A sole proprietorship as one man business is characterized by limited financial resources limited managerial capability, unlimited liability for the obligations of the business etc. to mention a few. When the business expands, there is need for more financial resources an greater managerial capability to manage it apart from the increased risk to be shouldered.
The sole proprietorship is no match to meet the above requirements. To overcome sue situations, partnership form of business has been evolved. Further, a wealthy entrepreneur without managerial skill may associate with a person with managerial capacity but lacking financial resources to carry on some business by pooling their capital and skill. This possibility also leads to formation of partnership business.
Meaning and Definitions of Partnership:
The partnership business is governed by the rules contained in the Indian Partners Act, 1932. Section 4 of the Partnership Act defines partnership as “the relations between persons who have agreed to share the profits of a business carried on by all or any of the acting for all.”
The analysis of the definition reveals that at least two persons need to associated to carry on partnership business. The persons must associate to undertake certain business with the motive to share the profit. The relationship must be contractual and there must be principal-agent relationship between or among the persons.
L. H. Haney has defined partnership as “the relationship between persons who a, to carry on a business in common with a view to private gain.” This definition puts emphasis on sharing of gains by carrying on a business through agreement.
From the above definitions it can be concluded that partnership is an association of two or more persons to share the profits of a business carried on by all the persons or any of them acting for all. The persons who form themselves into a partnership are individual called ‘partners’ and collectively known as the ‘partnership firm’ or ‘firm’. The name in which the business is carried on is called the ‘firm name’. However, law does not recognise the firm as a separate entity distinct from the partners composing the firm.