifies its consent to the use of such words as part of the firm name to order in writing [sec 58] . It should be noted that a firm is not a legal entity i.e. it has no separate legal personality or existence of its own like a company, although it has a distinct meaning and is distinct from its members. The firm name may be personal or impersonal singular or plural. Individuals may carry on business under any name and style they may choose to adopt, provided the name is not misleading to the public.
Source: Business law





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