A Partnership is defined by the Indian Partnership Act, 1932, as ‘the relation between persons who have agreed to share profits of the business carried on by all or any of them acting for all’. This definition gives three minimum requirements to constitute a partnership firm, viz.

• Agreement of between persons desiring to form partnership whether oral or written,
• The object of the agreement is to share the profits of the business, and
• The intended business must be carried on by all the partners or by any of them acting for all of them.

A partnership firm is best for small businesses that plan to remain small. Low costs, ease of setting up and minimal compliance requirements make it a sensible option for such businesses. Registration is optional for General Partnerships. However, for larger businesses, it has lost its relevance with the introduction of the Limited Liability Partnership (LLP). This is because an LLP retains the low costs of a partnership while providing the benefit of limited liability, which means that partners are not personally liable for the debts of the business.

The partners in a partnership firm are the owners, and thus, are not separate entities from the firm. Any legal issues or debt incurred by the firm is the responsibility of its owners, the partners. A partnership must have at least two partners. A partnership firm in the banking business can have up to 10 partners, while those engaged in any other business can have a maximum of 20 partners. The consent of all the partners plays an important role in matters like an admission of new members, dissolution of the firm, conversion of the firm, etc.

A partnership is easy to form as no cumbersome legal formalities are involved. A partnership is formed by an agreement, which may be either written or oral. When the written agreement is duly stamped and registered, it is known as "Partnership Deed" which may be registered or not registered. Ordinarily, the rights, duties, and liabilities of partners are laid down in the deed. But in the case where the deed does not specify the rights and obligations, the provisions of The Indian Partnership Act, 1932 will apply.

The partnership deed contains goals, vision, strategies, details of partners, profit-loss sharing ratio, duties of partners, etc. It is important to note that other than individuals, companies can become a partner in a firm due to their separate legal entity.