A partnership is a relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.
The following are the main characteristics of partnerships:
- There must be two or more persons to form a partnership
- There must be a written or verbal agreement between all the concerned persons
- The agreement must have the aim of conducting business
- The business may be carried on by all or any of the partners acting for all
- The gain or loss must be shared by all
The persons who form a partnership are individually called “partners.” The collective name given to them is a “firm.” The maximum number of partners is limited to 10 in banking businesses and 20 in trading concerns.
Sharing the gain is an important element of a partnership. However, it is not conclusive proof of being a partner. There are examples of entities that share in a firm’s gain without being considered partners. For example:
- Employees paid on the basis of profit
- Lenders who receive a rate of interest that varies with the amount of profit
Partnerships are based on an agreement that may be written or oral. Even oral agreements may not be necessary; partnerships can be implied from the acts of the persons engaged in the enterprise.
It is, however, always better to make a partnership agreement in writing.