TAXATION IN A LLP

Abstract

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. In order to constitute a partnership, the parties must enter into a contract to make the partnership valid. There are five essential elements to constitute a partnership. They are-

1. Contract- partnerships do not arise out of inheritance, operation of law or status of parties but is an outcome of a contract. A contract becomes the most basic and foundation step in formation of a partnership no matter whether it is either express or implied or can be made in oral or in writing. ‘Relation of partnership arises from contract and not from status.'
2. Association of two or more persons-in order to construe a valid contract, it is necessary that at least two people are into it. As partnership is the outcome of a contract, it becomes necessary that two or people are involved in it. In a partnership firm, there is no limit for the maximum number of partners but in a company, there must be a maximum of 10 partners in a banking business and 20 in any other business and the involvement of more partners than the specified number, the business will be considered illegal.
3. Carrying on of business- the parties in a partnership must agree to carry on a business and mere charitable work does not amount to business and there will be no partnership. Moreover, even if the members decide to divide their income or the goods among themselves, there will not be any partnership as there is no carrying of any business. As seen in the case of Govind Nair v. Maga, the owners of a tea shop shared the money equally and purchased the required utensils and pottery for their job and then rented that shop which was shared by them equally. The court held that they were mere co-owners and not partners as there was no carrying of any business. Therefore, carrying of any business means that there should be repetition or continuity of acts, and an isolated single transaction between the parties does not amount to carrying of a business.
4. Sharing of profits-in a partnership, the members must carry on a business with an object to share their profits among the partners only. There can be no partnership, if only one partner is making profit for the whole business. However, sharing of loses does not constitute to any ground for partnership. This could be seen in the case of Raghunandan v. Harmajee.
5.  Mutual Agency-another essential element to constitute a valid partnership is mutual agency. The partners act as both principal and agent for themselves as well as for the other partners. The acts done by the partners can bind the other partners and the decisions and acts by other partners binds an individual partner in a course of partnership business. Thus, every partner can carry on a business on behalf of other partners.