Partnerships are a form of business association between two or more persons who join to carry on a trade or business. Each person contributes money, property, labour or skill and expects to share in the profits and losses of the business.

Partnership is a form of business organization, where two or more persons join together for jointly carrying on some business. It is an improvement over the ‘Sole-trade business’, where one single individual with his own resources, skill and effort carries on his own business. Due to the limitation of resources of only a single person being involved in the sole-trade business, a larger business requiring more investments and resources than available to a sole-trader, cannot be thought of in such a form of business organization. In partnership, on the other hand, a number of persons could pool their resources and efforts and could start a much larger business, than could be afforded by any of these partners individually. In case of loss the burden gets divided among various partners in a Partnership

As per Section 4 of The Indian Partnership Act, 1932 “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 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”.

ESSENTIAL ELEMENTS TO CONSTITUTE PARTNERSHIP FIRM 

1. Atleast 2 parties. Persons must be competent to enter into a contract. 
2. Parties may be natural or Artificial. 
3.  Agreement between the parties.
4.  Agreement may be oral or in writing.
5.  It may be express or implied.  
6. Agreement must be to share the profits of the business;
7.   Business must be carried on by all or any of them acting for all

Important Points

1. Members of HUF carrying on family business together are not partners. Burmese Buddhist Husband and wife doing business together are not partners. 

2. Sharing of Profits is not the only evidence for partnership – This means that of two person are only sharing profit then it does not means that they both are partners.

Example – A joint owner of a property sharing its return with the other owner does not make joint owners partner

 Salient features of partnership:

• For partnership there must be two or more people who are eligible to contract, partners may be natural person or artificial person.
• In a partnership, the partners are agents for the partnership. As such, one partner may legally bind the partnership to a contract or agreement that appears to be in line with the partnership’s operations. As most partnerships create unlimited liability for its partners, it is important to know something about potential partners before beginning a partnership.
• In a partnership the liability of partners is unlimited. Partners may be called on to use their personal assets to satisfy partnership debts when the partnership cannot meet its obligations. If one partner does not have sufficient assets to meet his/her share of the partnership’s debt, the other partners can be held individually liable by the creditor requiring payment.
• The relation of partnership arises from contract and not from status; and, in particular, the members of a Hindu undivided family carrying on a family business as such are not partners in such business.
• As general rule, a person who receives a share of the profits is prima facie deemed to be a partner of the firm but the receipt of such share, or of a payment contingent on or varying in the profit of a business, does not of itself make him a partner in the business. Thus if a person is being repaid the money that it has advanced to the partnership firm from the profits of the firm then it does not become a partner.
• Sharing of profit means sharing of losses too.
• Pa-basis Partnership Company Legal Status A firm is not a legal entity. Therefore, it has no legal identity distinct from the personalities of its constituent members A company is considered a separate legal entity distinct from its members. Agency In a firm All the partners are an agent for each other, as well as of the firm In a company, a member is not an agent of any other member nor the company. A member’s actions do not bind either Distribution of Profits The profits of a firm must be distributed among the partners according to the terms stated in the partnership deed There are no compulsions to distribute its profits among its members. A portion of the profits becomes distributed among the shareholders when dividends are declared partnership should be there to carry on some business.