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When one is starting a business, one may form a sole proprietorship when the business is small. The problem with this kind of business is that it cannot grow beyond a certain limit. This is because a sole proprietorship will not be readily sponsored by banks other sources of finance.

Also the amount of money that the sole proprietor can contribute to the business “alone” is not very high. Besides this, the sole proprietor has to take wise decisions in running the business. If he is unable to do so, the business will not be very successful and will not grow.

A sole proprietor might be an expert at marketing or might be technically strong. But it is not likely that he will be strong in all the fields that are important for making wise and successful business decision.

For all the above reasons, one may choose to form a partnership firm right from the start or later change their firm to a partnership firm. So, one may start a partnership firm with the objective of pulling in people so that more capital is generated or making specifically skilled people partners so that wise business decisions may be made.

Definition Of Partnership :-“Partnership” is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called individually” partners” and collectively” a firm”, and the name under which their business is carried on is called the” firm name”.


In determining whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts taken together.

Explanation I : The sharing of profits or of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners.

Explanation II : The receipt by a person of a share of the profits of a business, or of a payment contingent upon the earning of profits or varying with the profits earned by a business, does not itself make him a partner with the persons carrying on the business.and, in particular, the receipt of such share or payment –

  • by a lender of money to persons engaged or about to engage in any business.
  • by a servant or agent as remuneration,
  • by the widow or child of a deceased partner, as annuity, or
  • by a previous owner or part-owner of the business, as consideration for the sale of the goodwill or share thereof,

does not of itself make the receiver a partner with the persons carrying on the business.

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