A partnership firm is an association of two or more persons to carry on a legal business and share its profits or losses. The persons who join hands together to do a business are individually known as partners and collectively a firm.
According to Sec 4 of the Indian Partnership Act, 1932, "the term partnership is the relation between two or more persons who have agreed to share the profit of the business carried on by all or any of them acting for all."
Essential elements of Partnership:
•1. At least two persons: There must be at least two persons to form a partnership and all such persons must be competent to contract.
•2. Agreement: There must be an agreement to form a partnership. This agreement can be oral or written.
•3. Legal Business: An agreement should be for the purpose of carrying on the business or profession. The business to be carried on by the partners should be legal.
•4. Profit Sharing: The agreement between the partners must be to share the profits or losses of the business in the particular ratio.
•5. Mutual agency: There should be a mutual agency relationship among the partners. 'Mutual Agency' relationship means that each partner is both an agent and the principal. Each partner is an in the sense that he can bind the other partners by his acts done.
•6. Number of partners: The minimum limit of the partners in a firm is two and maximum number of partners in a banking firm should be 10 and in the other firm should be 20.