The limitations and deficiencies of sole proprietorship such as limited financial resources, limited, managerial skills and concentrated risk led to the emergence of partnership as a form of organization. When two or more person join together in a business with common ownership and management under an agreement, it is known as partnership

The essential features of tests of a partnership firm are discussed below:

(i)    Two or More Persons. There must be minimum two persons to form a partnership. The partnership Act fixes no maximum limit on the number of partners of a partnership firm.

(ii)    Agreement. The relation of partnership arises form contract and not from status. It does not arise because of natural love and affection or because of birth in a family. It arises only as an outcome of a contract between persons who are competent to enter into a contract. Therefore, minors, lunatics, insolvents and other person incompetent to enter into a valid contract cannot enter into a partnership agreement.

(iii)    Lawful Business. The partners must agree to carry on some lawful business. Mere holding of property in joint ownership cannot be considered as partnership unless, it is accompanied by version business activates like production and/or distribution of goods and services.

(iv)    Sharing of Profits. There must be an agreement between the partners to share the profits (and loss) of the business.

(v)    Agency Relationship. There must be an agency relationship between the partners. Every partner is a proprietor as well as a n agent of the firm. The business of the firm may be carried on by all or any of them acting for all. Each partner is entitled to take part in management of the day-to-day business of the firm and to represent other partners in dealing with third parties.

(vi)    Unlimited Liability. As a result or contractual relationship between the partners of a firm, all the partners are liable jointly and severally for all debts and obligations of the firm to an unlimited extent. It means that if the assets of the firm are not sufficient to meet the obligations of creditors of the firm. The private assets of the partners can be attached to satisfy their claims.

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