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This can be enumerated as follows:-
1. Agreement: – the first essential element of partnership is agreement. It is a relation between persons who have agreed to share profits. There can be no partnership without an agreement. Therefore the relation of partnership arises from contract and not from status.
2. Business: – The second essential element of partnership is “business” because without business there can be no partnership. Business includes every trade, occupation and profession. It is not necessary that the business should be of long standing and permanent. A single commercial transaction may constitute a business (Abenneim (1913) 109 LT 219, 220). According to Lindley (Lindley on partnership, fourteenth Edition. P.116) if the persons are not already partners, share profits and losses of a particular transaction, they may be partners for the said particular transaction.
3. Sharing of profits: – Another essential element of partnership is sharing of profits of a business. If two or more persons agree to carry on a business but their objective or motive is not to share profits, it shall not constitute a partnership. Thus sharing of profits or participation in profits of a business is one of the important essential elements of partnership. Prior to 1860 this essential element was considered so much important that if two or more persons agreed to carry out a business with the objective of sharing profits, it was considered to be decisive of constituting a partnership between them. In 1860 the decision in Cot v. Hick man (1860) 8 HLC 268) brought about a revolutionary change in this respect. Delivering the judgment Lord Cranworth of the House of Lords said that sharing of profits is good evidence that the business in which profits have been incurred is being carried on behalf of the persons who are sharing profits. In other words, sharing of profits is prima facie evidence of partnership. But the decisive test is mutual agency. The real basis of liability is that the business is being carried on behalf of the persons sharing profits.
4. Manual agency: – if two or more persons agree to carry on a business to share profits, it is still possible that the partnership may not come into in order to constitute a partnership in addition to the above noted three elements, the case of Cox v. Hickman (supra) deserves a special mention in this connection.
Lord justice Lindley defined company as “an association of many persons who contribute money or money’s worth to a common stock and employ it for a common purpose (Dr. N. C. Paranjape, company law, 2002). In undertaking the operations of the hotel and restaurant, both parties need to form ad incorporate the company either by special statute or by registration under the companies Act for the time being in force. Further the company many also be incorporated by Royal charter which is perhaps the oldest mode of incorporation. Therefore the means that it means that if David and Angela decide to run their business as a company then their property will be the partnership it is appropriate as their property will continue to be theirs and they will only share profits and losses of the company.
There are several disadvantages and advantages of using partnership over a company in the prevailing case of David and Angela.