CSR and Social Governance · Partnership Firms

Partnership Not Created by Status: Section 5 Explained

Updated 11 October 2026 · Fact-checked

Section 5 of the Indian Partnership Act, 1932 says partnership arises from contract and not from status. You cannot become a partner by birth, marriage or family position. To solve a question, look for an agreement to share profits of a business carried on by all or any of them acting for all.

Understand Partnership Not Created by Status

A partnership is a legal relation built on agreement. Section 4 defines it as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The key word is agreed.

Section 5 states the same idea in another way: the relation of partnership arises from contract and not from status. Status means a position you hold by birth, family relation or operation of law. You do not choose it. A contract is something you choose to enter.

The Act gives two examples. Members of a Hindu undivided family (HUF) carrying on a family business as such are not partners in that business. A Burmese Buddhist husband and wife carrying on business as such are also not partners. In both cases the business arises from the family relation, not from a partnership contract.

This is why an HUF is different from a partnership firm. In an HUF, a person becomes a member by birth, and the family relation governs the business. In a firm, each person becomes a partner by agreement. Partners can leave or be added only by the contract route.

The example does not mean family members can never be partners. Two brothers, or a husband and wife, can form a firm if they actually enter into a partnership contract. Under Section 6, the court looks at the real relation between the parties, shown by all relevant facts taken together. Family ties alone prove nothing either way.

Key rules to remember

Section 5 rule: Partnership = arises from contract, NOT from status; The relation of partnership arises from contract and not from status.
Statutory examples under Section 5: HUF members carrying on a family business as such ≠ partners; Burmese Buddhist husband and wife carrying on business as such ≠ partners; The words 'as such' matter. The business is carried on by virtue of the family relation.
Definition test (Section 4): Agreement + sharing of profits + business + carried on by all or any of them acting for all; All elements must be present for a partnership.
Real relation test (Section 6): Existence of partnership = real relation shown by all relevant facts taken together; Profit sharing alone does not make a person a partner (Section 6, Explanation 2).

How to solve Partnership Not Created by Status questions

Use this method for any fact-based question on whether persons are partners or whether Section 5 applies.

1Identify the persons and how they are related: family members, HUF, spouses, or strangers.
2State the rule: partnership arises from contract and not from status (Section 5).
3Check for a contract. Ask if there is an express or implied agreement to carry on a business and share profits (Section 4).
4Check if the business is carried on 'as such', that is, only by virtue of the family relation, as in an HUF business or the Burmese Buddhist husband and wife example.
5Apply Section 6: look at all the facts together, such as conduct, accounts, profit sharing and mutual agency. Note that profit sharing alone is not conclusive.
6Conclude clearly: partners or not partners, and give the reason.

Quickest way: Contract or status in three questions

When to use it: Use this when a short-answer or case question asks whether family members or others are partners.

Is there a contract, express or implied, to share profits of a business run by all or any acting for all?
If the only link is birth, marriage or family position, status is the source, so no partnership under Section 5.
Even where family members are involved, a real partnership agreement can create a firm. Conclude on the real relation (Section 6).

Common mistakes in Partnership Not Created by Status

Saying family members can never be partners.
Students over-read the HUF example in Section 5.
Fix: Write that only family members carrying on business 'as such' are not partners. If they agree by contract to carry on business and share profits, they can form a firm.
Treating HUF members as partners of the family business.
Both involve a group of persons sharing business profits.
Fix: Remember that HUF membership comes from birth (status). The relation does not come from a contract, so Section 5 denies partner status.
Assuming profit sharing always creates a partnership.
The Section 4 definition mentions sharing profits, so students stop there.
Fix: Quote Section 6, Explanation 2. A lender, servant or agent, widow or child of a deceased partner, or previous owner receiving profit share is not a partner merely for that reason.
Leaving out the 'as such' qualifier.
Students memorise a short version of the rule.
Fix: Always write 'carrying on a family business as such' to show the exact condition.
Confusing Section 5 with Section 6.
Both deal with how to tell if a partnership exists.
Fix: Section 5 gives the source of the relation (contract, not status). Section 6 gives the method of finding it (real relation, all facts together).

Worked examples

Example 1

Ramesh, his sons Suresh and Mahesh, and his wife run a family kirana business in Indore as members of a Hindu undivided family. There is no written or oral agreement among them to form a partnership. A supplier claims all four are partners and can be sued as a firm. Advise.

Show the solution

Rule: under Section 5, partnership arises from contract and not from status. Members of an HUF carrying on a family business as such are not partners in that business.
Facts: the four are members of an HUF and carry on the family business as such. No contract to form a partnership exists.
Application: their link is family status, not agreement. The Section 4 requirement of an agreement to share profits is not shown.
Under Section 6, the real relation shown by all the facts is a joint family business, not a firm.

Answer: The four are not partners. The supplier's claim fails on the Section 5 basis that the family business of an HUF carried on as such creates no partnership.

Example 2

Anita and her brother Vikram, both adults, inherited a shop from their father. They signed a deed agreeing to carry on trading in the shop under the name 'Anita Traders' and to share profits equally. Is a partnership created, or does Section 5 prevent it because they are family members?

Show the solution

Rule: partnership arises from contract and not from status (Section 5). Section 4 requires an agreement to share profits of a business carried on by all or any of them acting for all.
Facts: there is a signed deed that expressly agrees to carry on business under a firm name and to share profits equally.
Application: the source of the relation is the contract, not the sibling relation. Section 5 denies partnership only where the relation arises from status, such as HUF members carrying on a family business as such.
Under Section 6, the deed and conduct show the real relation is one of partnership.

Answer: A partnership is created. Anita and Vikram are partners in the firm 'Anita Traders' because they entered into a contract. Being family members does not stop them.

Exam tips

Quote the rule word for word: 'The relation of partnership arises from contract and not from status.' Then apply it to the facts.
In case questions, underline whether the facts show an agreement or only a family relation. That one fact decides the answer.
Cite Section 5 for the status rule, Section 4 for the definition and Section 6 for the real relation test. Do not mix them.
Where asked to distinguish an HUF from a firm, use points such as source of the relation (birth against contract) and how members join.
Always end with a clear conclusion in one line, since written papers reward provision, analysis and conclusion.

Practice questions from Partnership Firms

Partnership Not Created by Status: frequently asked questions

What does Section 5 of the Indian Partnership Act, 1932 say?

It says the relation of partnership arises from contract and not from status. It adds that 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.

What is the difference between an HUF and a partnership firm?

An HUF member gets that position by birth, which is status. A partner joins by contract. Under Section 5, HUF members carrying on a family business as such are not partners in it.

Can family members form a partnership firm?

Yes. If family members agree by contract to carry on a business and share its profits, they can be partners. Section 5 only denies partnership where the relation arises from family status alone.

Does sharing profits make a person a partner?

Not by itself. Section 6, Explanation 2, says receiving a profit share does not of itself make a person a partner. Examples include a lender, a servant or agent, a widow or child of a deceased partner, and a previous owner selling goodwill.