Section 4 of the Partnership Act, 1932 defines Partnership as the relationship between two or more persons who have agreed to share the profits and losses of a business carried on by all or any one of them acting for all.
Partnership firm is owned, managed and controlled by partners constituting the firm. As compared to other forms of businesses, partnership firms are comparatively convenient to incorporate. Such form of doing business is prevalent amongst small as well as medium sized businesses in the unorganized sector. Quantum of resources in the form of investments is higher as compared to a sole proprietorship because association is between two or more persons. Partners in their individual capacity can contribute more effort, time and capital for the business.
Types of partnership firms
As per the provisions of Indian Partnership Act, a firm is allowed to be formed and executed by entering into partnership agreement. A partnership firm can be of the following types:
- Unregistered partnership firm: This form of business organization is formed and executed by entering into agreement by the partners of the proposed firm. It has legal existence in the eyes of law and allows the partners to carry on their business activities as per the terms of agreement. An unregistered partnership firm can be registered at any point of time.
- Registered partnership firm: Such firm is to be registered with the Registrar of Firm (ROF) having requisite jurisdiction over the place of business of the firm. Certain government fee is paid to ROF for registering the partnership firm. Such fee is fixed as per State Law and varies from state to state.
Partnership deed is a document laying down the rights and responsibilities of all the parties to a business operation. It states the code of conduct for all the partners and possesses the force of law, hence, preventing disputes and disagreements over the duties and role of all the partners in the business.
A partnership firm can experience smooth and successful business operations provided there is clear understanding among its partners with regard to various policies and procedures governing their partnership. It defines various terms resulting in clarity among the partners. It is not mandatory to have partnership deed, but it is better to enter into one to mitigate any possible disputes and litigations among the partners. Only a deed signed and stamped by all the partners is valid in the eyes of law.
Constituents of partnership deed
Partnership deed includes the following:
- Purpose of the firm
- Duration or term of partnership
- Name of the firm
- Address of firm
- Capital contribution by each partner
- Profit and loss sharing ratio
- Interest on capital contributed, if any
- If salary or commission payable to partners
- Interest on Partner’s loan
- Duties and obligations of partners
- Provisions related to death, resignation, retirement and addition of a partner
- Amount of drawings allowed to each partner
- Interest on drawings to be charged, if any
Advantages of registering a partnership firm
- Flexibility in operations: Lesser legal implications in Partnership setup leads to flexibility as compared to other forms of organization. Partners have the capacity to change the size or nature of the business or area of its operations. The consent of all the partners is sufficient.
- Easy initiation and swift process: Setting up of partnership firm is an easy process. A partnership firm can be incorporated within few days. Cost of incorporating a partnership firm is an allowable expense against corporation tax.
- Improved decisions: Partners are owners of the business and each of them has an equal right to participate in the decision making process of the business. Reckless and hasty decisions are avoided as a result of all the partners participating in the management of the business. In times of conflict, partners can deliberate and take unanimous decision.
- No Legal Compliances: A partnership firm can be incorporated by minimum two partners. Performance and submission of annual audit is not mandatory for a partnership firm. No obligation related to filings at Ministry of Corporate Affairs (MCA) or under any other law, unless becomes applicable.
- Tax implications: As per the provisions of Income Tax Act, the tax liability of the firm is on income earned from the partnership business. Profits earned by the partners are not taxable in their hands. Also, no dividend distribution tax is payable on distribution of profits to partners.
- Profit earned and loss incurred: Profits earned as well as losses incurred are shared among the partners in the agreed ratio, as per terms of agreement.
Steps for incorporating a Partnership firm
- Preparation and execution of Partnership deed
- Stamp duty payment, as applicable
- Registration with the Registrar, if required
- Application for Permanent Account Number (PAN)
- Opening of bank account
Documents required for registration
- Application form in the format prescribed
- Partnership deed
- Self-attested copy of PAN card of partners
- Self-attested copy of address proof of partners
- Copy of utility bill
- If place is rented, rent or lease agreement as well as NOC from the owner of place of business
- Any other documents as specified by ROF
Legal compliances of Partnership firm
Following returns are filed in case of partnership firm:
- Income Tax Return: At the end of financial year, partnership firm prepares financial statements such as profit and loss account, balance sheet, etc. Subsequently, Income tax return is filed by the firm.
- Goods and Services Tax (GST) Return: If partnership firm has acquired GST registration, GST returns will be filed on monthly or quarterly basis.