Partnership

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Definition

A partnership is an arrangement where parties, known as business partners, agree to cooperate to advance their mutual interests.

The partners in a partnership may be individuals, businesses, interest-based organizations, schools, governments or combinations.

In India, we have a definite law that covers all aspects and functioning of a partnership, The Indian Partnership Act 1932.

The act also defines a partnership as “the relation between two or more persons who have agreed to share the profit from a business carried on by either all of them or any of them on behalf of/acting for all”

So, in such a case two or more (maximum numbers will differ according to the business being carried) persons come together as a unit to achieve some common objective. And the profits earned in pursuit of this objective will be shared amongst themselves.

The entity is collectively called a “Partnership Firm” and all the individual members are the “Partners”. So let us look at some important features.

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Feature of Partnership

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The essential features and characteristics of a partnership are:

1. Agreement: The partnership arises out of an agreement between two or more persons.

 

2. Profit sharing: There should be an agreement among the partners to share the profit of the business.

 

3. Lawful business: The business to be carried on by a partnership must always be lawful.

 

4. Membership: There must be at least two persons to form a partnership. The maximum number is 20. But in case of banking business the maximum is 10 members.

 

5. Unlimited liability: The liability of every partner is unlimited, joint and several.

 

6. Principal-agent relationship: Every partner is an agent of the firm. He can act on behalf of the firm. He is responsible for his own acts and also for the acts done on behalf of the other partners.

 

Advantages of  Of Partnership

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1. Easy Formation:

Partnership is a contractual agreement between the partners to run an enterprise. Hence, it is relatively ease to form. Legal formalities associated with formation are minimal. Though, the registration of a partnership is desirable, but not obligatory.

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2. More Capital Available:

We have just seen that sole proprietorship suffers from the limitation of limited funds. Partnership overcomes this problem, to a great extent, because now there are more than one person who provide funds to the enterprise. It also increases the borrowing capacity of the firm. Moreover, the lending institutions also perceive less risk in granting credit to a partnership than to a proprietorship because the risk of loss is spread over a number of partners rather than only one. 

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3. Diffusion of Risk:

You have just seen that the entire losses are borne by the sole proprietor only but in case of partnership, the losses of the firm are shared by all the partners as per their agreed profit-sharing ratios. Thus, the share of loss in case of each partner will be less than that in case of proprietorship.

 

4. Flexibility:

Like proprietorship, the partnership business is also flexible. The partners can easily appreciate and quickly react to the changing conditions. No giant business organisation can stifle so quick and creative responses to new opportunities.

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Disadvantages Of Partnership:

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1. Unlimited Liability:

In partnership firm, the liability of partners is unlimited. Just as in proprietorship, the partners’ personal assets may be at risk if the business cannot pay its debts.

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2. Divided Authority:

Sometimes the earlier stated maxim of two heads better than one may turn into “too many cooks spoil the broth.” Each partner can discharge his responsibilities in his concerned individual area. But, in case of areas like policy formulation for the whole enterprise, there are chances for conflicts between the partners. Disagreements between the partners over enterprise matters have destroyed many a partnership.

 

3. Lack of Continuity:

Death or withdrawal of one partner causes the partnership to come to an end. So, there remains uncertainty in continuity of partnership.

 

4. Risk of Implied Authority:

Each partner is an agent for the partnership business. Hence, the decisions made by him bind all the partners. At times, an incompetent partner may lend the firm into difficulties by taking wrong decisions. Risk involved in decisions taken by one partner is to be borne by other partners also. Choosing a business partner is, therefore, much like choosing a marriage mate life partner.

 

Types of Partners

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Not all partners of a firm have the same responsibilities and functions. There can be various types of partners in a partnership. Let us study the types of partners and their rights and duties.

• Active Partner: As the name suggests he takes active participation in the business of the firm. He contributes to the capital, has a share in the profit and also participates in the daily activities of the firm. His liability in the firm will be unlimited. And he often will act as an agent for the other partners.

 

• Dormant Partner: Also known as a sleeping partner, he will not participate in the daily functioning of the business. But he will still have to make his share of contribution to the capital. In return, he will have a share in the profits. His liability will also be unlimited.

 

• Secret Partner: Here the partner’s association with the firm is not public knowledge. He will not represent the firm to outside agents or parties. Other than this his participation with respect to capital, profits, management and liability will be the same as all the other partners.

 

• Nominal Partner: This partner is only a partner in name. He allows the firm to use the name of his firm, and the attached goodwill. But he in no way contributes to the capital and hence has no share in the profits. He does not involve himself in the firm’s business. But his liability too will be unlimited.

 

• Partner by Estoppel: If a person makes it out to be, through their conduct or behaviour, that they are partners in a firm and he does not correct them, then he becomes a partner by estoppel. However, this partner too will have unlimited liability.

 

What is a Partnership Deed and How is it Formulated?

 

Partnership Deed is basically a document that charts out the rights and responsibilities of all the partners in the business entity. The Deed is enforceable by law and acts as a guide to the partners in carrying out the day-to-day business activities.

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Further, it helps to avoid any discrepancy or disagreement with regards to the role of each partner and the benefits that accrue to them. The key elements of the partnership deed are as follows:

• Name, principal address and a short outline of the nature of the business undertaken by the partners.

• Important financial information such as:

  • amount of capital invested,

  • profit and loss sharing,

  • salaries due and

  • method of distributing income to each partner.

• Method of accounting to be followed for cash flow, profit and loss and assets and liabilities of the business. Further, it also determines the fiscal year to be followed in all the accounting statements and how such statements are to be shared among the partners and other shareholders.

• Duties, powers and the liability of each partner. The Deed may also spell out the name of the partners who would act as the managing partner and would be liable for managing the day-to-day business.

• Information with regards to necessary actions to be taken in case of withdrawal or death of a partner.

• Details about method of changing the partnership rights in case of expulsion of a partner.

• Method of dissolving the partnership in case of termination of the business.

• Information with regards to the mode of arbitration of disputes.

 

Partnership Firm Registration In India

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Partnership form of business entities come under the Indian Partnership Act, 1932. According to this Act, it is not mandatory to register partnership firms. This means it is completely a choice of partners whether to register such form of business entity. However, in case the partners choose not to register the partnership firm, they would not be able to avail the benefits available to registered partnership firms.

Section 58 of the Indian Partnership Act, 1932, lays down the provisions for Partnership Registration. These provisions are as follows.

 

1. Application for Registration

Partnership firm can be registered by sending an application in Form No. 1. Along with the form, requisite fee and a true copy of the partnership deed also needs to be sent to the Registrar. Such an application needs to be filed with the Registrar of Firms of the area in which business is located. Thus, the application must outline:

• Firm name and nature of business of the firm

• Place or principal place of business

• Names of other places where business is undertaken

• Date of joining of each partner

• Full names and addresses of the partners

• Duration of the firm

Further, such an application must be signed by all the partners or agents who are specially authorized to do so on their behalf. Also, it must be sent to the Registrar within a period of one year from the date of formation of the partnership firm.

 

2. Verification of Application for Registration

Each partner signing such an application must also verify the same in the manner as suggested under the Act.

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3. Documents To Be Attached To The Application for Registration

Following documents along with the prescribed fee must be submitted to the Registrar. These include:

• Registration Application in Form No. 1

• Duly filed affidavit

• Certified and true copy of Partnership Deed. It must be noted that the Partnership Deed created by the partners must be on a stamp paper as the Indian Stamp Act. Or the Deed must be on a stamp paper that is applicable in the State in which such a Deed is implemented.

• Rental or Lease Agreement or proof of ownership of place of business

 

4. Fee for Registration

As per section 71 of the Act, the State government is free to make rules regarding the fees to be given to the Registrar along with the other documents for registration.

 

5. Naming A Partnership Firm

The name of the partnership firm should consider the rules mentioned in the above section while choosing a name for the partnership firm. However, the firm so registered must use brackets and the word (Registered) after its name.

Further, if any partner is not satisfied with the order of the Registrar with regards to the firm name, he may appeal to the person authorized by the State Government in this behalf. This appeal must be made within 30 days from the date of communication of such an order and on the payment of the requisite fee.

The authorized officer on receiving the appeal would make the decision in this regard.

 

6. Entry of Statement in a Register

Finally, as per section 59 of the Act, the Registrar makes an entry of the Statement in a register called the register of forms and files the Statement. This is undertaken after the Registrar is satisfied that application of registration complies with all the necessary provisions. The date on which the Registrar records and files the Statement is considered as the date of registration of the Partnership firm.

 

7. Apply for a PAN Card

It is important to note that registration with the Registrar of Firms is not the same as the registration with the Income Tax Department. It is necessary for all the firms to apply for registration with the Income Tax Department and obtain a PAN Card.

 

8. Open a Bank Account

After receiving the PAN Card, the partnership firm must open a current account in the name of the firm. This is done to undertake all the operations via the current account of the business.

To help you with understanding the procedure behind partnership firm registration in India, here is an infographic on Partnership Firm Registration.

 

Partnership Firm Compliances

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Partnership firms are required to maintain compliance like LLPs and Companies registered in India. Partnership firm compliance mainly includes filing of income tax return, while corporate entities like LLP and Company require both income tax return filing with the Income Tax Department and annual return filing with the Ministry of Corporate Affairs. Partnership firms having annual turnover of over Rs.100 lakhs are also required to obtain a tax audit.

In addition to the basic compliance, partnership firms may also be required to comply with TDS regulations, GST regulations, VAT / CST regulations, Service Tax regulations, ESI regulations and others. The compliance requirement for a business would vary based on the type of entity, industry, state of incorporation, number of employees and sales turnover.

 

• INCOME TAX  Filing      

Once the registration process of the firm is done, it is necessary for the partnership firm to obtain Permanent Account Number (PAN) and Tax Deduction Account Number from the Income Tax Department. A Partnership firm needs to file ITR irrespective of the revenue or loss. For partnership firm, the rate of income tax on the whole of the total income will be 30%.

 

• GST Filing            

GST registration is required for businesses whose annual turnover exceeds Rs. 40 lakhs (Rs. 20 lakhs for North Eastern states). For some businesses like Export-Import, E-commerce, and Market Place Aggregator, GST registration is mandatory. Under the GST regime proposed to be rolled out in 2017, partnership firms having GST registration would be required to file monthly, quarterly and annual GST returns.                                                        

• TDS Filing

Quarterly TDS returns must be filed by partnership firms that have TAN and are required to deduct tax at source as per TDS rules.

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• ESI Return

ESI return must be filed by all partnership firms having ESI registration. ESI registration is required once the partnership firm employs over 10 employees.

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• Service Tax or VAT

In case a partnership firm has service tax or VAT registration, it must file the respective returns. Service tax returns are due half-yearly while VAT return due date changes from state to state.

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DISCLAIMER- These materials are public information and have been prepared solely for educational purposes. These materials reflect only the personal views of the author and are not individual legal advice.

It is understood that each case is fact specific and that the appropriate solution in any case will vary. Finally, the owner will not be accountable for any loses injuries or damages from the exposures or usage of this information.

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