Partnership Firm in India: A Comprehensive Overview
A partnership firm is defined as a business organisation that is of high significance. In India, it is a common type of business structure. Setting up a partnership firm requires at least two people to be involved. In a partnership firm, these people form a business together and agree to divide the profits in a predetermined proportion. Any type of trade, employment, or profession is covered by the partnership business. The Indian Partnership Act of 1932 determines the laws with regard to partnership firms in India. This Act specifies the obligations and rights that partners have to one another as well as any other legal relationships that may arise between partners and third parties as a result of forming a partnership. As a result, the Act defines a partner's and a partnership firm's legal and contractual obligations towards third parties in situations when the partnership firm's operations result in such relationships. This article will examine several facets of managing a partnership firm in India.
Table of content
What is a Partnership Firm?
A partnership firm is a type of business entity in which two or more people collaborate to run and manage a company. The partners combine their assets, expertise, and knowledge to accomplish shared business objectives. Its simplicity and convenience of formation make it a popular choice for company structures. The partnership business includes vocations, professions, and trades. In India, partnership firms are governed and controlled under the Indian Partnership Act of 1932. Partners are the people who come together to establish a partnership firm. A contract between them sets up a partnership firm. A partnership deed governs their mutual relationship as well as their relationship with the partnership firm.
Rules for Partnership Firms
Partnership Agreement:
A partnership is formed as a result of a contract. It cannot arise from a position, a legal operation, or inheritance. For example, a son of a partner in a partnership firm may receive a portion of the partnership assets upon the partner's death. However, he cannot join the partnership without first receiving permission from all other partners. Likewise, because a HUF's involvement in a family business is founded more on social standing than a contract, members of the group cannot be called partners. The "contract" is an essential building element of a partnership.
A partnership can have a maximum of 20 partners:
A partnership requires the participation of two or more people since it is formed on the basis of a contract. The Indian Partnership Act, 1932 does not set a maximum number of partners. However, a partnership with more than 10 members for a banking firm and more than 20 members for any other business would be prohibited under the Companies Act of India. As a result, it is appropriate to consider that the number of partners in a partnership business has now achieved its maximum number.
A partnership agreement can only be signed by individuals who are able to do so lawfully. People can originate from natural or artificial sources. A company can get into a partnership agreement if its memorandum of association specifically permits it to do so. A company is an artificial legal person. Two businesses may even decide to collaborate (Steel Bros & Co. Ltd. v. Commissioner of Income Tax). As a result, partnerships are not allowed to enter into partnerships with other partnerships or with individuals. It is unlike other legal entities such as corporations, which are recognised as having a separate legal entity from that of their participants (Duli Chand vs Commissioner of Income Tax).
According to the terms of the partnership contract (in the firm's name), it is permissible for members of one partnership firm to enter into a partnership contract with another partnership firm or an individual in their capacity (Jadavji Narsidas & Co. Vs Commissioner of Income Tax)
Continuing Business in a Partnership:
The decision to conduct business jointly must be the third essential component of forming a partnership. "Business" refers to any trade, occupation, or profession that is in existence and is used in the broadest sense imaginable. It would not be regarded as a partnership as long as the objective is to carry out charitable activities. Furthermore, there is no partnership and these people cannot be referred to as partners. It is because they are not conducting business as a company in either scenario if they agree to split the proceeds from a specific property or the goods that they buy in bulk among themselves.
Profit-Sharing:
An agreement to conduct business that divides profits equally amongst all of the partners is one of the most crucial prerequisites. Thus, if a company is run only for charity and not for profit, or if only one partner gets to keep all of the company's earnings, there wouldn't be a partnership. Conversely, the partners may decide how to split the profits as they see fit. A partner's commitment to third parties is unrestricted by partnership law This is despite the fact that they might not be held accountable for the losses of the company. In India, a brand-new kind of partnership called a Limited Liability Partnership (LLP) has been created to let partners restrict their liability to outside parties. The partners' liability to third parties is greatly decreased when they establish a Limited Obligation Partnership.
Partnerships involving Mutual Agency:
The business must be conducted by all of the partners or by any (one or more) of them acting on their behalf. This establishes a mutual agency. Every partner in this manner serves as both a principal and an agent for the other partners as well as for himself. In other words, he has the power to tie others through his actions and let the other partners bind him. The significance of the mutual agency feature lies in its ability to encourage each partner to act on behalf of the other partners during business operations.
Advantages of Partnership Firm
A partnership firm can be easily incorporated, unlike other business organisation types. The partnership firm can be established by creating a partnership deed and signing a partnership agreement. There are no more documents needed for a partnership deed. It is not even required to have Registrar of Firms registration. A partnership firm is free to include and register at a later time. Registration is not required.
Unlike a business or limited liability partnership (LLP), a partnership firm is subject to comparatively minimal compliances. The partners do not require a Director Identification Number (DIN), or Digital Signature Certificate (DSC), which is necessary for an LLP's authorised partners or company directors. Any updates to the company can be quickly introduced by the partners. There are legal limitations on what they can do. It is less costly and requires a less complicated process of registration than a company or limited liability partnership. There are not many legal formalities involved, and the dissolution of the partnership firm is simple.
In a partnership firm, ownership and management are one and the same, therefore decision-making happens quickly. The partners jointly make all of the choices, which are then quickly put into action. The partners can act on behalf of the company with a wide range of authority and responsibilities. They even have the power to act on behalf of the partnership firm in some transactions without the approval of other partners.
The partners equally split the company's gains and losses. They are even free to choose the partnership firm's profit and loss ratio. They feel accountable and have a sense of ownership since their labour determines the firm's turnover and profitability. As a result, the burden of loss will not fall on just one partner or individual. Rather, it will be shared equally among them or in accordance with the partnership deed ratio. They bear joint and several liability for the company's operations.
Disadvantages of Partnership Firm
The primary disadvantage of a partnership firm is the partners' unrestricted liability. The partners' personal estate must be used to cover the firm's loss. In contrast, a company's or limited liability partnership's shareholders' or partners' liability is capped at the value of their shares. All of the partners in the partnership firm are responsible for paying any liabilities that one partner creates. The partners will have to use their own assets to settle the debt with the creditors if the firm's assets are not enough to cover it.
Unlike a business or limited liability partnership, a partnership does not have permanent succession. This means that a partnership firm will dissolve if one of the partners passes away or if all of the partners become insolvent save for that one. It can also be disbanded if one partner notifies the other partners of the firm's dissolution. As a result, the partnership firm may dissolve at any moment.
A partnership firm can have not more than 20 participants. The amount of capital invested in the company is likewise limited due to the restriction on the number of partners. The total amount that each partner has invested makes up the firm's capital. The partnership business is unable to embark on large-scale projects as a result of the limitations on its resources.
It is challenging to raise money for a partnership firm since it lacks everlasting succession and a distinct legal entity. In contrast to a company or limited liability partnership, the firm has fewer alternatives for obtaining funding and expanding its operations. People are less confident in the company because there are no stringent legal requirements. Publication of the firm's accounts is not required. As a result, borrowing money from other people is challenging.
What is the Registration of Partnership Firm?
Registration of a partnership is defined as the partners' registration of the partnership firm with the Registrar of Firms. It is advisable that the partners register their firm with the state's Registrar of Firms. The registration of partnership firms is optional. Therefore, partners may choose to register their firm at the time of formation or at any point thereafter while it is in existence. A partnership deed, a business name, and the presence of two or more partners are required for the registration of a partnership. It is not possible for partners to be spouses or members of a Hindu Undivided Family.
Steps for Registration of Partnership Firm
Step 1: Submitting a Registration Application
The Registrar of Firms of the State in which the firm is located must receive an application form (Form 1) and the required fees. Each partner or their representative must sign it and confirm if it is genuine. The application form (Form 1) is available to download and access from the Registrar of Firms website in the relevant state or can be picked up at the Registrar of the Firms office. You can physically send or mail the application to the Registrar of Firms, which includes the following information:
Name.
Principal place of business.
The locations of any additional sites used for business.
The day that each partner joined.
Every partner's name and permanent address.
The length of the entity.
Step 2: Choosing the Partnership Firm's Name
It is possible to call a partnership firm by any name. However, there are a few pre-requisites that must be met when choosing a name for your firm:
The name should not be too same or similar to one already in use by another company engaged in the same activity.
Words that imply endorsement or authorisation from the government, such as emperor, crown, empress, or empire, should not be used in the name.
Step 3: Registration Certificate
The firm shall be registered in the Register of Firms and the Registration Certificate shall be issued by the Registrar upon his satisfaction with the registration application and supporting documentation. The most recent information of all firms is available in the Register of Firms, which is accessible for everyone by paying a fee. The Registrar of Firms of the State where the firm is located must receive an application form and associated payments. Signing the application is essential for each partner or their representative.
Types of Partners
Managing or Active Partner:
As the name implies, an active partner actively participates in the operations of the company. On behalf of each partner, he conducts day-to-day operations. This implies that he represents each of the other partners in all day-to-day dealings and matters pertaining to the regular business of the company. Thus, an active partner must notify the public in advance of his desire to withdraw from the company. As a result, he will not be held accountable for the actions of his retired partners. He will be accountable for all actions even after he retires unless he issues a public notification.
Sleeping or Dormant Partner:
This partner does not actively participate in the day-to-day operations of the partnership firm. This means that he has no contribution to its daily running. Nonetheless, he is constrained by what each of the other partners does. Like all other partners, he will continue to contribute his fair part of capital and share the company's gains and losses. Such a dormant partner is not required to announce their retirement to the public if they do so.
Nominal Partner:
This partner has no genuine or substantial stake in the business venture. He is really just endorsing the relationship with his name. He will not contribute any capital to the company, and as a result, he will not be entitled to any portion of the earnings. However, the nominal partner will be accountable for the actions of any additional partners to outsiders and other parties.
Estoppel's Partner:
A partner cannot dispute that he is not a partner if he represents himself to another as a partner of the firm through words, deeds, or behaviour. This basically indicates that, despite the fact that such a person is not a partner, he has claimed to be one. As a result, he gains the status of partner by holding out or by estoppel.
Exclusive Partner in Profits:
This partner will not be responsible for any debts. His only share of the company's revenues will be shared. He shall bear entire responsibility for acts of profit while having connections with third parties. He will not bear any liability.
Minor Partner:
The Contract Act prohibits a minor from becoming a partner in a company. All partners must agree for a partner to be granted access to the partnership's benefits. He will receive a portion of the company's revenues, but his liability for losses will be capped at his ownership stake. A minor partner gets six months from the time he reaches majority (18 years old) to determine whether or not he wants to join the firm as a partner. The next step is for him to provide a public notice of his decision. Therefore, he will have to make a public announcement whether he chooses to resign or stay on as a partner.
What is a Sub-Partner?
An associate partner of a partner is one who has another associate in his portion of the business. He offers a portion of his share to others. It is important to remember that the sub-partner and the partner have a connection, not the partnership firm. As a result, a sub-partner is not an entity of the company and has no legal obligations to the company. Typically, a sub-partner consents to split any earnings received from the third party. Such a partner is not permitted to act on behalf of the original firm as a partner. Additionally, he is not liable for the actions of the firm's partners and does not retain any rights in the original firm. The partner who has hired him as a sub-partner is the only one from whom he may collect his agreed-upon profit share.
What is a Partnership Deed?
Clear communication between partners regarding the many policies regulating their partnership is essential to the efficient and prosperous operation of a partnership firm. This operation is completed by the partnership document. The partnership deed consists of a number of clauses to offer clarity to the partners. This includes sharing of profit/loss, remuneration, capital interest, draws, entry of a new partner, etc. A legal contract executed by two or more partners who intend to run a business for gains is called a partnership deed. It is sometimes defined as a partnership agreement. Any dispute or disagreement between the partners regarding the partnership standards is resolved by the partnership deed. A partnership deed serves the function of clearly outlining each partner's responsibilities, promoting the seamless operation of the partnership business.
Types of Partnership Deeds
General Partnership Agreement
This type of partnership deed is the most common.
It outlines each partner's obligations and functions as well as their capital contributions, profit-sharing arrangements, and management of the partnership company.
Limited Partnership Deed
This deed of partnership entails limited and general partners.
General partners are in charge of running the company and are fully liable for any obligations incurred by the partnership.
Limited partners have less responsibility and function as passive investors, with their liability being capped at the amount of money they have contributed.
Limited Liability Partnerships (LLP) Deed
A Limited Liability Partnership (LLP) is a type of partnership structure where limited liability benefits each and every participant.
The LLP agreement specifies each partner's obligations, capital contributions, profit-sharing percentages, and management procedures for the LLP company.
It also outlines the LLP's and partners' relationship.
Partnership agreements provide flexibility in the way commercial partnerships are structured. It is because they serve to define the parameters within which the partnership operates and the degree of obligation assumed by its members.
Components of Partnership Deed
The information which is present in the partnership deed is stated as follows:
The firm's name: The name of the company shall be determined by the partners in accordance with the Partnership Act. The name under which the business runs is known as the corporate name.
Information about the partners: Every partner should have their name, address, phone number, title, and other information included in the deed.
Business operations of the firm: The firm's operations should be determined in the deed. It could have to do with providing services or making things.
Duration of the firm: The partnership firm's duration should be specified in the deed. This includes whether it is established for a set amount of time, for a particular project, or indefinitely.
Location of the enterprise: The primary location where the partnership conducts business should be listed in the deed. It should also list the names of any additional locations that it works with.
Capital contribution: Each partner will provide the company a certain amount of funds. The deed must list the firm's total capital as well as each partner's portion of the contribution.
Distribution of earnings or losses: The deed should determine how partners will divide the company's gains and losses. The distribution of the funds might be determined by the capital contribution ratio, any other agreed-upon ratio, or equally among all partners.
Pay and commission: The deed should contain information on the partners' income and commission. The partners may receive compensation and commission according to their position, qualifications, or any other capacity.
Partner's drawings: Each partner's permitted drawings from the company and any interest that must be paid to the company on such drawings should be specified in the deed.
Loan from a partner: A business's ability to borrow money, loan interest rates, properties to be pledged, and other details should all be included in the deed. It may also state whether or not a partner in the company is eligible to borrow money from the company.
Partners' responsibilities and duties: The partnership agreement should showcase each partner's rights, responsibilities, and duties, so as to prevent problems in the future.
Partner admission, passing away, and retirement: The partner's admission date, the rules governing the entrance of a new partner, the partner's resignation, and any modifications made following the partner's death should all be included in the deed.
Accounting and inspection: Information regarding the firm's audit process should be included in the deed. The specifics of how the partnership accounts are to be created and kept up should be covered.
Importance of Partnership Deed
The status of the firm's partners is showcased in a partnership deed. The importance of a partnership deed is stated below:
It aids in the definition of the parameters of a partnership.
It governs the type of business and each partner's responsibilities, rights, and obligations.
Since the deed outlines every aspect of the partnership, it helps to prevent misunderstandings between the partners.
The conditions of the partnership document will govern how disputes between partners are resolved.
The understanding of partners’ respective profit and loss sharing ratios will be unambiguous.
It addresses the part played by every single partner.
It clarifies the compensation that partners are expected to receive, preventing misunderstandings or disagreements.
As the conditions and responsibilities amongst partners are documented, it guarantees the business runs well.
Drafting Partnership Deed
Both written and oral forms of the partnership deed are acceptable. However, written partnership agreements are preferable as they serve to prevent future disputes and are helpful for tax and partnership business registration purposes. All of the partners may draft the partnership document if they have reached a consensus on its provisions. Legal professionals can also draft it. The following should be considered when drafting the partnership deed:
The clauses which are mentioned above should be included in the deed.
It must be carried by at least two or more partners.
The partners should agree on how it should be drafted.
It is important to stay away from ambiguous statements and clauses. The specifics or description must be stated explicitly in the clauses.
It needs to be printed on e-stamp paper which costs at least Rs. 200.
Each page of the deed is required to be signed by every partner.
Registration of Partnership Deed
The Indian Registration Act of 1908 governs the registration of the partnership deed. It needs to be printed on non-judicial stamp paper that costs at least Rs. 200, depending on the partnership firm's capital. Each partner needs to sign the partnership deed, and a copy should be sent to every partner. The partnership firm's deed needs to be registered with the Sub-Registrar or Registrar Office of the jurisdiction where it is located, once the partners have signed it. State-by-state variations exist in the stamp duty associated with partnership deed registration. The stamp duty that must be paid to the Sub-Registrar at the time of registration is specified by the Stamp Act of the relevant state. In addition to being registered, the partnership deed must be notarised. The partnership deed becomes operative after registration.
Conclusion
People from various backgrounds who possess the aptitude, know-how, and managerial skills get together to operate a business as a partnership firm. This leads to increased financial resources, risk reduction, talent and knowledge, and administrative strength. These types of businesses work well for comparable small firms, like small manufacturing units, professional services, medium-sized mercantile establishments, retail and wholesale trade, etc. Typically, partnerships are used to build the foundation of many businesses. After they demonstrate to investors that they are both financially stable and attractive, they become limited liability companies.
FAQ
Q1. What is a partnership firm?
Essentially, a partnership business is made up of two or more individuals pooling their resources to launch a business venture and committing to split the venture's gains and losses.
Q2. What is an example of a partnership firm in India?
Medical groups, law firms, real estate firms, and accountancy groups are common instances of partnership businesses.
Q3. How is a partnership formed?
An agreement between two or more people results in a partnership. It should be mentioned that a contract, not status, is the only source of this kind of agreement. For this reason, a Hindu Undivided Family operating a family business cannot be confused with a partnership.
Q4. What is the scope of liability of partners who are a part of a partnership firm?
Each partner is responsible for all acts and activities of the company while they are a partner, both individually and together with the other partners. This implies that all partners, even if one of them was responsible for the loss or damage, will be held accountable if it results in harm to a third party or if a fine is assessed while doing business.
Q5. How much time does it take to register a partnership firm in India?
It can take up to 10 or 14 working days in India to register a partnership firm. However, depending on the state's requirements, the time required to produce a certificate of incorporation may differ. The duration of government processing for registering a partnership firm varies by state.
Q6. Can a partnership be considered invalid?
A partnership may frequently be declared void by the court if the partnership agreement is not registered. The court may declare the partnership void and dissolve it if the business's purpose is unlawful.
Q7. Can all the partners mutually decide to terminate the partnership firm?
When it comes to a partnership of will, the partners can dissolve the partnership by giving notice if they choose to end the partnership. A partnership firm may be dissolved by making a separate agreement or in line with the conditions specified in the Partnership Deed.
Q8. Can a partnership registration certificate be cancelled?
A partnership's certificate of formation is nullified with the dissolution of the business. Dissolution proceedings may be initiated automatically in the event that all partners, or all partners but one, are declared bankrupt. Alternatively, the firm may be involved in illegal activities. This includes trafficking of drugs or other illicit goods, corporate malfeasance, or entering into commercial agreements with nations that could jeopardise India's interests.
Q9. Is a partnership deed mandatory for partnership firm registration?
Yes. A partnership firm cannot be registered until a correct copy of the partnership deed is filed with the Registrar of Firms. The submission of this essential document to the Registrar of Firms is needed.
Q10. What is the stamp duty on the partnership deed?
Stamp duty to be paid to the Sub-Registrar at partnership deed registration is specified by the Stamp Act of the relevant state. The partnership deed must be notarised on a non-judicial stamp paper with a value not less than Rs. 200 or more, even though state-by-state stamp duty rates vary.
Q11. Should the partnership deed be registered?
A deed of partnership does not have to be registered. However, the partners need to do so in order for it to be legally enforceable. The partners should pay a small court fee and stamp duty to the Sub-Registrar/Registrar Office of the jurisdiction where the firm is located in order to register it. In addition, each partner must file an affidavit declaring their purpose to form a partnership on stamp paper costing Rs. 10.
Q12. Does a partnership deed need to be notarised?
Yes, in addition to being registered, the partnership deed must be notarised. The partnership deed becomes enforceable upon notarisation, allowing the partners to defend it in court should disputes emerge. The partnership deed must be notarised by each partner by being signed in front of a public notary.
Q14. Can a partnership deed be changed or modified?
Yes. The partners may, at any time, agree mutually to modify, amend, or change the partnership deed. All of the partners must sign the updated deed. The original partnership deed's Sub-Registrar's office is where the amended deed should be registered. Additionally, it needs to be turned in for the Registrar of Firms' records.
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