Difference Between Partnership and Employment

Partnership and employment are two different legal relationships used for carrying on business and performing work. A partner joins a business as a co-owner, shares profits and may bind the firm through mutual agency. An employee works under the control of an employer and receives salary or wages for services. 

The difference between partnership and employment mainly depends on ownership, control, profit sharing, liability and authority.

Add LawBhoomi as your preferred source on Google.

Add Now →

What Is Partnership?

Partnership is a legal relationship between persons who agree to carry on a business together and share its profits. Section 4 of the Indian Partnership Act, 1932 defines partnership as the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

The persons entering into partnership are individually called partners. They are collectively called a firm, and the name under which the business is carried on is known as the firm name.

A partnership is based on agreement. It does not arise merely because two or more persons own property together, belong to the same family or receive money from the same business. There must be an intention to carry on a business and share its profits.

The main elements of partnership are:

• There must be an agreement between two or more persons to create the partnership relationship. The agreement may be written, oral or inferred from the conduct of the parties.
• The agreement must relate to the carrying on of a business. The term business includes trade, occupation and profession.
• The persons must agree to share the profits of the business. Actual distribution of profits is not always necessary if the agreement clearly provides for such sharing.
• The business must be carried on by all partners or by any one of them acting on behalf of all. This principle is known as mutual agency.

Mutual agency is the most important test of partnership. Every partner is both a principal and an agent. A partner acts as a principal in relation to personal rights and as an agent while conducting the business of the firm on behalf of the other partners.

What Is Employment?

Employment is a contractual relationship in which one person, called the employee, agrees to perform work or services for another person, called the employer, in return for salary, wages or other remuneration.

The employer generally determines the nature of work, working conditions, responsibilities and level of supervision. The employee performs assigned duties but does not ordinarily become an owner of the business.

An employment relationship may be created through a written contract, oral agreement, appointment letter or conduct of the parties. Its existence depends on the real nature of the relationship rather than the title given to it.

The main characteristics of employment include:

• The employee performs work for the employer under a contract of service. The work may be managerial, professional, technical, clerical, skilled or unskilled.
• The employer exercises a degree of control over the manner, time and place of work. The amount of control may vary depending on the nature of the employment.
• The employee receives salary, wages, commission, incentives or other agreed benefits in return for services.
• The employee does not normally share the ownership of the business or possess an interest in its assets merely because of employment.
• The employee is generally not personally responsible for the ordinary debts and liabilities of the employer’s business.

Difference Between Partnership and Employment

The difference between partnership and employment lies in the legal position of the parties. A partner participates in the business as a co-owner, while an employee works under the authority of the employer.

A partner may share profits, take part in management and bind the firm through authorised acts. An employee normally receives fixed remuneration and exercises only those powers that are given by the employer.

The existence of profit-based remuneration does not automatically create a partnership. Similarly, the use of terms such as salary or monthly payment does not always establish employment. Courts examine the complete arrangement, including mutual agency, control, ownership and intention.

Nature of the Legal Relationship

• Partnership is a relationship between persons who jointly carry on a business. The partners are associated with one another as co-owners and not merely as persons providing services.
• Employment is a relationship of service. The employee works for the employer and performs duties according to the terms of employment.

Ownership of the Business

• A partner has an interest in the partnership business. Partnership property is held and used for the common purposes of the firm, subject to the partnership agreement.
• An employee does not acquire ownership in the business merely by working for it. Even a senior manager or highly paid employee remains separate from the ownership structure unless given an actual ownership interest.

Sharing of Profits

• Partners agree to share the profits of the business. Profit sharing is an important element, though it is not by itself conclusive proof of partnership.
• Employees usually receive salary, wages or commission. An employee may also receive a profit-linked bonus, but such payment does not make the employee a partner in the absence of mutual agency and ownership rights.

Mutual Agency

• Mutual agency is the central feature of partnership. Every partner may act on behalf of the firm and bind the other partners when acting within the ordinary course of the firm’s business.
• An employee has only limited authority arising from the employment role. The employee does not automatically have the power to bind all owners of the business in the manner of a partner.

Right to Participate in Management

• Every partner generally has a right to take part in the conduct of the business, unless the partnership deed provides otherwise. Internal restrictions may regulate this right.
• An employee participates in management only to the extent permitted by the employer. Even a managerial employee exercises delegated authority and remains accountable to the employer.

Degree of Control

• Partners may agree on their respective roles, but one partner is not ordinarily treated as a servant of the others. Their relationship is based on mutual confidence and common business interest.
• Employment commonly involves supervision and control. The employer may determine duties, performance standards, reporting structure, working hours and workplace policies.

Remuneration

• A partner is not automatically entitled to remuneration for taking part in the business. Any salary, commission or bonus payable to a partner must generally be authorised by the partnership agreement.
• An employee is engaged specifically in return for remuneration. Payment of salary or wages is therefore a central part of the employment relationship.

Liability for Business Debts

• Partners may be jointly and severally liable for the acts of the firm. Personal assets of partners may become relevant where firm assets are insufficient to meet lawful business liabilities.
• Employees are not ordinarily responsible for the debts of the employer. Personal liability may arise only in exceptional situations, such as fraud, negligence or unauthorised acts.

Interest in Business Property

• Partners collectively have an interest in the property of the firm. No partner usually owns a specific item of partnership property exclusively while the partnership continues.
• Employees may use, manage or possess business property for work purposes, but such use does not create any proprietary right.

Risk of Loss

• Partners may bear business losses according to the partnership agreement. In the absence of a different agreement, profits and losses are generally shared equally.
• Employees ordinarily receive remuneration regardless of the final profitability of the business. They do not bear business losses merely because the employer suffers financial difficulty.

Termination of Relationship

• Partnership may end through dissolution, retirement, expulsion, death, insolvency, completion of an undertaking or events stated in the partnership deed.
• Employment may end through resignation, retirement, dismissal, retrenchment, expiry of a fixed term or termination in accordance with the contract and applicable law.

Can a Partner Be an Employee of the Same Firm?

A partner cannot ordinarily be treated as an employee of the same partnership firm. A traditional partnership firm is not a legal entity completely separate from its partners. The firm name is generally treated as a collective name for all the partners.

A contract of employment normally requires two distinct persons: one as employer and the other as employee. Since a partner forms part of the firm, the partner cannot ordinarily enter into a contract of service with the same firm in the strict legal sense.

In Commissioner of Income Tax, Madras v. R.M. Chidambaram Pillai, the Supreme Court explained that salary paid to a partner is not the same as salary paid to an employee. Such payment is generally treated as a special method of distributing the profits of the firm.

Therefore, a working partner may receive monthly remuneration, commission or bonus under the partnership deed without becoming an employee.

When to Choose Partnership

Partnership may be suitable where two or more persons intend to carry on a business jointly and participate as owners.

• Partnership is appropriate where the persons wish to contribute capital, skill, labour or business connections and share the resulting profits.
• It is also suitable where the parties want decision-making rights and are willing to accept responsibility for the obligations and risks of the firm.
• A partnership structure may work well for professional practices, family businesses, trading concerns and small or medium-sized enterprises based on mutual confidence.
• The partnership deed should clearly define capital contributions, profit-sharing ratios, duties, authority, remuneration, retirement and dissolution.

When to Choose Employment

Employment may be suitable where a person intends to provide services without taking ownership risks in the business.

• Employment is appropriate where the person seeks fixed salary, defined responsibilities, workplace benefits and limited exposure to business losses.
• It is suitable where the business owner wishes to retain overall control and delegate specific duties to another person.
• Employment is commonly used for managers, accountants, consultants appointed under contracts of service, sales staff, clerical workers and technical personnel.
• The employment contract should clearly state duties, remuneration, working conditions, confidentiality obligations, leave, termination and dispute-resolution terms.

Conclusion

The difference between partnership and employment depends on the true nature of the legal relationship. Partnership is based on co-ownership, profit sharing, mutual agency and participation in business risks. Employment is based on service, remuneration, control and delegated authority. 

A partner may receive salary-like remuneration without becoming an employee, while an employee may receive profit-based incentives without becoming a partner. Mutual agency, ownership, liability and management rights remain the most important factors for distinguishing the two relationships.