What is Partnership Firm?

A Partnership Firm is when two or more people agree to share profits and losses in a specific ratio. In India, partnership registration follows the rules outlined in the Indian Partnership Act of 1932.

To establish a Partnership Firm, a legal document called the partnership deed is needed. This document outlines the terms and conditions of the partnership.

According to the law, a partnership involves individuals who agree to share profits earned from the business conducted within the firm. A partnership can have up to 50 members.

It's important to know that members of a Hindu Undivided Family or a Burmese Buddhist member cannot be part of a partnership firm.

You can find more details about Partnership Firm rules and regulations in The Partnership Act, 1932.

Key Points

1) Basic Idea

A partnership firm is when two or more people team up to start a business together.

2) Simple Setup

Starting a partnership firm is quick and easy compared to other business types.

3) Affordable Registration

It costs less to register a partnership firm compared to other business structures.

4) Tax Advantages

Partnership firms often enjoy more tax benefits than sole proprietorships.

5) Risk Sharing

Partnerships allow individuals with similar business goals to share risks and rewards.

6) Minimal Requirements

Partnership firms have fewer rules and regulations to follow compared to other business forms.

Features of Partnership Firm

·       Number of Partners: You need at least two people to start a partnership, but you can't have more than 50.

·       Voluntary Registration: Registering your partnership isn't mandatory, but it unlocks extra benefits.

·       Contractual Agreement: Partners are bound by the terms laid out in the partnership deed, a formal document that all partners must sign.

·       Partner Eligibility: Only adults can become partners in a partnership firm; minors aren't allowed.

·       Profit and Loss Sharing: Partners divide profits and losses based on the percentages outlined in the partnership deed.

·       Unlimited Liability: Each partner is responsible for the firm's debts and losses, collectively and individually.

·       Interest Transfer: Partners can't sell or transfer their stake in the firm without consent from all other partners.

·       Principal-Agent Relationship: Partners act as agents for the firm, making decisions in its best interest. Any partner can represent the others, and decisions are usually made jointly.

Different Types of Partnerships in India

Types of Partnership Firms Explained in Simple Terms:

1. General Partnership:
• Most common type.
• Partners share equal rights and responsibilities.
• Each partner contributes capital, shares profits and losses, and participates in management.
• Unlimited liability for all partners.
2. Limited Partnership:
• Involves general partners and limited partners.
• General partners have unlimited liability.
• Limited partners have liability limited to their investment.
• Limited partners aren't involved in day-to-day management.
3. Partnership at Will:
• Formed without a fixed duration.
• Partners can dissolve the firm anytime by mutual agreement.
• Partners can join or leave without affecting the firm's continuity.
4. Limited Liability Partnership (LLP):
• Each partner's liability is limited to their contribution.
• Governed by the Limited Liability Partnership Act, 2008.
• LLP has its own legal identity, and liabilities are limited to firm assets.

 

 

Importance of Partnership Firm Registration

Registering your partnership firm comes with important rights and benefits that unregistered firms don't have.

When your partnership is registered, you can take legal action against any partner or the partnership itself if they don't fulfill their agreements. But if your partnership isn't registered, you can't take legal action against your partners.

A registered partnership can also take legal action against third parties if they don't fulfill their agreements. However, an unregistered partnership can't do this.

Moreover, a registered partnership can use certain legal strategies to enforce its agreements, like set-off. But an unregistered partnership can't use set-off in legal proceedings against it.

Various Types of Partners

1. Active Partner:
• Actively manages the business.
• Represents other partners.
• Must publicly announce retirement to avoid future responsibilities.
2. Dormant Partner:
• Not involved in business management.
• Shares profits and losses.
• No requirement to publicly announce departure.
3. Principal Partner:
• Not an actual equity holder.
• Not involved in management.
• Still liable for firm's actions.
4. Profit-Share Partner:
• Receives share of profits.
• Not liable for losses.
• Only responsible for firm's actions to third parties.
5. Sub-Partner:
• Shares profits with another party.
• No rights or liabilities against the firm.
6. Prospective Partner:
• Accepted as a future partner.
• Not liable for previous firm actions.
7. Previous Partner:
• Leaves while other partners remain.
• Accountable for firm's actions until formal notice of departure.
8. Partner by Holding Out (Section 28):
• Represents themselves as a partner.
• Liable to anyone who relied on this representation.
• Responsible for firm's actions to third parties.

 

Essential Documents for Partnership Firm Registration

· Photos, Aadhar cards, and PAN cards of all partners.

· The address of your proposed firm.

· Form No. 1 (This is the application form for registration under the Partnership Act).

· The original copy of your Partnership Deed, signed by all partners.

· An affidavit stating that you intend to become a partner.

Easy Steps to Register Your Partnership Firm: A Simple Guide

Step 1: Choose a Unique Name

Select a name for your partnership firm that's not already taken and follows the Registrar of Firms' guidelines. Avoid using government-related or prohibited names.

Step 2: Determine Partner Details

 Decide on profit-sharing ratios, firm address, investment amounts, partner duties, and other terms agreed upon by all partners.

Step 3: Draft Partnership Deed

 Hire a professional to create a partnership deed according to the Partnership Act, 1932. This includes obtaining appropriate stamp paper, printing the deed, collecting signatures from all partners, and applying for registration.

Step 4: Submit Application

 Complete and submit an application form, along with required fees, to the Registrar of Firms in your state. The application must be signed and verified by all partners or their representatives.

Step 5: Obtain Registration Certificate

 After approval from the Registrar of Firms, you'll receive a Registration Certificate. This certifies your partnership firm's registration and is recorded in the Register of Firms, which is accessible to the public for a fee.

 

 

 

Perks of Partnership Firm RegistrationTop of Form

1.     Minimal Compliance: Partnership formation involves less paperwork and legal requirements compared to other business types. This means less time spent on compliance and more focus on running your business.

2.     Easy to Start: Starting a partnership is straightforward. You mainly need a partnership deed, which is easy to obtain. This makes setting up a partnership quick and hassle-free.

3.     Cost-Effective: Partnership formation is more economical than other business structures like private limited companies. You only need to pay for partnership deed registration, which is usually cheaper than other fees.

In summary, forming a partnership is a great choice for small businesses in India. With less compliance work, a simple registration process, and lower costs, partnerships offer several benefits for entrepreneurs starting a new venture.

Tax Responsibilities After Registering your Partnership FirmTo

Tax Responsibilities After Partnership Firm Registration Made Simple:

 

1. Get PAN and TAN: Partners need to obtain PAN and TAN from the Income Tax department after registering their partnership firm.

 

2. File ITR: Registered partnership firms must file Income Tax Returns (ITR) regardless of their income.

 

3. Pay Taxes: Partnership firms pay 30% tax plus cess & surcharge on their total income.

 

4. Tax Audit: Firms with annual income over 100 lakhs need to undergo a tax audit.

5. GST Registration: Firms with income over 40 lakhs (20 lakhs for north eastern states) must register for GST. Those in e-commerce or export-import must also register.

6. GST and TDS Returns: After GST registration, firms must file GST and TDS returns monthly or quarterly.

7. ESIC Registration: Partnership firms must obtain ESIC registration and file ESIC returns

 

 

 

Differentiate Between Partnerships Firm and Company

1. Legal Status:

·       Partnership Firm: Not incorporated.

·       Company: Incorporated.

2. Number of Owners:

·       Partnership Firm: Two or more partners.

·       Company: One or more shareholders.

3. Liability:

·       Partnership Firm: Partners have unlimited liability.

·       Company: Shareholders have limited liability.

4. Management:

·       Partnership Firm: Managed by partners.

·       Company: Managed by directors appointed by shareholders.

5. Ownership:

·       Partnership Firm: Joint ownership by partners.

·       Company: Individual ownership of shares by shareholders.

6. Raising Capital:

·       Partnership Firm: Limited options.

·       Company: Can issue shares and raise capital from the public.

7. Legal Compliance:

·       Partnership Firm: Governed by Partnership Act, 1932 with fewer formalities.

·       Company: Governed by Companies Act, 2013 with more formalities.

8. Taxation:

·       Partnership Firm: Partners pay tax on their share of partnership income.

·       Company: Taxed as a separate legal entity, shareholders taxed on dividends.

9. Continuity:

·       Partnership Firm: Dissolves on the death or resignation of a partner.

·       Company: Has continuity of existence.

10. Transferability of Ownership:

·       Partnership Firm: Ownership cannot be transferred without the consent of partners.

·       Company: Shares can be freely bought and sold.

Difference between Partnership Firm and Club

1) Legal Structure:

• Partnership: Unincorporated.
• Club: Also unincorporated.

 

2) Formation:

• Partnership: Formed by agreement between two or more persons.
• Club: Formed by individuals with a common interest.

3) Members:

• Partnership: Called partners, jointly own and manage the business.
• Club: Called members, part of a group with a common interest.

4) Liability:

• Partnership: Partners have unlimited liability for firm's debts.
• Club: Members have limited liability, usually up to their contribution amount.

5) Management:

• Partnership: Managed jointly by partners.
• Club: Typically run by a board of directors or elected officers.

6) Taxation:

• Partnership: Profits and losses flow through to partners' personal tax returns.
• Club: May be taxed as non-profit organizations and exempt from federal income tax.

7) Ownership:

• Partnership: Partners jointly own business assets and liabilities.
• Club: Owned by a non-profit organization or collectively by members

Differentiate Between Partnership Firm and Hindu Undivided FamilyTop of FormBottom of Form

 

1) Type of Organization:

• Partnership: Business organization where two or more people come together to carry on a business.
• HUF: Business organization where family members of a Hindu undivided family collectively own and manage the business.

2) Governing Law:

• Partnership: Governed by the Indian Partnership Act, 1932.
• HUF: Governed by the Hindu Succession Act, 1956.

3) Formation:

• Partnership: Created through a partnership deed outlining terms like profit-sharing, capital commitment, etc.
• HUF: Created by operation of law, typically by the birth of a male child in a Hindu undivided family.

4) Liability:

• Partnership: Partners have unlimited liability for debts and obligations.
• HUF: Members' liability is limited to their share in the HUF property.

5) Number of Members:

• Partnership: Maximum of 20 partners (general) and 50 partners (banking).
• HUF: No upper limit for the total number of members.

Differentiate between Partnership Firm and Association

1) Ownership:

• Partnership: Shared ownership among 2 or more individuals.
• Association: No ownership; represents a group of people.

2) Profit/Loss:

• Partnership: Profits and losses are shared equally among the partners.
• Association: Members do not share profits and losses; organization run by bylaws.

3) Liability:

• Partnership: Partners have personal liability for the debts of the business.
• Association: Members do not have personal liability for the debts of the organization.

4) Purpose:

• Partnership: Formed for conducting business activities.
• Association: Can be formed for social, cultural, or charitable purposes.

5) Taxation:

• Partnership: Partnership revenue reported on tax returns and taxed.
• Association: May be tax-exempt if organized for charitable or educational purposes.

 

6) Termination:

• Partnership: Dissolved by agreement, death or withdrawal of a partner, bankruptcy, or court order.
• Association: Dissolved by agreement of the members, expiration of the organization's charter, or court order.