Partnership firm evolved because of the limitations of sole proprietorship such as limited
capital, limited managerial ability, small scale of operations, concentrated risk, etc.
According to the Indian Partnership Act, 1932, “Partnership is the relation between
persons who have agreed to share the profits of a business carried on by all or any of them acting
The essential features ofia partnership firm are as follows
(i) Lawful Business The partners must agree to carry on some lawful business. Mere holding of property in joint ownership cannot be considered as partnership unless it is accompanied by certain business activities like production and distribution of goods and service.
(ii) Risk Bearing and Sharing of Profits The risks involved in running a partnership is borne
by all the partners. They share the profits (and losses) of the business in the agreed ratio. It is significant to note that sharing of profits is not a conclusive proof of partnership. Thus, employees, or creditors who share profits cannot be called partners in the absence of any agreement of partnership. .
(iii) Agency Relationship There must be an agency relationship between the partners. Every partner is a proprietor as well as an agent of the firm. The business of the firm may he carried on by all or any of them acting for all. Each partner is entitled to take part in management of the day-to-day activities of the business.
(iv) Formation The partnership form of business organisation is governed by the Indian Partnership Act, 1932.
(v) Membership There must he at least two persons to form a partnership and all such persons must be competent to contract. Maximum number can be ten in case of banking industry and twenty in case of any other business.