Partnership Agreement Basics

Partnership Characteristics

• A partnership is a result of an agreement between partners, which can be written or oral, but a written agreement is preferred.
• A minimum of two partners are required to start a partnership firm, and the maximum number of partners is fifty, as per the Companies Act 2013 (Amended in 2014).

Lawful Business

• The business undertaken by a partnership must be lawful and not prohibited by the state.
• The partnership definition does not permit any illegal business.

Profit and Loss Sharing

• The purpose of a partnership is to earn maximum profits, and partners must share profits and losses according to the ratio given in the agreement.
• If the agreement is silent about the ratio, profit and loss sharing will be equal.

Unlimited Liability

• The liability of partners is unlimited, joint, and several, meaning partners are liable until the last rupee in their pocket.
• If the business's assets are not sufficient to pay liabilities, then personal property of partners can be used.
• If one partner is declared insolvent, their liability will be borne by the solvent partner.

Registration

• Registration of a partnership firm is compulsory only in the state of Maharashtra, effective from 1st April 2005.
• According to the Indian Partnership Act, 1932, registration of a partnership firm is optional.
• Registration of a firm merely certifies its existence and is a process of entering the name of the partnership firm in the register of the Registrar.

Joint Ownership and Management

• Each partner is a joint owner of the property of the firm and cannot use it for personal use.
• All partners have equal rights in managing the firm, and all partners are jointly responsible for the management of the firm.

Principal and Agent

• Each partner works in two-fold capacities, i.e., as a principal and an agent.
• A partner acts as a principal of the firm with outsiders and as an agent with other partners.

Dissolution

• A partnership firm can be dissolved through an agreement between partners.
• A partner can dissolve the firm by giving fourteen days' notice.
• The firm can also be dissolved if a partner dies, retires, becomes insolvent, or insane.