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Agreement of partnership

As stated above a partnership is constituted by an agreement between the partners. The agreement may be in writing or oral. But from the practical point of view and particularly in view of the provisions of other Acts such as the  Income Tax Act as well as  Partnership Act an oral partnership is not practicable, and therefore, a partnership agreement is necessarily required to be in writing.

Therefore, the mere fact that two persons as joint owners either as heirs or legatees are carrying on a business it does not necessarily mean that they are partners and if they want to carry on the business in partnership, then a Partnership agreement in writing becomes necessary. For example, if a person dies leaving a running business and his heirs continue to carry on such business, it will not be a business carried on in partnership and if they want to do so they will have to enter into a regular agreement of partnership.

Being an agreement and an agreement enforceable at law, such an agreement must fulfill the basic requirements of a valid contract, as required by the Contract Act. Therefore, a minor or a mentally handicapped person cannot enter into a partnership agreement though by virtue of the provisions of the Partnership Act a minor can be admitted only to the benefits of the partnership. But that only means that a minor can have a share in the profits of the business, but he cannot become a partner, and cannot execute any agreement of partnership.

Similarly if a partnership deed provides that on the death of a partner his heirs or any one or more of them should be admitted as partners or partner in place of the deceased partner even in such a case on the death of a partner his heirs or any of them do not become partners automatically on such death. But a fresh agreement of partnership will have to be executed between the existing partners and the heirs or heir of the deceased partner and if the heir is a minor the new partnership will stand postponed till the minor attains majority or if the surviving partners are more than one, the minor can only be admitted to the benefits of partnership.

Test of partnership

As stated before, a partnership agreement can be oral or in writing. It is not the general practice to enter into a preliminary agreement to enter into a regular partnership agreement. But if such a preliminary agreement is entered into and the partners start business in anticipation of executing a formal deed of partnership, the partnership shall be deemed to have commenced from the commencement of the business, unless the preliminary agreement is conditional upon the happening or not happening of some event in which case the partnership cannot be said to have come into existence unless the event has happened or not happened. Another test of partnership as mentioned above is that of sharing profits, and which is an essential requirement of a partnership. Profits may be shared in such proportions as the parties may agree, but sharing of profits is most essential. As against that, sharing of losses only suffered in business is not a test to constitute a partnership.

Therefore, the partnership agreement may provide that a particular partner or partners will not be liable to bear any losses of the firm. As regards sharing in profits the agreement may provide that a partner shall receive only a fixed share in the profits or a fixed periodical amount and It is not necessary that profits should be shared in certain proportions.

Section 6 of the Partnership Act provides that In determining whether a group of persons is or is not a firm or whether a person is or is not a partner in a firm regard shall be had to the real relation between the parties as shown by all the relevant facts taken together.

It further provides that sharing of profits or gross returns arising from property by persons holding joint or common interest in that property does not of itself make such persons partners, that is, as stated above, mere joint ownership of business does not constitute a partnership.

Similarly, receipt by a person of a share of the profits of a business or a payment contingent upon earning of profits or carrying with the profits earned by a business, does not of itself make him a partner with the person carrying on the business. For example, the receipt of a share or payment by a lender of money to persons engaged or about to engage in a business does not make such lender a partner.

Similarly, a share given in profits to a servant or agent as remuneration does not make him a partner, or if a widow or child of a deceased partner is given any annuity in payment of the share of the deceased partner It does not make the widow or child a partner, or if a business is sold with goodwill and the seller is given a share in profits towards payment of the sale price it will not make him a partner of the firm. But otherwise wherever the agreement is for sharing of business carried on by two or more persons the partnership relation will be inferred.

The partnership business may consist of doing anything which is not illegal or against public policy. Business may consist of carrying a continuous trade. or profession or any manufacture and any other activity of which the object is to earn profits. Or it may be limited to a single adventure.


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