When two or more person jointly start a business, the business firm shall be called as partnership firm and persons who have started the business shall be called as partners of the business firm.
As per Indian Partnership Act, 1932 the definition of the partnership firm is as given below:-
“Partnership is the relation between persons who have agreed to share the profit of a business carried on by all or any of them acting for all.”
According to the above definition of partnership firm we can describe the following characteristics of partnership firm:-
- There should be a proper contract between the partners which shall state all the terms and conditions of the partnership firm. The contract clearly will show the rights and liabilities of the partners, capital to be employed by the partners, the interest on capital of the partners, the salary and other remuneration to the partners, the admission of new partners, the dissolution of the partnership firm etc.
- Nothing is clear in Indian Partnership Act in respect of number of partnership firm but as per the Company Act there should not be more than 10 persons in case of banking business and 20 persons in other business. Otherwise the partnership shall be deemed as illegal.
- The partnership firm should be formed for doing a business and the aim of the business firm should be to earn profit. For example Mr. X and Mr. Y agree to go on a pleasure trip and agreed to divide the expenditure 50:50, it is not a business. Hence, it will not be treated as partnership firm.
- The profit should be divided between the partners after the end of financial year as per the agreement. The profit can not be carry forwarded in case of partnership firm.
- The business can be carried out by one partner or few partners or by all.
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