Partnership is the relationship between persons who have agreed to share the profits of a business carried on by all of them acting for all. So essentially a partnership has the following features:
- It is an association of two or more persons
- It is a result of an agreement .i.e. is a creation of contract.
- It is organised to carry on a business.
- Persons concerned agree to share the profits of the business
- Business is carried on by all or any of them acting for all .i.e. there exist the element of mutual agency.
The agreement to form a partnership need not be a formal written contract it may be evident by the conduct of the parties concerned or a result of mutual understanding. Therefore a written partnership deed is not necessary. Registration of partnership is voluntary in most states of India.
However, for the purposes of Income Tax Act, 1961 it is a must have, if the partners desire their firm to be assessed as such firm. It is more beneficial to be accessed as a partnership firm than as an Association of persons (AOP), since a partnership firm can claim some additional deductions like authorised interest paid to the partners & salary bonus or remuneration to the working partner.
It provides extremely flexible structure, the partners can change the size or nature of the business whenever they wish to, there are no complex legal procedures to be followed, only requirement is the consent of all the partners.
In a partnership firm all the partners share the business risk and liability, and can be held personally liable for acts of the partnership firm itself.