Difference Between Partnership and Agency

Partnership and agency are closely connected legal relationships, but they are not the same. In a partnership, every partner is both a principal and an agent of the firm for business purposes. 

In an agency, an agent generally acts only on behalf of the principal. The main difference between partnership and agency lies in ownership, profit-sharing, mutual authority, liability and the nature of the legal relationship.

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What Is Partnership?

Partnership is a legal relationship created when two or more persons agree to carry on a business and share its profits. The business may be carried on by all the partners or by any one or more of them acting on behalf of all.

Section 4 of the Indian Partnership Act, 1932 defines partnership as the relation between persons who have agreed to share the profits of a business carried on by all, or by any of them acting for all.

The expression “acting for all” is important because it introduces the principle of mutual agency. Each partner can act for the firm, and the acts of one partner may bind all the other partners when those acts are performed within the scope of the firm’s business.

A partnership therefore includes the following essential elements:

• There must be an agreement between two or more persons.
• The agreement must relate to carrying on a business.
• The parties must agree to share the profits of the business.
• The business must be carried on by all or by any of them acting for all.
• Mutual agency must exist between the partners.

A partnership is not a separate legal entity in the same manner as a company. The firm name is generally treated as a collective name for all the partners. The rights, duties and liabilities of the firm ultimately belong to the partners.

What Is Agency?

Agency is a legal relationship in which one person, known as the agent, is authorised to act on behalf of another person, known as the principal.

The agent represents the principal in dealings with third parties. When the agent acts within the scope of authority, the principal may become legally bound by the agent’s acts.

Agency may arise through:

• an express agreement;
• an implied agreement;
• necessity;
• estoppel;
• ratification; or
• operation of law.

An agent does not usually acquire ownership in the principal’s business or property merely because of the agency relationship. The agent performs authorised acts for the principal and may receive salary, commission, fees or another form of remuneration.

The agent’s authority may be actual or apparent. Actual authority is authority directly given by the principal. Apparent authority arises when the principal’s conduct causes a third party to reasonably believe that the agent has authority.

Difference Between Partnership and Agency

The main difference between partnership and agency is that partnership creates a wider commercial relationship based on mutual agency, shared profits and common business interests. Agency creates a representative relationship in which the agent acts for the principal.

Every partner is an agent of the firm for the purposes of the firm’s business, but every agent is not a partner. A partner has a direct interest in the business and may be personally liable for its obligations. An ordinary agent generally has no ownership interest in the principal’s business and is not personally liable for authorised acts performed on behalf of the principal.

Nature of Relationship

• Partnership is a commercial relationship between persons who agree to conduct a business and share its profits. It creates rights and duties among the partners and also affects their dealings with outsiders.
• Agency is mainly a representative relationship. The agent acts on behalf of the principal and creates legal relations between the principal and third parties.

Position of the Parties

• In partnership, each partner occupies a dual position. A partner is a principal because the acts of other partners may bind that partner, and an agent because that partner may act for the firm.
• In agency, the principal and agent occupy separate roles. The principal authorises the agent, while the agent carries out acts on behalf of the principal.

Mutual Agency

• Mutual agency is an essential feature of partnership. Each partner may act for all the other partners in matters connected with the firm’s business.
• Mutual agency is not necessary in an ordinary agency relationship. The agent may bind the principal, but the principal is not usually treated as the agent of the agent.

Ownership and Business Interest

• A partner has a direct financial and proprietary interest in the partnership business. Partnership property is held for the purposes of the firm and belongs collectively to the partners.
• An agent generally has no ownership interest in the principal’s business or property. The agent manages, deals with or represents the property only within the authority granted.

Sharing of Profits

• The sharing of profits is an important element of partnership. Partners may agree on the proportion in which profits and losses will be distributed.
• An agent does not ordinarily share business profits as an owner. The agent usually receives commission, salary, fees or fixed remuneration.

Liability for Business Acts

• Partners may be jointly and severally liable for acts of the firm done while they are partners. One partner’s authorised act may create liability for all.
• An agent acting within authority generally does not become personally liable to third parties. The principal is usually responsible for authorised acts of the agent.

Authority to Bind Others

• A partner may bind the firm through acts done in the usual course of the firm’s business. This power arises from the relationship of partnership and the Indian Partnership Act, 1932.
• An agent may bind the principal only within actual or apparent authority. Acts beyond authority may not bind the principal unless they are later ratified.

Source of Authority

• A partner’s authority arises from the partnership agreement, the nature of the business, the Indian Partnership Act and established business customs.
• An agent’s authority arises from express appointment, implied conduct, necessity, estoppel, ratification or operation of law.

Right to Remuneration

• A partner is generally not entitled to remuneration for participating in the conduct of the firm’s business unless the partners have agreed otherwise.
• An agent is normally entitled to remuneration according to the agency agreement, established practice or the nature of the work performed.

Termination of Relationship

• A partnership may end through dissolution by agreement, expiry of a fixed term, completion of an undertaking, notice in a partnership at will, insolvency, death or other legal grounds.
• Agency may end through revocation by the principal, renunciation by the agent, completion of the work, expiry of time, death, insanity, insolvency or destruction of the subject matter.

How Is a Partner an Agent of the Firm?

Section 18 of the Indian Partnership Act, 1932 provides that a partner is the agent of the firm for the purposes of the business of the firm.

This means that a partner can represent the firm in business dealings. When a partner acts within the usual course of the firm’s business, the act may bind the firm and all the partners.

For example, a partner in a trading firm may ordinarily purchase goods, sell stock, receive payments and enter into routine commercial contracts on behalf of the firm.

However, the agency of a partner is limited to the business of the firm. A partner does not automatically become an agent of the other partners in their personal matters.

Why Is Mutual Agency the True Test of Partnership?

Profit-sharing alone does not conclusively establish partnership. A person may receive a share of profits as remuneration, interest, commission or repayment without becoming a partner.

The true test is whether the business is carried on by all or any of the persons acting for all. If each person has the authority to represent and bind the others in relation to the business, mutual agency is present.

This principle distinguishes partnership from:

• co-ownership;
• employment;
• profit-linked remuneration;
• creditor arrangements; and
• commission-based agency.

Courts generally examine the entire relationship between the parties, including the agreement, control over the business, authority to bind others, sharing of profits and intention of the parties.

When Is Partnership More Suitable?

Partnership is more suitable when two or more persons intend to jointly own and manage a business.

It may be appropriate where:

• all persons are willing to share profits and business risks;
• each person is expected to participate in management;
• mutual trust exists among the proposed partners;
• the business requires shared capital, skill or professional knowledge; and
• the parties accept that one partner’s business acts may bind the others.

Partnership is commonly used for small businesses, family businesses, professional firms, trading concerns and specific commercial ventures.

The parties should clearly define capital contribution, profit-sharing, management powers, admission of new partners, retirement, dispute resolution and dissolution in a written partnership deed.

When Is Agency More Suitable?

Agency is more suitable when one person needs another person to represent, negotiate or perform certain acts without granting ownership in the business.

It may be appropriate where:

• representation is required for a specific transaction;
• the principal wants to retain ownership and control;
• the agent is appointed for sales, distribution, negotiation or management;
• remuneration is based on salary, commission or fees; and
• the relationship is intended to be limited to a defined authority.

Agency is commonly used in insurance, real estate, distribution, employment, brokerage, banking, commercial representation and contract negotiation.

The agency agreement should clearly state the scope of authority, remuneration, duration, reporting duties, confidentiality obligations and grounds for termination.

Conclusion

Partnership and agency are closely related because every partner is an agent of the firm for the purposes of its business. However, the two relationships differ significantly. Partnership involves joint business ownership, profit-sharing, mutual agency and wider personal liability. 

Agency mainly involves representation, where the agent acts within the authority given by the principal. The existence of mutual agency remains the most important factor distinguishing partnership from an ordinary agency arrangement.