WHAT IS IT
A partnership is a business owned jointly by more two or more persons who have agreed to share profits of the business. This is among the most common business formats seen in India today. A partnership can have a maximum of 20 partners. The partnership agreement gives the partners the complete flexibility to decide on matters such as capital contribution, management of affairs and distribution of profits. Commonly, partnership firms are set up in case of small and mid-sized businesses in which the owners themselves provide specialised services. Examples legal firms, accounting and auditing firms and engineering firms.
In India, a partnership can be registered with the Registrar of Firms or it may conduct business as an unregistered partnership. A registered partnership gets the right to file and defend court cases in its own name; in case of an unregistered partnership, the partners have to file and defend cases in their own name. In addition, only a registered partnership firm can claim set off of reciprocal debts. It is advisable to conduct business through a registered partnership firm.
THE FORMATION PROCESS
An unregistered partnershp firm can commence business on the basis of (a) the partnership deed and (b) completion of the other statutory requirements such as obtaining PAN in the name of the firm, registering the firm under the Shops & Establishments Act and registering the firm under the Service Tax Act, as applicable. In case of a registered partnership firm, in addition to the above, the partnership agreement has to be registered with the Registrar of Firms.
+ Easy to set up
+ Minimal compliance requirements
- Unlimited liability of the partners
- Partners are jointly and severally liable for acts of any partner
- A partner can transfer his interest only with consent of all the other partners
- Creditworthiness linked to the owner's credit standing
FREQUENTLY ASKED QUESTIONS
Q. Are there any special qualifications for becoming a partner in a partnership firm?
A. No. Any Indian citizen residing in India and above the age of 18 years can be a partner. In certain circumstances, a person under the age of 18 years may also be included as a partner.
Q. What is the minimum amout of capital required?
A. A partnership firm can be started with any amount of capital. There is no minimum requirement as such.
Q. What are the documents required for setting up a partnership firm?
PAN card of each of the partners along with their proof of identity (Aadhar card, Passport, etc.) and address proof are required. In addition, the partnership deed has to be signed by each partner.
Q. Can a partnership hold a bank account in its own name?
Yes. To open a bank account, the firms needs to submit a copy of (a) the partnership deed, (b) its PAN card and documents showing identity and address of each of its partners.
Q. Which partner manages the daily affiars of the partnership firm?
Unless the partnership agreement specifies otherwise, all partners are entitled to manage the business of the firm.
Q. Can a partner transfer his partnership interest in the firm?
Yes. However, unless the transfer is to one of the existing partners, the transferring partner has to obtain the written consent of each existing partner for making such transfer effective.
Q. Can a partnership be converted into a Limited Liability Partnership or a Private Limited Company?
Yes, a partnership firm can be converted into a Limited Liability Company or a Private Limited Company. However, the procedure is tedious and time consuming. Also, there are implications of such conversion under the Income Tax Act, 1961, particularly regarding applicablity of capital gains provisions.
There are minimal legal formalities in setting up a partnership firm. Further, other than filing of regular business taxes, partnerships do not have to file reports with the government. But with the introduction of Limited Liability Partnerships, general liability partnership firms are expected to see a decline in popularity. Exposure to unlimited liability, no independent legal existence of the business and ability of a partner to make the other partners liable through his acts are the factors which make general partnerships unappealing. In our view, it is advisable for entrepreneurs to consider a Limited Liability Partnership instead of a general partnership for their venture.