Partnership Firm

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

Independent Separate Legal Entity

An LLP is a Separate Independent Legal Person established under the LLP Act 2008. As such, the business is separate from its partners.

Limited Liability

Limited liability partnership protects your personal assets with the “Limited Liability” feature. Maximum Liability of the partners is limited to the extent of their contribution.

No Minimum Capital Requirement

There is no minimum Capital contribution required to start a Limited liability Partnership.

No Share Capital

LLP does not have the concept of shares like a private limited company or one person company.

Uninterrupted Existence or Perpetual Succession

An LLP has perpetual existence. Which means, they continue to do business even if the partners / directors changed or died (which is not the case of Sole Proprietorship or Partnership Firms).

Minimum Two Designated Partners

The minimum number of designated partners required to incorporate an LLP is two.
There is no upper limit on the maximum number of designated partners.
Among the partners, there should be two designated partners and at least one of them should be an Indian resident.

Lesser compliance requirements

Post incorporation compliance in an LLP is lesser when compared to a Private Limited Company, like board meetings, etc are not mandatory and Statutory Audit by a Chartered Accountant (CA) is not mandatory.

The annual filings of an LLP: Form 8 and Form 11

Form 8 (Statement of Account and Solvency):

It is a document specifying details of the Partners, their contributions, etc. The same needs to be filed within 60 days of the closure of the financial year.

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

Is it mandatory to register a company before starting a business in India?

No, there are other business entities as well. Eg: Sole Proprietorship, Partnership, One Person Company (OPC) and Limited Liability Partnership (LLP).

Can I register a company in India in just one day?

No. There are multiple steps involved like getting Digital Signature (DSC) for the Directors, Reserving the Name and filing of SPICe and other forms, etc. Hence it will usually take at least 8 to 12 business days (or more) to register a company in India.

What are the advantages of a Private limited company?

A Private limited company is universally recognized as a stable and credible entity, vis a vis, the other forms of business entities.
The liability of the promoters is restricted to the extent of shares held by them and they have no personal liability to the creditors of a company for company’s debts.
A private limited company can have up to 200 shareholders, and 15 directors.
Angels, VCs, and Private Equity firms invest only in a private limited company.
The most preferred or recognized form of legal business entity.
Banks prefer to offer loans to a private limited company than other forms of business entities.
A Private Limited Company has ‘Perpetual Succession’. Which means, a company is a separate legal person, it is unaffected by death or retirement of any member and it continues to be in existence irrespective of the change in ownership.
Ownership of business can be transferred conveniently by way of share transfers.

How to start a Single / One Person Company (OPC) in India?

The procedure to start a Single / One Person Company significantly differs from that of Pvt. Ltd. You can find detailed information about One Person company

What are the disadvantages of a Private limited company?

Mandatory Post-Incorporation compliances for a private limited company is on a higher side compared to any other entity such as LLP, OPC, Partnership or Proprietorship.
Winding up a private limited company is a tedious and lengthy process.
Maintenance of Books of Accounts in the prescribed format is mandatory.
Statutory Audit by a qualified Chartered Accountant is mandatory.
A Private Limited Company cannot accept deposits from the general public.

Do I have to be physically present for registration of a Private limited company?

No, private limited company registration is a completely online process. As all forms need to be filed electronically, you would not need to be physically present. You may just need to send us scanned copies of all the required documents.

How much does it cost to run a Private limited company?

The cost of running a Private Limited company can be bifurcated into:

Tax compliance – GST, Professional tax etc
Secretarial compliance
Audit and ITR filing
Other incidental expenses

An approximately cost would come to around Rs. 30,000 – Rs. 40,000 in the first year. This may significantly vary based on the nature of the business, number of transactions, turnover etc.

What is the minimum capital needed to incorporate a Private limited company?

As per Law, there is no minimum capital required for starting a private limited company. However, We recommend at least Rs.10,000 to meet the mandatory Govt. compliances.

What are the fees to incorporate a Private limited company?

MCA fees depend on the state of registration and the Authorized Capital. For e.g, Company registration in Bangalore, the RoC fees comes to around Rs. 2,020. Similarly, Company registration in Chennai, the RoC fees costs around Rs. 520 (for up to 10 lakh authorized capital).

Our consulting fees will depend on the number of directors and whether they already have a DIN and DSC.

Is It Necessary To Register A Company under MCA In India?

Yes, if you are willing to incorporate or register either a “Private Limited Company (Pvt Ltd)” or “One Person Company (OPC)” or “Limited Liability Partnership (LLP)” the governing body is the Ministry of Corporate Affairs (MCA).

What is the minimum age to register a company in India?

As per the prevailing laws, the minimum age to become a director / shareholder in a company in India is 18 years. Accordingly, the minimum age to register a company in India is 18 years.

What is the procedure for registering a Foreign company in India?

An Indian business entity can be a subsidiary or a wholly owned subsidiary of a US / Foreign company. The process is similar to incorporating a Private Limited Company in India but the paperwork involved is a bit high. We recommend you to get in touch with our team who can personally guide you completely on this.

Can there be only one Director in a Pvt Ltd Indian company?

No, a Private Limited company should have at least two (2) Directors. You can add a family member or a friend as another director and give them a minority stake in the company. They can hold a minimum stake, even as low a just one share. Alternatively, you can go for a One person company whose details are fully described

Which is better, LLP or Pvt Ltd?

The answer to this depends on the subsequent decisions you make. If you are likely to go for external fundraising from investors like angel / seed / venture capital then Private limited company is suitable.

When it comes to post incorporation compliance and audit, the compliance regulations for LLP (Limited Liability Partnership) is more relaxed and simple. You need not conduct board meetings regularly and statutory audit is not mandatory until the annual turnover exceeds a certain turnover threshold, etc. Cost for maintaining an LLP is also less compared to Pvt Ltd.

Can I register a company in India without a physical address?

Registered office address is a mandatory requirement. However, you can use your Residential Address or an address of a business center or a co-work space, etc. for registration. Provided that you may have to submit an agreement, NoC, etc from the respective owner of the premises and the applicable utility bill is submitted for proof.

Can we register a company Pvt. Ltd. through Udyog Aadhaar?

No, Udyog Aadhar is a Government Registration Scheme that is provided along with a recognition certificate and a unique number in order to certify an MSME / SME. You have to register the private limited with the Ministry of Corporate Affairs (MCA), which is the governing body for companies in India.

How do Partnership Deed differ from company registration?

Partnership Deed / Partnership Agreement is a document for starting a partnership firm entered by the respective partners of a business between themselves. This agreement contains the details with respect to the Partners, Nature of the Business, Address of the Firm, Profit and Loss Sharing Ratio, Capital Contribution of Each Partner etc. This is needed to start a partnership firm, not a company.

How to close or wind-up a Pvt Ltd company?

An application has to be made by the promoters to ROC / MCA for striking off the company’s name from MCA records. If a company has failed to commence its business within one year of incorporation, or if the company is not carrying out any business activity for preceding 2 financial years, then the company’s name can be removed from MCA. However, in order to close down or wind up a company voluntarily, a long procedural compliance needs to be followed.

Can you use your residential address to register a Private limited company?

Yes, you can register the company using your residential address.