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

(i)    Two or More Person. 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. But the Companies Act, 1956 lays down that any partnership or association of more than 10 persons in case of banking business and 20 persons in other business operations is illegal unless registered as a joint stock company. Thus, the maximum limit on the number of partners is 10 in case of banking and 20 in case of any other business.

(ii)    Agreement. The relation of partnership arises from contract and not from states. 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 certain business activities 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. Charitable institutions and hospitals, though run jointly are not partnership as there is no sharing of profits. It is also significant that sharing of profits is not a conclusive proof of partnership. Thus, employees or creditors who share profits cannot be called partners in the absence of any agreement of partnership.

(v)    Agency Relationship. There must be an agency relationship between the partners. Every partner is a proprietor as well as an 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 their parties.

(vi)    Unlimited Liability. As a result of 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.

(vii)    Common Management. All the partners are allowed by the law to take part in the management of the business. However, they may agree to entrust day-to-day management of the firm’s business to a few or anyone of them. But whenever a crucial policy decision is to be taken the consent of all the partners is essential.

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