Partnership — two or more owners
The answer
A partnership is 2 or more people carrying on a business together for profit. It is created by agreement, not by registration, so you can be in one without ever signing anything. Every partner can bind the firm, and every partner is personally liable for the whole of the firm's debts — not just their share.
Why this costs you money
There are 2 losses here, and the second is the one nobody sees coming.
The obvious one. The business fails owing ₹40,00,000. There are 4 partners. You assume you owe ₹10,00,000. You do not. Liability is joint and several, so each partner can be pursued for the entire amount. If the other 3 have nothing, the creditor takes ₹40,00,000 from you, and recovering ₹30,00,000 from your partners is a separate fight you may never win.
The worse one. Your partner signs a contract you knew nothing about. They had no authority from you, they did not discuss it, and you would have said no. The firm is bound anyway, because every partner is an agent of the firm and of every other partner. This is mutual agency. You did not sign. You are liable.
And a partnership needs no document. Section 4 of the Indian Partnership Act 1932 defines it as a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. In the United States a general partnership arises when 2 or more people carry on a business as co-owners for profit. Neither definition requires registration, a deed, a bank account or a name.
If you and a friend run something together and split the money, you are probably already partners. With unlimited liability. Since you started.
How it works
Four features define a partnership, and each follows from one idea: the law treats the partners as the business.
1. Mutual agency. Section 18 of the Indian Act states it directly: a partner is the agent of the firm for the business of the firm. Anything done in the ordinary course binds everybody.
2. Unlimited, joint and several liability. Section 25 makes every partner liable jointly with the others and individually for all acts of the firm done while they are a partner. Personal assets are reachable.
3. Profits and losses are shared as agreed — and equally if there is no agreement. The default is equality, which is almost never what anybody intended.
4. It is fragile. A partnership at will can be dissolved by any partner giving notice. A death or a serious disagreement can end the firm, and contracts, licences and the bank account do not carry over.
The instrument that fixes most of this is the partnership deed. It is not required by law and it is the most valuable document a small business ever signs. A deed worth having answers 6 questions:
- Who contributes what capital, and what happens if more is needed?
- How are profits and losses shared? What does each partner draw?
- What can 1 partner do alone, and what needs everybody's signature? Put a rupee limit on it.
- How does a partner leave, and how is their share valued?
- What happens if a partner dies?
- How is a deadlock broken?
Question 3 answers mutual agency. It does not protect you against outsiders — an outsider dealing with your partner in good faith is still protected — but it gives you a claim against your partner, and it changes behaviour before anything goes wrong.
What it tells you, and what it does not
Being a partnership tells you where liability sits: with every partner, personally, for the whole amount, regardless of who caused the problem.
It does not tell you the firm is informal or small. Some of the largest professional firms in the world are partnerships. It is a structure, not a stage.
And it does not mean a partnership is a bad idea. It is the natural structure for a few people who trust each other, want to share profit without company formalities, and face a limited maximum claim. Two consultants in a room is a reasonable partnership. Two people importing goods on credit is not.
The decision rule
Before you agree to share profit with anybody, answer 1 question:
"What is the largest cheque this person could sign in our name without asking me, and could I pay it?"
If the answer to the second half is no, you need a deed with hard limits, or a different structure. Trust does not solve it. Mutual agency is not about honesty, and an honest partner making an honest mistake binds you as completely as a dishonest one.
Try this now
Five minutes, on your own arrangements.
- Write down every arrangement where you share the money from an activity with another person. Include the ones that do not feel like a business: a side project with a friend, a shop run with a sibling, a rental property you own and manage jointly, a trading account 2 of you fund, a freelance job where you split the fee.
- For each, answer 3 questions in writing. Is there a signed, dated document — not a chat message? Does it say what either of us can commit the arrangement to without the other agreeing? Does it say what happens if one of us walks away?
- In India, if any of these has a business name, search your state's Registrar of Firms for it. If it is an LLP, look it up free on the Ministry of Corporate Affairs website under "View Company/LLP Master Data".
- In the United States, check whether anything was filed with your state or county. If nothing was, that does not mean the partnership does not exist. It means it exists and is undocumented.
- Now the exposure test. For each arrangement, write down the largest amount your co-owner could commit the business to tomorrow, in the ordinary course of that business, without telling you. Ask whether you could pay it.
What you should see. Most people find at least 1 arrangement with no written document. That is a general partnership under the law of both countries, it started on the day you began sharing profit, and your exposure is unlimited.
Step 5 has a number in it. Write it down. It is the honest size of a risk you were carrying without measuring.
Three real cases
1. Apple Computer Company, 1 to 12 April 1976 (United States) — mutual agency, in 12 days Steve Jobs, Steve Wozniak and Ronald Wayne formed Apple as a partnership on 1 April 1976. Wayne took 10%, drew the first logo and wrote the partnership agreement. Within days Jobs took a $15,000 line of credit to build machines for an order from a computer shop known for paying late. Wayne was 41, had personal assets, and understood that in a partnership every partner is personally responsible for debts incurred by any partner. He withdrew on 12 April 1976 for $800. The stake he gave up would be worth hundreds of billions of dollars today. He was not being foolish. He was being accurate about the structure he was in.
2. Punjab National Bank, complaint filed 29 January 2018 (India) — firms, not companies Fraudulent letters of undertaking were issued in favour of 3 firms — Diamonds R Us, Solar Exports and Stellar Diamonds — in which Nirav Modi, his wife Ami, his brother Nishal and Mehul Choksi were named as partners. The exposure was restated to about ₹14,357 crore by 18 May 2018. The structural point is separate from the fraud. These were partnership firms, so the partners stood behind no corporate wall. That is why enforcement reached personal assets directly, and why every partner's name mattered rather than only the person who signed.
3. The Goldman Sachs Group, 4 May 1999 (United States) — why partnerships have a ceiling Goldman Sachs was founded in 1869 and was a partnership for most of its first 130 years. Its capital was its partners' own money, and when a partner retired, the capital left with them. It went public on 4 May 1999, saying it wanted permanent capital to grow and to share ownership broadly among employees. That is the honest limit of a partnership: the money is only as permanent as the people, and no partnership can raise capital from strangers.
The question that resolves it
A novice looks at a partnership and asks: do I trust my partner?
An expert asks: what can my partner do without me, and what happens to me if they are wrong?
Trust answers the first question and has no bearing on the second. The Apple partnership had 3 honest founders. Ronald Wayne still had to leave.
What would make this wrong
If partners were liable only for their own share, a creditor of a failed firm could recover from each partner only their proportion. Section 25 of the Indian Partnership Act 1932 makes liability joint and several, and the Revised Uniform Partnership Act does the same across most US states.
The honest limits are 3.
First, an act must be in the ordinary course of the firm's business to bind the firm. If your partner in a bookshop buys a tractor in the firm's name, a court may find the supplier could not reasonably have thought that was bookshop business. The protection is real and narrow.
Second, a limited partnership is different. In an LP there are general partners with unlimited liability and limited partners whose exposure is capped at what they put in, as long as they stay out of management. It is the standard structure for US private equity and venture funds.
Third, a retiring partner stays liable for debts incurred while they were a partner unless proper public notice is given. In India, Section 32 governs that notice. Retiring quietly does not end your liability.
In India
The Indian Partnership Act 1932 governs. Its central design choice is that a firm is not a separate legal person. "Firm" is a convenient name for the partners collectively, and property held by the firm is held by the partners.
Registration is optional. A partnership is valid without it. But Section 69 penalises not registering: an unregistered firm cannot sue to enforce a contractual right against a third party, and a partner cannot sue the firm or the other partners to enforce the deed. Note what that does not say. Other people can still sue you. Non-registration removes your sword and leaves your exposure unchanged. That is the worst position, and it is the default one.
Registration is with the Registrar of Firms of the state, not the Ministry of Corporate Affairs. There is no national register of firms and no free national lookup like the one for companies, which is why checking a firm is harder than checking a company.
Maximum partners: 50, under Rule 10 of the Companies (Miscellaneous) Rules 2014.
Tax. A firm is taxed as a separate assessee at 30%, plus surcharge and cess. Partner remuneration and interest on capital are deductible within the limits of Section 40(b) of the Income Tax Act 1961. The profit share a partner receives after that is exempt in the partner's hands.
In the United States
A general partnership is the default when 2 or more people carry on a business as co-owners for profit. No filing creates it.
Most states have adopted a version of the Revised Uniform Partnership Act, which makes 1 choice Indian law does not. Section 201 says a partnership is an entity distinct from its partners. The firm can own property and sue in its own name.
That sounds as though it should change liability. It does not. Partners remain jointly and severally liable for the obligations of the partnership. The entity status is about title and procedure, not protection.
Tax. A partnership files an information return on Form 1065 and pays no federal income tax itself. Each partner receives a Schedule K-1 and reports their share on their personal return. Partners generally pay self-employment tax on their share of ordinary business income.
Filings. Some states allow a Statement of Partnership Authority to be filed, putting on public record what individual partners can and cannot do. It is inexpensive, rarely used, and directly addresses mutual agency.
Where they differ, and what that tells you
The 2 countries separate the same 2 ideas in opposite places.
Indian law says a firm is not a separate person, and partners are personally liable. Those 2 arrive together and it feels logical.
US law says a partnership is a separate entity, and partners are still personally liable. The entity exists and protects nobody.
What that tells you is the most important idea in this cluster. Being a separate legal entity and having limited liability are 2 different things, and they can be switched on independently. A US general partnership has the first without the second. Limited liability is not an automatic consequence of being an entity. It is a separate privilege, and it has to be asked for.
That is what the next 2 structures do. An LLP is a partnership that asks for it. An LLC is an entity built with both from the start. Once you see the 2 ideas are separate, every remaining structure here is a choice about which combination you want.
Carry this
- If you share profit from a business with somebody, you are probably already partners, with no document and no limit.
- Every partner can bind the firm. You are liable for a contract you never saw.
- Liability is joint and several. Your exposure is the whole debt, not your share of it.