What is Partnership

Meaning of Partnership

A partnership is an association between two or more persons who agree to do business and share profits and losses of the business

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Features of Partnership

Who is a Person

Two or More persons - At least 2 persons are required to form a partnership. A single person alone cannot form partnership. If a single person does a business then it it called sole proprietorship.

Who cannot enter into partnership - a) Persons of unsound mind b) Persons disqualified by law. Please note that this limitation is as per Indian Contracts Act.

Who is a person of Unsound Mind - In the context of partnership agreements, a person of unsound mind refers to someone who doesn't have the mental capacity to understand the agreement and its implications. This could be due to a mental illness, intellectual disability, or temporary mental incapacity.

Who are persons disqualified by law - Incompetency to contract or disqualification to contract may arise due to political status, corporate status, legal status, etc. Such persons are alien enemies (person belonging to a country in war with India) , foreign sovereigns and ambassadors, convicts (sentenced by court under any law) , insolvent (Persons whose Liabilities > Assets) , etc.

Can Minor enter into partnership - Yes Minor can enter into partnership but only for profits. Example - Suppose A, B and C are partners. A and B are majors and C is a minor. In the year 2020 firm earns a profit of Rs 2 Lakhs. This will be shared among all the 3 partners. Next year firm had a loss of Rs 2 Lakhs. This year the loss will be shared only between A and B.

Diagram Depicting Meaning and Essential Features of Partnership

%%{init: {'theme' : 'base','themeVariables': { 'fontSize' : '16px'}}}%% mindmap root((An Association)) [www.edunol.in] [www.edunol.in] A(Two or more persons) B(unsound mind) C(not allowed) D(disqualified by law) (not allowed) (minor) (allowed only for profits) (Agree to do business) %%[www.edunol.in] (means profit objective) (charitable activity not a business) (Share profits and losses) (means share both profits and losses) (not necessary for all to share losses) %%[www.edunol.in]


The partnership agreement can be either oral or written. The written agreement among the partners is called Partnership Deed

It can be for a particular venture, particular period or at will


  • Every trade , occupation or profession with the objective to earn profits is business except :
    • charitable activity as it is not done with the objective to earn profits
    • A business which is unlawful in the eyes of law. Example - a business to do drug dealing or smuggling cannot be formed as partnership.

Profit Sharing

An agreement to share profits means agreement to share profits and losses both. So in a numerical question is profit sharing ratio is given then it means both profits and losses wiil be shared in this ratio among the partners

However it is not necessary that all partners will share losses. It can be agreed that some partners will not share losses

Unlimited Liability

The liability of partners under partnership is unlimited. It means if liabilities of the firm cannot be paid through firms assets then partners have to pay the firms liability from their personal assets.

In other words the liability under partnership of partners is not limited till assets of the firm but its limits extend up to the personal assets of the partners.

What are firms Assets - The assets shown in the Balance sheet of the firm like land and buildings, Machinery, vehicles, computer, etc. with the help of which the business of the firm is conducted

What are personal assets of partner - Assets owned by partner for personal usage of himself and his family. Examples - house where partner lives with family, Car which he uses for his personal use like go to market, drop his children to school etc. , Furniture at his house, Jewellery owned by his wife, his personal deposits in bank, etc.

Principle - Partnership business is not a separate legal entity distinct from its partners. As explained above the firms debts are payable by partners if firm is unable to pay its debts. So A partnership business is different from a company which is indeed a separate legal entity.

It is pertinent to note that we are not talking here about the separate entity concept from accounting point of view. From accounting point of view every business is separate from its owners. But that is mainly for the purpose of applying the accounting rules of debit and credit and preparing its final accounts. Example - Capital invested by the owner in the business is shown on liability side of balance sheet. it is due to the fact that from accounting point of view the business is separate from its owner and when a person invests capital that in a way he is lending money to a person called 'business' and so its a liability for the 'business' whose Balance Sheet we prepare while preparing final accounts

Minimum 2 persons required by Samridhh Fin Coach

For Advanced Users

Who is person of sound mind for contracting - This definition is given in Sec 12 of Indian Contracts Act. As per this section :

  • A person is said to be of sound mind for the purpose of making a contract, if,
    • at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interests
    • .A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind.
    • A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind.
    • A patient in a lunatic asylum, who is, at intervals, of sound mind, may contract during those intervals.
    • A sane man, who is delirious (confused mental state due to illness, medication, fever, substance abuse and due to this they are unable to think and speak clearly) or
    • who is so drunk that he cannot understand the terms of a contract, or form a rational judgment as to its effect on his interests, cannot contract whilst such delirium or drunkenness lasts.
mindmap root(Soundness of Mind and Contract Law) [www.edunol.in] (Sound Mind) (Capable of understanding the contract) (Forming a rational judgment as to its effect on their interests) (Occasional Sound Mind) (May make a contract during those intervals) (Occasional Unsound Mind) (May not make a contract when they are of unsound mind) (Lunatic Asylum Patient) (May contract during intervals when they are of sound mind) (Delirious or Drunk Person) %%::icon(fa fa-beer) (Cannot enter into a contract whilst in that state)

Who is an alien enemy - A person who belongs to a country that is in a war situation with India. In other words a person who belongs to a country which is in a geopolitical conflict with India

Why foreign sovereigns and ambassadors are disqualified - Such persons are free form any civil liability and cannot be sued in Indian courts except if they voluntarily submit themselves to the court or with the approval of the Central Government

Who are Insolvents - A person who is incapable of meeting his financial obligations. In other words he is someone whose Financial Liabilities > Financial Assets and hence he is incapable of discharging all his financial obligations

Who are Convicts - A convict is a person found guilty of a crime and sentenced by a court or a person serving a sentence in prison. However a convict after he has served his sentence becomes eligible to enter into partnership

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