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The relationship between partners are created by an agreement, i.e. a partnership deed between two or more persons. An agreement from which the relationship of partnership arises may be expressed or implied. It may be oral or in writing. An agreement to make a partnership must be valid and enforceable by law. It must have all the essential elements of a valid contract like free consent, lawful consideration etc.
As per Section 5 of the Indian Partnership Act, 1932 “the relation of partnership arises from contract and not from status”. Thus, a partnership comes into existence only by an agreement between all the partners and not by status (as in the case of Hindu Undivided Family) or operation of law (as in case of Co-owners).


Note: If a partnership firm has partners - X, Y and Z, and if Y dies, his successor cannot claim to be a partner on the ground of having the status of the deceased partner’s successor. He will have to make a new contract with the other partners to become a partner in the same firm.

Association of two or more persons

There must be at least two persons to form a partnership. Moreover, the persons must be competent to enter into a contract. It may be noted that one person cannot be a partner with himself. Thus, when in the existing partnership firm, the number of partners is reduced to one, the firm is compulsorily dissolved.
The Indian Partnership Act does not contain any provision about the maximum number of partners. However Sec. 11 of The Companies Act fixes the maximum limit of partners as under:-
  • Where the firm is carrying on banking business, the number of partners should not exceed 10
  • Where the firm is carrying on any other business, the number of partners should not exceed 20
  • If the number of maximum partners exceeds the above limit, the partnership becomes an illegal association


  • The term ‘person’ would mean any person competent to contract and would include an individual i.e. a natural person and also an artificial person, such as a company. Thus, a company can form a partnership with a natural person (any competent person) or, two companies can form a partnership.
  • A partnership firm cannot enter into a contract of partnership with another firm, since it does not have separate legal identity distinct from its partners.



Mr. Z is a Chairman and the main shareholder of a Company. The Company may form a partnership with Z. This will be a valid partnership between the two persons.

There must be some business

The term ‘business’ includes all kinds of trade, occupation and profession. The motive of the business is the acquisition of gains. Thus, a ‘partnership’ can be formed only with the intention to share profits of the business. People coming together for some social, philanthropic (charitable) or religious purposes do not constitute a partnership.
It is not necessary that a business should consist of a long permanent undertaking. A person may become a partner with another person in a particular adventure or undertaking. The requirement of law is that a certain sense of carrying on or continuity must be there.



Karan and Arjun agree to produce a film and divide the profits. It is a partnership regardless of being a single venture, as it would require a series of transactions.


Note: To constitute a valid partnership, the business must be in existence and being carried on. A contract to carry on a business at a future time does not result in partnership unless that time arrives and the business is started.

There must be sharing of profits

There must be an agreement among all the partners to share the profits of a business. They may share it in any way they like i.e. either equally or in any other ratio. The agreement to share losses is not an essential element. However, in the event of losses, unless until agreed otherwise, such losses must be shared in profit sharing ratio.


Note: It is not necessary that all partners must agree to share losses. The partners may agree that one or more of them shall not be liable for the loss/losses incurred. But where only one partner is entitled to the entire profits of the firm, there will be no partnership.



Mahesh and Ramesh agreed to work together as partners, but they agreed that Mahesh shall receive all profits and shall pay wages to Ramesh. In this case, Mahesh and Ramesh are not partners as there is no sharing of profits.

Mutual agency

There must be agency relation between the partners. Of all the features of partnership, ‘mutual agency’ is the most important. It is this mutual agency among them which gives the concerned person the status of the owner of the business, the status of main functionaries of the business and also the notion of mutual trust that the partners are expected to keep in each other.
Agency relation means that the business of the partnership must be carried out by all the partners or by any one partner acting for all the other partners. A partnership is therefore, an extension of the principle of agency. Hence, each partner carries on the business as a principal as well as an agent of the other partners. This is the cardinal principle of the Partnership Law.
A partner is an agent of the other partners, in the sense that he can bind the other partners by his act.
A partner is a principal, in the sense that he can be held liable for the acts of the other partners.


Note: A partnership is determined from the real relation between the parties (i.e. mutual agency) and the sharing of profit is not a conclusive test of partnership. Therefore, sharing of profit is only a prima facie evidence of partnership where as the true test of partnership is mutual agency.

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