Section 4 of the Indian Partnership Act, 1932 defines a partnership as ‘the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all’. Persons who enter into a partnership are individually called ‘Partners’ and collectively a ‘Firm’, and the name under which the business is carried on is called the ‘Firm’s Name’.

The essential characteristics of a partnership organisation are:

  • A partnership is an association of two or more than two persons. However, a limit is placed by s.11 of the Companies Act, 1956 on the maximum number of partners – at ten in case of banking business and twenty in case of any other business.
  • A partnership must be the result of an agreement between two or more persons.
  • The agreement must be to carry on some business.
  • The agreement must be to share profits of the firm.
  • The business must be carried on by all or any of them acting for all. The partnership is based upon the idea of mutual agency. Every partner assumes a dual role – that of a principal and an agent.
  • The liability of each partner of the firm is unlimited in respect of the firm’s debts.
  • A partnership firm has no independent legal existence apart from the persons who constitute it.
  • A partnership agreement is based on mutual confidence and trust of the partners.
  • No partner can transfer his share in a partnership to an outsider without the consent of all the other partners.
  • No change can be made in the nature of the partnership business without the consent of all the partners.


A partnership firm may be distinguished from a company in the following ways:

  1. Legal Status: A partnership firm has no existence apart from its members. A company is a separate legal entity distinct from its members.
  2. Mutual Agency: A partnership is founded on the idea of mutual agency – every partner is an agent of the rest of the partners. A member of a company is not an agent of the other members.
  3. Liability of Members: The liability of a partner is unlimited, i.e., even his own personal assets are liable for the debts of the firm. The liability of a member of a limited company is limited to the extent of the amount remaining unpaid on shares held by him or the amount of guarantee, as mentioned in the memorandum of association of the company.
  4. Transfer of Interest: A partner cannot transfer his interest in the partnership without the consent of all other partners. A member, subject to the restrictions contained in the articles, can freely transfer his shares in the company.
  5. Duration of Existence: Unless there is a contract to the contrary, the death, retirement, or insolvency of a partner results in the dissolution of the firm. In contrast, a company enjoys a perpetual succession. Death or retirement or insolvency of a member of a company does not affect the existence of the company.
  6. Minimum Membership: The minimum number of persons required to form a partnership is two. The minimum number required to form a private company is two and in the case of a public company the minimum number is seven.
  7. Maximum Membership: A partnership cannot be formed by more than twenty persons. The number is limited to ten in the case of a banking business. In the case of a public company, there is no limit to the maximum number of members. However, a private company cannot have more than fifty members.
  8. Audit: The audit of the accounts of a firm is not compulsory, whereas the audit of accounts of a company is mandatory.
  9. Use of the Words ‘Limited’ and ‘Private Limited’ not Allowed: Section 631 provides that if any person or persons trade or carry on business under any name or title of which the words, “Limited” or “Private Limited” are the last words, that person or each of these persons shall, unless duly incorporated as a public or a private company, as the case may be, be punishable with fine which may extend to 500 for every day upon which that name has been used.



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