Question

In partnership, an agreement to share profits implies_____.

• A. Sharing of losses
• B. Not to share losses
• C. To contribute capital
• D. To pay the creditors

Answer 1

Answer: (A)

Sharing of losses

The following features are essential to the formation of a partnership.

• Association of more than one person: To form a partnership there should be at least two persons. A partnership cannot survive if the number of partners gets reduced to one for whatever reasons — death, insolvency, lunacy, etc,.
  
• Result of an agreement: Partnership is formed as a result of an agreement between two parties. It does not arise out of status or inheritance as in the case of Hindu Undivided Family (HUF). It even does not arise by operation of law as in the case of co-ownership or Joint Stock Company. Thus, creation of an agreement [whether express (written or oral) or implied] between two or more people is the very foundation of partnership. Besides, the contract must contain all essential elements of a valid contract.
  
• Agreement to carry on some business: Another essential element of a partnership is that it is formed for the purpose of carrying on some (but lawful) business. An association or society formed primarily to carry on some charitable, religious, or social works cannot be regarded as partnership. Even a co-ownership does not amount to partnership.
  
• Sharing of profits: Sharing the profits of business amongst all the partners is the core of partnership. There will be no partnership where only one of the partners is entitled to the whole of the profits of the business. Sharing of loss is also an essential feature of partnership.
  
• Mutual agency: Mutual agency is the conclusive test of a partnership. Business of the firm may be carried on by all or any of the partners acting for all. This means that a partner is both an agent and a principal in a partnership firm.