May 18, 2022
A Partnership is one of the most basic forms of a business organisation. Two or more people come together to form a business and divide the profits thereof in an agreed ratio. A Partnership is easy to start, and the compliance is minimal as compared to companies.
The challenge becomes real when multiple partners decide their terms for the business operation of a firm. This diversification of opinions has many legal and compliance angles to deal with. Leave Such matters to experts like us!
The proprietorship form of ownership has limitations viz—limited resources of human resources, the limited skillset for work & unlimited Liability of losses. More capital, better skills & limited Liability helps in the Expansion of business. A proprietor finds him unable to fulfill these requirements. This call for more persons to come together with different edges and start a business—for example. This person lacks few managerial skills but may have capital compliments your business requirement.
A person can be a good manager but may not have capital. When these persons come together, pool their money and skills and organise a business, it is called partnership. Partnership grows because of the limitations or disadvantages of proprietorship.
At least two Individuals must pool resources to start a partnership firm. The Partnership Act, 1932 does not specify any maximum limit on the number of partners. However, the Companies Act, 1956 lays down that any partnership or association of more than ten persons in the banking business and 20 persons in other types of business is illegal unless registered as a joint-stock company.
A partnership comes into existence with agreement between parties to enter into a contract. The agreement should be written to make everything black and white clear the fog surrounding all knotty issues.
The partners in a firm can take up only legitimate activities. Any illegal activity carried out by partners does not enjoy legal sanction. Moreover, they can put you in lots of trouble.
Under the Partnership Act, registration of a partnership firm is not compulsory in any manner. (In fact, in most states in India, registration is voluntary). If the partnership firm isn't registered, it cannot obtain certain legal benefits. The effects of non-registered firms are- (i) the firm cannot file a legal suit or take any action against any other parties for settlement of claims and (ii) in case of a dispute between partners, it is not possible to settle the disputes through a court of law.
The partnership agreement must specify everything in detail with minute accuracy and transparency. The matter of sharing profits and losses among partners have to be utterly mentioned in them. A charitable hospital, an educational institution run jointly by like-minded persons, is not to be viewed as a partnership since there is no sharing of profits or losses. However, mere sharing of profits is not conclusive proof of partnership. In this sense, employees or creditors who share profits cannot be called partners unless there is an agreement between the partners.
Generally speaking, every partner is considered an agent of the firm and other partners as well. Partners have a close relationship among themselves; this is the sole reason they came together to form the partnership firm. The business can be carried out jointly by all partners together or run by one nominated partner on behalf of all. Any acts done by a nominated partner in good faith and on behalf of the firm are binding on other partners and the firm.
All partners are together responsible for all activities carried out by the partnership firm. In other words, in all cases where the firm's assets are not sufficient to meet the obligations of creditors of the firm, the partners' private assets can also be attached. The creditors can get hold one anyone partner —who is financially sound-and get their claims satisfied.
The firm does not have a personality of its own. The business gets terminated in case of death, bankruptcy or lunacy of any one of the partners.
A partner cannot transfer his interest in the firm to outsiders unless all other partners agree unanimously. A partner is an agent of the firm and is ineligible to transfer his interest unilaterally to outsiders.
A partnership firm is built around the principle of mutual understanding among partners. Each partner is supposed to bring the talent of his own to benefit all. If faith is broken and partners work at cross purposes, the firm will get crushed under its weight.
The following are some of the major advantages of a partnership firm:
Easy to Start
Partnership firms are the most accessible type of entity to start. The only requirement for creating a partnership firm in most cases is a partnership deed. Hence, You can start a partnership firm on the same day. On the other hand, an LLP registration would take about 5 to 10 working days, as the digital signatures, DIN, Name Approval and Incorporation must be obtained from the MCA.
Decision making is the crux of any organization. Decision making in a partnership firm could be faster as there is no concept of the passing of resolutions. The partners in a partnership firm enjoy a wide range of powers and in most cases can undertake any transaction on behalf of the partnership firm without the consent of other partners.
Trust is a significant factor in a partnership firm compared to a proprietorship firm; it can quickly raise funds. Multiple partners make for a more feasible contribution among the partners. Moreover, banks also view a partnership more favorable while sanctioning credit facilities instead of a proprietorship firm.
Every partner manages different activities of their firm. Partners responsibilities might be varied, but people in a partnership firm are united for a common cause. Ownership creates a higher sense of accountability, paving the way for a diligent workforce.
The disadvantages of a partnership firm are as follows:
Unlimited Liability
Every partner is liable personally for the losses of a partnership firm. The liability created by a partner in the partnership firm will also make each of the partner personally liable. To limit the liability of partners in a partnership firm, the LLP structure was created by the Government.
The maximum number of members a partnership firm can have is restricted to 20. In case of an LLP, there is no restriction on the maximum number of partners.
Leadership can both uplift and derail a firm. Combined ownership takes away the possibility of leadership and lack of leadership leads to directionless operations. On the other hand, in a partnership firm, certain partners can be given the position of designated partner with more powers and responsibilities.
A partnership firm is easy to start and does require any registration. A partnership firm can also operates without much of a structure or regulations. Hence, it often leads to distrust amongst the general public.
A partnership firm would be dissolved due to the death or insolvency of a partner. Such an abrupt dissolution will hamper a business. On the other hand, the death of a partner will not automatically dissolve an LLP. Hence, continuity of business is maintained in a LLP.
4. Remuneration and Interest received by the partners shall be taxed in their hands as income under head PGBP. However, the salary and interest which have not been allowed under Section 40(b) or any other section shall not be added to the income of the partners.salary and interest which have not been allowed under Section 40(b) or any other section shall not be added to the income of the partners.
5. The share of the partners in the total income of the firm is exempt in the hands of the partners as the same has already been taxed in the hands of the partnership firm.
6. Losses of the firm should be carried forward and not allowed to be allocated to the partners.
7. Deductions under Chapter VI-A would be allowed from the Gross Total Income only for Donations or in case the business falls under the specified category of business.Donations or in case the business falls under the specified category of business.
8. In case the partnership firm is unable to pay the tax dues, the partners can be held liable for recovery of the tax dues.
9. It is pertinent to note that although LLP’s are treated in the same manner as Partnerships, there is only one section which does not apply to LLP’s and applies to Partnership Firms which is Section 44AD. LLP’s cannot claim benefits of Section 44AD by using Presumptive Taxation.Section 44AD by using Presumptive Taxation.
Often, the Partner introduces capital in the Partnership by way of transferring assets to the Partnership Firm. In such cases, provisions of Section 45(3) would be applicable, and the amount recorded in the books of accounts of the Partnership Firm would become the Sale Consideration received in the hands of the Partner and tax would be levied in the hands of the Partner based on the Sale Consideration Received.
In some cases, at the time of dissolution, the partnership firm also gives assets to the Partners. In such cases, provisions of Section 45(4) would be applicable, and income tax would be levied in the hands of the partnership firm on the sale of the asset. The asset's fair market value on the date of purchase would be taken as the sale price and tax levied thereon.
Name given to the Partnership firm
Any name can be given to a partnership firm as long as you fulfil the below-mentioned conditions:
???? The name shouldn’t be too similar or identical to an existing firm doing the same business,
????The name shouldn’t contain words like emperor, crown, empress, empire or any other words which show sanction or approval of the government.
Q. Following details are required in a partnership deed:
A. General Details:
1. Name and address of the firm and all the partners
2. Nature of business
3. Date of starting of business
4. Capital to be contributed by each partner
5. Capital to be contributed by each partner
6. Profit/loss sharing ratio among the partners
B. Specific Details:
Apart from these, certain specific clauses may also be mentioned to avoid any conflict at a later stage:
1. Interest on capital invested, drawings by partners or any loans provided by partners to firm
2. Salaries, commissions or any other amount to be payable to partners
3. Rights of each partner, including additional rights to be enjoyed by the active partners
4. Duties and obligations of all partners
5. Adjustments or processes to be followed on account of retirement or death of a partner or dissolution of firm.
6. Other clauses as partners may decide by mutual discussion
Q. How should be the agreement between partners formed?
A partnership deed is a written agreement between partners in which each partner's rights, duties, profits, shares, and other obligations are mentioned. A partnership deed is always written, parties duly signing the deed to avoid any conflicts in the future.
Q. Is it necessary to register a partnership firm?
Indian Partnership Act, 1932 governs the partnerships. Registration of partnership firm is optional and at the discretion of the partners. Registration of partnership firm may be done at any time – before starting a business or anytime during the continuation of partnership. It is always advisable to register the firm since a registered firms enjoy special rights which aren’t available to the unregistered firms.
Q. How to register the partnership firm?
An application form along with fees is to be submitted to Registrar of Firms of the State in which firm is situated. The application has to be signed by all partners or their agents.
Q. What are the Documents to be submitted to Registrar?
???? Application for registration of partnership (Form 1)
???? Specimen of Affidavit
???? Certified original copy of Partnership Deed
???? Proof of principal place of business (ownership documents or rental/lease agreement)
If the registrar is satisfied with the documents, he will register the firm in Register of Firms and issue Certificate of Registration. Register of Firms contains up-to-date information on all firms and can be viewed by anybody upon payment of certain fees.
Ans. A Partnership is where two (or more) people join hands to carry out a business for profit. The partners become joint business owners and carry out operations governed by the partnership deed. The regulations are least and it makes it a desirable option for businesses having joint owners. However, in a partnership firm the partners are jointly and individually liable for debts of the firm. This form of structure is ideal if there are no/less requirement of external funds and low risk of bad-debts for example consultancy firms.
Q. When should we apply for registration of our partnership firm ?
Ans. A partnership firm can be registered whether at the time of its formation or even subsequently. The application for registration is to be made to the registrar of firms of the region in which the business is situated. It is advisable to get the firm registered as soon as it starts its business to avail the rights that can be enjoyed only by a registered firm.
The name of a partnership firm should not contain any words which indicate the approval/support of the government other than a case where the government has given its written consent for the use of such words as part of the firm’s name. Key pointers:
???? The names must not be too identical or similar to the name of another existing firm doing similar business.
???? The name must not contain words like Crown, Emperor, Empress, Empire or any other word indicating government approval.
Q. Can my certificate of registration be cancelled?
Ans. Partnership firms are governed by the Indian Partnership Act, 1932. Under the act, registration is not mandatory but it is advisable due to following reasons:
???? Partner(s) can’t file a case in any court against the firm/ other partners unless firm is registered.
???? The unregistered firm or its partners can’t file a case against third party on breach of a contract but the third party can file a case
???? In case of a dispute with a third party, the unregistered firm or any of its partners cannot claim a set off
The government fees applicable varies from state to state based on partner contribution. In most states the fee falls in range of Rs.2000-3500 along with stamp duty. Our experts will guide you on this. You will be charged only on actual government fees.
Q. How much time does it take to register a partnership?
Q. Are there any grounds on which my partnership can be invalid?
Q. If all partners wish to end the partnership, how can they do so?
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