Partnership Firm

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What is a Partnership Firm? Introduction and Meaning

A partnership firm is often formed by a group or two or more entrepreneurs / persons with a common goal, who have agreed to join together and do business. A partnership is a type of business entity that is brought into existence by virtue of an agreement known as a Partnership Deed. In essence, a Deed is an agreement between the Partners on the entire business of the partnership.

The Partnership Deed shall contain the following details:

  • Names and addresses of the Partners
  • Nature of Business proposed or carried
  • Office Address
  • Total Capital of the firm,
  • The capital and other contribution of each partner towards the business
  • Partner’s share in the profits and losses of the business
  • The extent of the authority of each partner in the management of the Firm
  • Salary or Commission payable to the respective Partner
  • Interest on Capital or Drawings, if any
  • Maintenance of books of accounts and audit
  • Allocation of powers and duties of Partner
  • Procedure for the Retirement of a Partner
  • Procedure for admission of a New Partner
  • Procedure for Dissolution of the firm
  • Arbitration clause for settlement of disputes, etc

Any other clause that is mutually agreed by all the partners can be included in the Partnership Deed. If the partnership deed is silent on any of the points, then the provisions of the Indian Partnership Act will apply.

In India, a partnership business is governed by the Indian Partnership Act, 1932. The minimum number of Partners in a partnership is two, and ideally, the seed should be Written or Printed on a Stamp Paper and registered at the respective Sub-Registrar’s Office, within whose jurisdiction the office of the firm lies.

The applicable stamp duty must be paid upon the Registration of Deed. The exact amount of the stamp duty will depend on the location of the firm and can be found in the Schedule to the relevant Stamp Act.

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Characteristics or Features of Partnership Firm

Ease of starting

Partnership firms are easy to start. You can execute the Partnership Deed, apply for PAN and TAN and further obtain a statutory registration such as  GST registration or Professional Tax Registration or a Shops and Establishments license and open a current bank account to get started.

Agreement

A partnership business must be formed by agreement among the partners. It must come into existence by an express voluntary agreement and Not due to the operation of law.    

Minor Partner

A minor, (who has not attained the age of 18 years) can also be admitted as a partner in an existing partnership firm with the consent of the partners. However, the minor partner may not have any liability and can only be admitted for the share in the benefits of the partnership business.

Minimal Compliance

Compliance requirement in a Partnership firm is minimal as there is no mandatory audit requirement or any requirement to file forms with the Ministry of Corporate Affairs / MCA, etc.     

Winding up is easy

Closing/winding up a Partnership firm is easy as a Dissolution deed can be executed and the statutory registration like GST/Professional tax, etc can be surrendered.

Altering is easy

If a Partner resigns, or a new Partner joins, it is easy to amend the Partnership agreement. This could be done by reconstituting the Partnership firm.

Collective Responsibility

A partnership firm cannot have a separate identity from the partners. A firm name is only a representation of the collective name of partners. No firm can exist without partners.

Unlimited Liability

Unlike in the case of a Sole Proprietorship Business, the liability of the partners of a firm is unlimited. The partners are fully liable individually and collectively.

Profit / Loss share is amendable

The Profit / Loss share of a Partner does not have to depend on the investment and can be amended easily as per the requirement.

Business/Trade Name

Partnership firms have no restriction in terms of choosing the name for their business and do not require any formal approval.

Restriction on Transfer

A partner cannot sell or transfer his share of his business to anybody else without the consent of the other partners.

No minimum capital requirement

There is no minimum capital required to start a Partnership firm. There is no legal requirement specifying any minimum capital threshold.

Relatively inexpensive

Since the compliance requirements are minimal, Partnership firms are relatively inexpensive to maintain.

Registration of Partnership Deed or Agreement. Is it Mandatory?

In India, anyone can form a Partnership Firm either by drafting a partnership deed / agreement in writing or just by Oral Agreement. Hence, as per law, it is not mandatory to have a Written Partnership Deed. Even registration is not mandatory. But in order to avoid any conflict between the partners in the future, it is highly recommended to have a written agreement and get it registered.

Further, the Partnership Act discourages the unregistered partnership business by limiting the legal recourse for such unregistered partnership firms. If a Partner of an unregistered Firm wishes to file a suit / case, the Deed must first be registered before any action can be taken in reliance on the contents of the Deed.

 

Advantages of Partnership Firm

As already mentioned in the list of Characteristics above, one of the primary advantages of a partnership firm is that it can be executed fairly quickly and the process is simple. As soon as the Partnership Deed is executed, you can apply for a PAN and TAN for the firm, using which you may open the bank account in the business name.

 

Disadvantages of Partnership Firm

The most obvious disadvantage of a Partnership is the “Unlimited Liability” of the Partners. To provide an example:

A partnership firm as A and B as partners, who have invested 10,000/- in total. In the course of business, they incur a debt of 12,000/-. In this scenario, A and B would lose their total investment and would then have to incur additional personal liability, i.e. the additional 2000 would have to be arranged from their personal sources.

Further, continuing the same example, in case B incurred some liability in the name of the business, A, being the other Partner, shall also be responsible for B’s actions, to the extent B’s action was done in pursuance of the business of the partnership.

Few Other Disadvantages are:
Client credibility is low as winding up is simple and quick
It is not a separate legal entity
Cannot issue shares or have investors in a Partnership firm

When to Opt for a Partnership Firm as a business entity

  • If you are planning to start a business with another person
  • If you want to start the business quickly and do not want any legal compliance burden,
  • If you want to test the market before opting for a Private Limited or Limited Liability Partnership (LLP),
  • If you want the freedom to add and remove partners without a hassle,
  • If you want flexibility in profit / loss sharing mechanism

Procedure to start a partnership firm

A Partnership Firm can be started in a simple process of 4 steps.

Step – 1
Prepare and execute a Partnership Deed on Stamp Paper.

Step – 2
Apply for a PAN And TAN of the firm. PAN and TAN application needs to be made on the firm’s name.

Step – 3
Apply for the relevant tax licenses and other business registrations, such as:
MSME Registration
GST Registration
Professional Tax Registration
Shops and Establishments Registration, etc

Step – 4
Open a current account in a bank and get started with your business.

Timeline – How long does it take to form a Partnership firm in India

 

If you want to form a partnership firm, it can be done in 3-4 working days.

If you want to register the Partnership firm at the Sub-Registrar’s Office, it takes anywhere between 8-10 working days.

This timeline is further subject to Government processing, approval time, public holidays, etc.

Fees / Cost for Registration of Partnership Firm

The charges and registration fee for forming a Partnership Firm will depend on the:

  • Stamp Duty Payable,
  • Location or Place of Business,
  • Applicability of additional legal Registration (like GST, MSME, etc).

For instance, MSME registration charges would cost you Rs.1,000, GST registration fee would cost you an additional Rs. 2,500.

FAQs for partnership firm

What is a Partnership Firm?

A partnership firm is a business structure where two or more individuals or entities come together to carry on a business with a shared goal and mutual understanding, while sharing the profits and losses


How many partners are required to form a partnership firm?

A partnership firm can be formed with a minimum of two partners. 


Is a written agreement necessary for a partnership?

Partnership agreement is required. An agreement outlines the rights, responsibilities, profit-sharing ratios, and other important terms among partners.


What is the liability of partners in a partnership firm?

Partners in a traditional partnership firm have unlimited liability, meaning they are personally liable for the debts and obligations of the firm.


How are profits and losses shared in a partnership firm?

The sharing of profits and losses is typically determined by the partnership agreement. Partners may agree on fixed ratios or varying percentages based on their contributions or roles.


Can a partnership firm own property and enter into contracts?

Yes, a partnership firm can own assets, enter into contracts, and sue or be sued in its own name. However, partners act on behalf of the firm and have the authority to bind the firm to legal obligations.


Can a partner transfer their interest to someone else?

In a traditional partnership, a partner’s interest cannot be transferred without the unanimous consent of the other partners. 


Is a partnership firm a separate legal entity?

In most jurisdictions, a partnership firm is not considered a separate legal entity like a company or corporation. The firm’s liabilities and obligations are directly linked to the partners.


What are the advantages of a partnership firm

Advantages include shared management and decision-making, combined skills and resources, ease of formation, flexibility in operations, and simple tax filing.


What are the disadvantages of a partnership firm?

Disadvantages include unlimited liability for partners, potential conflicts among partners, lack of continuity, and challenges in raising significant capital.

How are partnership firms taxed?

Partnership firms are taxed at flat 30%

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