How to - Test of partnership

Test of partnership

As stated before, a partnership agreement can be oral or in writing. It is not the general practice to enter into a preliminary agreement to enter into a regular partnership agreement. But if such a preliminary agreement is entered into and the partners start business in anticipation of executing a formal deed of partnership, the partnership shall be deemed to have commenced from the commencement of the business, unless the preliminary agreement is conditional upon the happening or not happening of some event in which case the partnership cannot be said to have come into existence unless the event has happened or not happened. Another test of partnership as mentioned above is that of sharing profits, and which is an essential requirement of a partnership. Profits may be shared in such proportions as the parties may agree, but sharing of profits is most essential. As against that, sharing of losses only suffered in business is not a test to constitute a partnership.

Therefore, the partnership agreement may provide that a particular partner or partners will not be liable to bear any losses of the firm. As regards sharing in profits the agreement may provide that a partner shall receive only a fixed share in the profits or a fixed periodical amount and It is not necessary that profits should be shared in certain proportions.

Section 6 of the Partnership Act provides that In determining whether a group of persons is or is not a firm or whether a person is or is not a partner in a firm regard shall be had to the real relation between the parties as shown by all the relevant facts taken together.

It further provides that sharing of profits or gross returns arising from property by persons holding joint or common interest in that property does not of itself make such persons partners, that is, as stated above, mere joint ownership of business does not constitute a partnership.

Similarly, receipt by a person of a share of the profits of a business or a payment contingent upon earning of profits or carrying with the profits earned by a business, does not of itself make him a partner with the person carrying on the business. For example, the receipt of a share or payment by a lender of money to persons engaged or about to engage in a business does not make such lender a partner.

Similarly, a share given in profits to a servant or agent as remuneration does not make him a partner, or if a widow or child of a deceased partner is given any annuity in payment of the share of the deceased partner It does not make the widow or child a partner, or if a business is sold with goodwill and the seller is given a share in profits towards payment of the sale price it will not make him a partner of the firm. But otherwise wherever the agreement is for sharing of business carried on by two or more persons the partnership relation will be inferred.

The partnership business may consist of doing anything which is not illegal or against public policy. Business may consist of carrying a continuous trade. or profession or any manufacture and any other activity of which the object is to earn profits. Or it may be limited to a single adventure.