What is a Partnership Firm?
A partnership firm is a business arrangement where two or more individuals combine with each other to carry on the business jointly. They do share profits, as well as liability. They are bound by a legal agreement that is called a partnership deed.
They are jointly and severally liable for debts. Partnership firms are very easy to form, every partner decides on some matters, and sometimes even the tax implications are friendly. In case of general partnerships, all partners share both profits and liabilities, but in other models, either liability and profit can be split differently.
Key Characteristics of a Partnership Firm
In a partnership firm two or more individuals collaborate to run a business, sharing profits and responsibilities. Here are eight characteristics of a partnership firm:
Partners
The least number of partners under a partnership firm is two. The partners must be of sound mind and not disqualified by law unless he is minor or of unsound mind. According to the Companies Rules, 2014, Rule 10, no more than 50 persons can form partners of a partnership firm
Deed of Partnership Agreement
It is an agreement/deed between partners that partners sign in order to constitute the terms and conditions of this partnership
Lawful Business
Partners are entered into the partnership to carry out lawful business, such as trade, vocation, or profession. Non-profit-generating charitable organisations cannot be considered a firm
Profit-Sharing
The terms of the profit-sharing percentage among partners are agreed upon while drafting the partnership deed
Mutual Agency
Both partners will act as agents and principals whereby all or any one partner can conduct the business on behalf of others
No Separate Entity
A partnership has no identity that is independent of its partners
Unlimited Liability
Each partner bears unlimited liability like that of a sole proprietorship
No transfer of interest without consent
One partner cannot transfer his interest in the firm without all other co-owners’ consent.
Importance & Benefits of Registering a Partnership Firm
Registering a partnership firm provides legal recognition, enhancing credibility and trust among clients and stakeholders. Here are five major benefits of the same:
- Legal Recognition and Protection: One of the most crucial benefits of registering a partnership firm is that it provides legal recognition. A registered partnership firm is considered an entity independent of those owners, and its partners shall be protected from the personal assets by the liability or debt incurred in business. Liability strictly is limited to the capital contributions agreed upon; hence their personal assets will not be subjected to liabilities or debts by using that for the business obligations.
- Formalisation of Business Relationship: Registering a partnership firm formalises the business relationship among the partners and defines roles and responsibilities clearly so that all parties are aware of what to expect from each other. For a partnership, a partnership deed is a legal document stipulating the terms and conditions to be observed by parties entering the agreement. This should be quite open, hence avoiding confusion between parties involved. A partnership deed gives an indication of the profit-sharing ratio and the mechanism of arriving at certain decisions, with the mechanism of settling any differences arising.
- Access to Business Opportunities: A registered partnership firm has credibility among clients, suppliers, and financial institutes. The increased credibility creates better access to highly valuable business opportunities, contracts, and collaboration that might not be available for the unregistered firm. It may be a show of professionalism and compliance which in turn attracts high-value clients as well as favourable terms from suppliers and lenders.
- Operational Flexibility: The operational flexibility provided by a partnership firm to its partners makes it possible for them to respond quickly to the fluctuations of markets and business conditions. Being relatively less formalised in governance and regulatory requirements, a partnership firm has fewer formalities and reporting requirements compared to corporations. Here, partners can take collective decisions, respond quickly to the market trends, innovate new strategies, and perform diverse activities without any bureaucratic strangles.
- Tax Advantages: Partnership firms have an advantage regarding tax treatment over other structures. The tax is at the partner level, which does not face double taxation, both at the entity level and at the individual level. Income is reported on personal income tax returns by the partners. In this manner, partners may benefit from lower tax rates and individual deductibles. Partnership firms can also become qualified to enjoy specific tax deductions and incentives, thus making it more tax efficient.
Types of Partnership Firms in India
Partnership firms in India are classified based on their liability and legal status. Understanding these types helps businesses choose the structure best suited to their needs and compliance requirements.
General Partnership vs. Limited Liability Partnership (LLP)
A general partnership involves partners sharing unlimited liability and mutual responsibilities for business obligations. In contrast, a Limited Liability Partnership (LLP) limits each partner’s liability to their investment, offering a more secure and structured business model. Here is a detailed comparison of the same:
General Partnership | Limited liability Partnership | |
Liability | In a general partnership, all partners are personally liable for the business's debts and actions. | In an LLP, partners are only liable for their own contributions to the business, and are not liable for the actions of other partners. |
Audit | General Partnership firms only need to have a tax audit of their accounts | While LLPs must get their accounts audited annually |
Annual returns | General Partnership firms do not need to file annual returns with the Registrar of Firms. | While LLPs must file an annual statement of accounts and solvency and annual return with the Registrar of Companies. |
Ownership | All partners are general partners in a general partnership, and ownership responsibilities are spread equally among them. | In a limited partnership, operations are handled by general partners, whereas limited partners do not take part in the day-to-day running of the business. Limited partners serve only as investors in the business. |
Establishment | General partnerships only require an agreement (even just a verbal one) between the partners to get up and running. | Limited partnerships require additional steps. You and your partner(s) will need to file a certificate of limited partnership with the secretary of state’s office in your state of operation. On this form, you’ll appoint a registered agent, which often can be the general partner |
Eligibility and Requirements to Register a Partnership Firm
To register a partnership firm, certain legal criteria and documentation must be met, ensuring the business is recognised under the law. This process involves choosing a partnership name, drafting an agreement, and fulfilling the requirements set by relevant authorities.
Minimum Partners Required
A partnership firm must have at least two persons. A partnership firm comes into existence when two or more persons, either by oral or a written agreement, come together to form a business and divide the profits between them in proportion that has been mutually agreed upon by them.
Documents Required for Partnership Firm Registration
To register a partnership firm, key documents such as the partnership deed, identity proofs of partners, and address proof of the firm’s registered office are required. Here is a list of documents for the same:
- Application for Registration of Partnership (Form 1)
- Registered photocopy of Partnership Deed
- Copy of an affidavit confirming all the details mentioned in the partnership deed and documents are correct
- PAN card and address proof of the partners
- Ownership documents or rental/lease agreement, for ascertaining the principal place of business of the firm.
Partnership Deed
The partnership deed is an agreement outlining the terms and conditions of a business operated by a partnership of two or more people. It defines how the profit will be shared, the responsibilities assigned to each other, rules, and so forth. It is also called the partnership agreement.
It is, however, a document that holds a legal importance with it and might be presented in court cases. It also provides some practical benefits, for instance, PAN eligibility, ability to open a bank account, and getting GST registration or FSSAI license for the business. To establish and operate the partnerships, knowledge about the partnership deed is essential.
Importance of Partnership Deed
A written Partnership Deed is essential for any business. As compared to an oral agreement, which has no locus standi in court; the written deed helps clear all the issues amicably by defining terms and conditions among the partners, what every partner is to do, profit/loss sharing ratio, and contribution made by each of them. It is said to reduce the potential conflicts between partners and to promote a clear understanding between business owners.
Notarisation and Stamp Duty for Partnership Deed
The Indian Stamp Act, 1899 mandates stamp duty on the partnership deeds under Section 46. Even though the amount of stamp duty differs according to the states, there would still be the necessity of getting the deed notarised on non-judicial stamp paper with a value of more than ₹200 and this payment will be payable to the sub-registrar.
For Delhi, the minimum stamp duty payable upon a partnership deed is ₹200. In Mumbai, it is ₹500. Here if the capital of the firm exceeds ₹500, then a ₹500 stamp duty would be required. Similarly, in Kolkata, the deed should be printed on stamp paper worth ₹500. In Gujarat, according to Article 44 of Schedule I to the Gujarat Stamp Act, 1958, the stamp duty on a partnership deed is 1% of the partnership capital, up to a maximum of ₹10,000.
Note: The stamp duty rates vary in every state, therefore the specified rate must be ascertained for the local state and stamp paper is purchased accordingly. For more information connect with a legal expert today
Post-Registration Compliance for Partnership Firms
Once the registration of the partnership firm is complete, the business must adhere to legal compliance standards under the Indian Partnership Act 1932. This includes filing annual reports, maintaining records of the share price, and ensuring accessibility to required business organisations. For expanding businesses, it is essential to keep accessibility links and documentation updated. Proper compliance will help maximise growth potential and ensure long-term sustainability of the partnership.
PAN and TAN Application for Partnership Firm
PAN application procedure for a Partnership firm Fill the Form 49A at the website of NSDL and/or UTIITSL by furnishing details of partnership firm and attaching documents like partnership deed and registration certificate. Apply status by using the acknowledgement number obtained after submitting the application.
For TAN, fill up the Form 49B on the NSDL website, and from there, provide the details of the firm and the fee to be paid. A copy of the PAN card is the only document required for the firm. Once processed, the PAN and TAN cards will be delivered to the firm’s registered address.
Frequently Asked Questions on Partnership Firm Registration
Who can become a partner in an Indian Partnership Firm?
In India, any individual, including minors (with certain limitations), as well as companies and LLPs, can become partners in a Partnership Firm, subject to the provisions of the Partnership Deed and the Indian Partnership Act, 1932.
How is the profit-sharing ratio determined in a Partnership Firm?
The profit-sharing ratio is determined by the Partnership Deed. If the deed does not specify, profits and losses are shared equally among the partners. 1932.
What are the compliance requirements for a registered Partnership Firm?
Compliance obligations include maintaining accurate financial records, filing income tax returns, conducting statutory audits when required, and ensuring adherence to labor laws and other regulations.
How can a registered Partnership Firm be dissolved?
A Partnership Firm can be dissolved voluntarily by mutual agreement among the partners, by a court order, or due to the insolvency or retirement of a partner, in accordance with the Partnership Deed and the Indian Partnership Act, 1932.
What are the tax implications for a registered Partnership Firm?
A registered Partnership Firm is treated as a separate legal entity for tax purposes, with profits taxed at a flat rate, while individual partners are taxed on their respective shares of profits.
Can a Partnership Firm be converted into another type of business entity?
It is possible to convert a Partnership Firm into a Limited Liability Partnership (LLP) or a Private Limited Company, subject to following the relevant legal procedures.
Can a Partnership Firm engage in multiple business activities?
A Partnership Firm can engage in multiple business activities, provided these are outlined in the Partnership Deed and adhere to applicable legal regulations.
What are the consequences of not registering a Partnership Firm?
Unregistered Partnership Firms cannot initiate or defend lawsuits in court, and their partners may face legal and financial disadvantages in disputes and contract enforcement.
How does one close or dissolve a Partnership Firm voluntarily?
To voluntarily dissolve a Partnership Firm, all partners must agree, settle liabilities, distribute any remaining assets, and inform the Registrar of Firms.
What are the restrictions on the transfer of interest in a Partnership Firm?
Partners cannot transfer their interest in the firm without the unanimous consent of all other partners, as stipulated in the Partnership Deed.