Ch # 11.

Nature of Partnership Page 35

CH # 11 NATURE OF PARTNERSHIP

INTRODUCTION

Partnership
“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”.

Firm and partners

“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”.

Act of firm
“An act of firm means any act or omission by all the partners, or by any partner or agent of the firm
which gives rise to a right enforceable by or against the firm.”

Third party
“Third party used in relation to form or to a partner therein means any person who is not a partner in
the firm.”

Those provisions of Contract Act, 1872 shall continue to apply to firms that are not inconsistent
with the provisions of Partnership Act, 1932.

TEST OF PARTNERSHIP

1) Association of two or more persons

▪ There can be no partnership consisting of a single individual.

▪ If the number gets reduced to one, for any reason, it ceases to be a partnership.
▪ Partnership Act does not say anything about the maximum number of partners.
▪ However, in company law the following maximum numbers are fixed:
- Partnership firm carrying on banking business; maximum number is 10.
- Partnership firm carrying on any other business; maximum number is 20.
- Partnership firm of professional persons; maximum number may exceed 20.
▪ If total partners exceeds maximum number such partnership becomes illegal association

2) Agreement

▪ This agreement may be express (written or oral) or implied.

▪ The written agreement is known as ‘partnership deed’.
▪ In Pakistan partnership arises from contract and not from status
(such as Joint Family Business, operation of law inheritance, or succession)
Ch # 11. Nature of Partnership Page 36

▪ A partnership deed usually sets out the following:

- Firm name
- Place or principal place of business of the firm
- Names of any other places where the firm carries on business
- The date when each partner joined the firm
- Number of partners
- Names in full and permanent addresses of partners
- Purpose and duration of partnership (if any)
- Rights and duties of the partners.
- Amount of capital that each partner should put into the business
▪ If a partnership does not have a written agreement, the rules set out in the Partnership Act
1932 are normally assumed to apply

3) Carrying on business69

▪ The parties must have agreed to carry on a business.

▪ Where there is no business to be done, there can be no question of partnership.
▪ If the purpose is to carry on some charitable work it will not be a partnership.

4) Sharing of profits

▪ Partners may share it equally or in any other proportion.

▪ It is not necessary that the partners should agree to share losses.

5) Mutual agency70

▪ Mutual Agency relationship means that each partner is both an agent and a principal.
- Agent in the sense that he has the capacity to bind other partners by his acts done.
- Principal in the sense that he is bound by the acts of other partners.

Important features of the partnership

▪ A partnership does not have a legal personality (Unlike a company, it is not a legal person)
▪ Any party entering into contract with a partnership actually have a contract with all partners.
▪ Partners in a partnership do not have limited liability, and are personally liable for any
liabilities of the partnership business that the partnership cannot pay.

Not a Partnership

Joint or common interest in the property

The sharing of profits or of gross returns arising from property by persons holding a joint or
common interest in that property does not of itself make such persons partners 71
Ch # 11. Nature of Partnership Page 37

Partnership firm Co-ownership

Formation Created by an agreement alone. Not necessarily a result of an agreement
Business Carry on business in essential Does not necessarily involve business.
Number of Minimum 2, Maximum 20 persons No limit on maximum number of the
persons (other than banking business) co-owners.
Sharing of One of the essential elements. Does not involve sharing of profit.
profit
Agency A partner is an agent of the firm Co-owners are not agents to one another
Transfer Partner cannot transfer his interest Co-owner can transfer his interest
of interest without getting consent from other without getting consent from other(s)

Sharing of Profits is not a Conclusive Evidence of Partnership

Receipts by a person of a share of profits of a business, or of a payment contingent upon such
profits, does not of itself make him a partner with persons carrying on the business, for example:
▪ Lender of money to persons engaged or about to engage in any business
▪ Servant or agent as remuneration
▪ Widow or child of a deceased partner as annuity
▪ A transferee of a partner’s interest
▪ A minor who is admitted to the benefits of an existing partnership
▪ Previous owner or part owner as consideration for the sale of goodwill or share of it.

Loan from Banking Company

The Partnership Act, 1932 shall not apply to a relationship where a banking company has
provided a loan to any partnership and the partnership shares a share of profit with that bank.

Types of partnership

Partnership-at-will
▪ Where no provision is made between the partners for the duration of their partnership
▪ In such partnership there is no provision as to when the partnership will come to an end.
▪ Any partner is free to dissolve the partnership by giving a notice in writing to all other
▪ The firm is dissolved as from the date mentioned in the notice (if any) or if no date is
mentioned as from the date of the communication of the notice.
▪ If agreement provides that the partnership can be dissolved by mutual consent of all the
partners, it will not constitute a partnership at will.

Particular partnership
▪ Where a partnership is created for any particular purpose or for a specific time period
▪ Such partnership comes to an end on the completion of venture or on expiry of the period.
▪ If partners decide to continue partnership after that, then it becomes partnership at will.
Ch # 11. Nature of Partnership Page 38

Types of partners

Actual or ▪ A partner who is actively engaged in the conduct of a business

ostensible ▪ Such partner is an agent of all other partners for the purposes of the business
partner ▪ Can bind himself and others for acts done in ordinary course of business.
Sleeping or ▪ Not known as such as a partner to third parties dealing with the firm.
dormant ▪ May or may not take active part in the conduct of the business of the firm.
partner72 ▪ He, like other partners, invests capital and shares in profits of the business.
▪ He is equally liable along with other partners for all debts of the firm
▪ Not required to give public notice of his retirement
(not liable for any act done by the firm after his retirement)
Nominal ▪ Does not contribute any capital but lends his name to firm
partner73 ▪ Sometimes he also does not have a share in profits,
▪ He along with other partners is liable to the outsiders for all debts of the firm.
Partner in ▪ A partner may agree that a partner shall get a share of the profits only and
profits only that he shall not be liable to contribute towards the losses.
▪ But for third parties he is liable for all the debts of the firm.
Sub- ▪ When a partner agrees to share his profits derived from firm with a stranger
partner74 ▪ Sub-partner is not connected with firm and cannot call himself a partner
▪ He has no rights against the firm nor is he liable for the acts of the firm.
Silent ▪ Those who by agreement with other partners have no voice in management
partner75 ▪ They share profit and losses, are fully liable for the debts of the firm
Partner by ▪ Where a person holds himself out as a partner or allows other to do it, they
estoppel or are then stopped from denying the character he has assumed and upon the
holding out faith of which creditors may be presumed to have acted.
(Tutor’s Note: This concept is explained later in onward topics of partnership)