BASIC THEORY OF PARTNERSHIP

21 March 2023 15:36

ACCOUNTING FOR PARTNERSHIP FIRMS - FUNDAMENTALS

When two or more persons combine their resources to set up a business and agree
to share its profits and losses, they are said to be in Partnership.

Section 4, of Indian Partnership Act ,1932 Defines Partnership as under:

"Partnership is the relation between persons who have agreed to share the profits of a
business carried on by all or any one of them acting for all."

Partners

The persons who have entered into a partnership business with another are
individually called as Partners and collectively as Firm.

Features of Partnership

1. Two or more persons

At least there must be two persons to form a partnership business and such persons
must be competent to contract.
2. Maximum number of partners
As per companies act,2013 maximum number of partners was 100 . But
As per Rule 10 of the Companies (Miscellaneous) Rules,2014 maximum number of
partners in a firm to be 50.

3. Eligibility to enter into Partnership

According to Indian Contract Act,1872, every person except for the following can enter
into partnership:
(a) Minor
(b) Persons of unsound mind
(c) Persons disqualified by law

4. Agreement

Partnership is the result of an agreement between two or more persons to do business

and share its profits and losses. It is the basis of relationship between partners. It can
be oral or written. The written agreement containing terms and conditions of
partnership business is called Partnership Deed.

3. Business

The partnership agreement must be to carry on some business because mere co-
ownership doesn't form a partnership business.

4. Profit Sharing

The agreement must be to share the profits and losses of the business.

5. Mutual Agency

The Business of the firm can be carried by all the partners or any one of them
acting for all (AGENCY RELATIONSHIP)

It means a partner can act as an agent as well as the Principal.

As an agent he represents other partners and thereby, binds them through his acts,
As a Principal, he is bound by the act of other Partners.

6. Liability of Partnership

Each partner of the firm has Unlimited liability, that is his private assets can be used to
pay off firm's debts.

Legal Status of Partnership

Partnership , from the legal point of view , is not a separate legal entity from its
partners.

Therefore the concept of Limited Liability Partnership (LLP) has come into existence.
Limited Liability Partnership is a separate legal entity from its partners with perpetual
succession.