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Partnership- Meaning, Definition, Characteristics, Formation

The partnership form of the business organization came out from the limitations of the sole proprietorship business. When a business expands, a single person is unable to arrange the funds and bear the risks. He cannot manage all the functions of business by himself. Therefore, two or more persons join hands and combine their capital and skills to start a business. 

Meaning of Partnership: 
      A partnership is a voluntary association of two or more persons who agree to carry on some business jointly and share its profits and losses. They combine their funds and skills to carry on business together.

Definition by L. H. Haney :
       Partnership is the relation existing between two persons competent to make contracts, who agree to carry on lawful business in common with a view to a private gain.

Definition according to The Partnership Act 1932:
     Partnership is the relation between persons who have agreed to share profits of a business carried on by all or any one of them acting for all.

Characteristics of Partnership

1. Two or more persons:  There should be at least two persons to start a partnership business. A single person cannot enter into a partnership with himself. The maximum number of persons for a partnership business should not exceed 10 in the case of a banking company and 20 in case of other types of business. 

2. Agreement: The relation of partnership business arises from the formation of a contract and not from status or birth. There should be an agreement between persons. The agreement may be oral or in writing but it must satisfy all the essentials of contract.

3. Mutual Agency: Partnership business can be carried on by any of them acting on behalf of the others. In other words, every partner is both principal and agent. Each partner is liable for acts performed by other partners on behalf of the firm.

4. Unlimited liability: The partners of a partnership business have unlimited liability. In case the assets of the firm are insufficient to pay the debts in full, the personal property of each partner can be attached to pay the creditors.

5. Joint ownership and control: A partnership business is owned and controlled jointly by all the partners. The partners share responsibility among themselves and control the day to day activities.

6. Utmost good faith: The relations between the partners are based upon mutual trust and confidence. Every partner is expected to act in the best interest of other partners and of the firm as a whole. The partners must observe utmost good faith in all dealings with his co-partners. He must render true accounts and make no secret profits from the business.

7. Continuity: Death, retirement, insolvency, or insanity of any partner can bring an end to a partnership business. However, the remaining partner may, if they desire so, continue the business on the basis of a new agreement.

Formation of Partnership Firm

       A partnership can be formed by two or more persons. Partnership is formed through a contractual relationship between two or more persons. This relationship is based on mutual trust and good faith. The agreement between the partners is to carry on a lawful business and to share the profits and losses.
         In order to avoid disputes, the agreement should be in writing, though the law does not require the agreement to be in writing. In the absence of an agreement, the rights and duties of partners are determined by the Partnership Act 1932.

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