Question

Lorraine, Maureen, and Claudette entered into a verbal agreement to open a law firm together. The women prepared an agreement outlining their respective contributions to the business and the ratio in which profit and losses will be shared. They have also agreed that 5% will be charged on drawings and 10% interest on the capital invested.

Identify the relationship that exists among the three business partners and briefly discuss at least five characteristics of the formation of such business organization?

Answer 1

The Relationship that exists among the three business partners are: Each partner has a right to share in the profits of the partnership. Unless the partnership agreement states otherwise, partners share profits equally. Moreover, partners must contribute equally to partnership losses unless a partnership agreement provides for another arrangement.

Characteristics of formation of partnership business organisation :

1. Existence of an agreement:

Partnership is the outcome of an agreement between two or more persons to carry on business. This agreement may be oral or in writing. The Partnership Act, 1932 (Section 5) clearly states that “the relation of partnership arises from contract and not from status.”

2. Existence of business:

Partnership is formed to carry on a business. As stated earlier, the Partnership Act, 1932 [Section 2 (6)] states that a “Business” includes every trade, occupation, and profession. Business, of course, must be lawful.

3. Sharing of profits:

The purpose of partnership should be to earn profits and to share it. In the absence of any agreement, the partner should share profits (and losses as well) in equal proportions.

4. Agency relationship:

The partnership business may be carried on by all or any of them acting for all. Thus, the law of partnership is a branch of the law of Agency. To the outside public, each partner is a principal, while to the other partners he is an agent. It must, however, be noted that a partner must function within the limits of authority conferred on him.

5. Membership:

The minimum number of persons required to constitute a partnership is two. The Act, however, does not mention the upper limit. For this a recourse has to be taken to the Companies Act, 1956 [Section 11 (1) & (2)]. It states that the maximum number of persons is ten, in case of a banking business and twenty, in case of any other business.