Sections 5 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 5 says that a partnership comes from contract, not from status, and gives two examples of people who are not partners merely because of their family position. Section 6 tells you how to decide whether a group is a firm or whether a person is a partner: look at the real relation between the parties, shown by all relevant facts taken together.
Partnership arises from contract and not from status (section 5). Members of a Hindu undivided family carrying on a family business as such, and a Burmese Buddhist husband and wife carrying on business as such, are not partners in that business merely by that relationship. Section 6 looks at the real relation between the parties, taking all relevant facts together. Sharing profits, or receiving a payment that varies with profits, does not of itself make someone a partner. A deed cannot create a partner who has not agreed; the question is always one of agreement and facts.
Section 5: contract, not status
The section has one rule and one illustration.
| Part | Text |
|---|---|
| Rule | The relation of partnership arises from contract and not from status |
| Illustration 1 | Members of a Hindu undivided family carrying on a family business as such are not partners in that business |
| Illustration 2 | A Burmese Buddhist husband and wife carrying on business as such are not partners in that business |
"Status" means a position a person holds by birth or by family relationship. Being a son in a family, or a spouse, does not by itself make anyone a partner. Two people become partners only when they enter into a contract, whether written, spoken, or shown by how they deal with each other, to share the profits of a business as set out in section 4. Our article on section 4 covers that definition.
If you are unsure whether your own arrangement amounts to a partnership, a short legal consultation can sort out the facts before they become a dispute.
The words "as such" are important. The illustrations speak of family members carrying on the family business as such, that is, simply in that family capacity. The text does not say that relatives can never be partners. Relatives who make a contract of partnership are judged by the same rules as anyone else.
Example. The Mehra family runs a general store handed down over generations, managed by the father with his two sons helping. They have signed nothing. Under section 5, their family relationship does not by itself make them partners in a firm. If, instead, the father and one son sign a deed agreeing to share the store's profits in the ratio 60:40, the relation now rests on contract.
Section 6: how to decide whether a partnership exists
Section 6 sets the test, followed by two Explanations. Section 6 is not a list of rules that can be changed by contract; it is the statute's way of reading the facts.
The main rule
In deciding whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts taken together.
Three practical consequences follow:
- Labels do not decide. Calling someone a "partner" or a "consultant" is only one fact.
- All facts together. Who puts in money, takes decisions, shares losses, deals with customers, and what the parties have said in writing are all relevant. No single fact is named as conclusive.
- Both directions. The test decides that a person is a partner as well as that he is not.
Explanation 1: joint interest in property
The sharing of profits, or of gross returns arising from property, by persons holding a joint or common interest in that property does not of itself make them partners.
Example. Two brothers inherit a rented building and divide the monthly rent equally. They hold a joint interest in the property and share the returns from it. This alone does not make them partners in a firm.
Explanation 2: receipt of profit shares and profit-linked payments
The receipt by a person of a share of the profits of a business, or of a payment contingent upon the earning of profits or varying with the profits earned, does not of itself make him a partner with the persons carrying on the business. The text names four cases in particular:
| Clause | Receiver | Reason for the payment |
|---|---|---|
| (a) | A lender of money to persons engaged or about to engage in any business | Return on the loan |
| (b) | A servant or agent | Remuneration |
| (c) | The widow or child of a deceased partner | Annuity |
| (d) | A previous owner or part owner of the business | Consideration for the sale of the goodwill or share of it |
In each of these, the receipt of a profit share or profit-linked payment does not of itself make the receiver a partner with the persons carrying on the business.
The key phrase again is "of itself". Profit-sharing matters under the definition in section 4, but section 6 warns that it is not conclusive. The deciding factor remains the real relation shown by all the facts.
Example. Ravi lends Rs 5 lakh to a bakery run by Seema and Tarun, and the loan agreement says he will receive 20 per cent of the bakery's yearly profit until the loan is repaid. Under Explanation 2(a), receipt of that share does not of itself make Ravi a partner. If, however, Ravi also takes part in running the bakery, signs contracts for it and bears a share of its losses, those further facts may show a different real relation.
Practical points
- Put it in writing. A partnership deed records who is a partner and on what terms, which makes the "real relation" much easier to show.
- Draft lender and employee arrangements carefully. If you pay a lender or an employee by reference to profits, state clearly that no partnership is intended and make sure the actual dealings match.
- Family businesses. A family running a business together needs a clear decision on whether they are, or want to be, partners. The statute does not treat family status as a substitute for agreement.
- The Act's rules on duties follow in sections 9–10.
Need help deciding whether a partnership exists?
When an arrangement mixes family ties, profit shares and loans, the question of who is a partner can be hard to answer from the outside. If you have such a situation, our team offers legal consultation to look at your documents and dealings and explain where you stand.
Key takeaways
- Partnership arises from contract, not status (section 5).
- Members of a Hindu undivided family carrying on family business as such, and a Burmese Buddhist husband and wife carrying on business as such, are not partners in that business.
- Section 6 looks at the real relation between the parties, shown by all relevant facts together.
- Sharing profits from jointly held property does not of itself create a partnership.
- A profit share or profit-linked payment received as lender, servant or agent, annuitant or seller of goodwill does not of itself make a person a partner.
Read next
- Sections 1–3: short title, definitions and the Contract Act
- Sections 7 and 8: partnership at will and particular partnership
- Partnership firm and its essential elements
- Definition of partnership: essential elements under section 4
Disclaimer: Based on the text of the Indian Partnership Act, 1932 as consulted on 1 October 2026. Several States have amended the registration chapter and make their own rules, forms and fees for the Registrar of Firms. This article is general information, not legal advice; check the official text and your State's rules before acting.