According to the Indian Partnership act,1932, Partnershipship Firm exists when people do a business together or any one person acts on the behalf of all and agrees to share the profits among themselves. Partners are the people who have entered into the business, collectively, they are called a Firm and the name under which the business is conducted is called the Firm name.
Partnership firms are associated with the subsequent characteristics:
Number of MembersThe minimum number of people who can form a partnership firm is two. However, the utmost number of individuals who can enter into this kind of firm is 20. According to the Indian Partnership Act, 1932, a Partnership of 10 people in a banking business or a partnership of more than 20 people in other businesses is considered illegal if not registered as a joint-stock company.
An Agreement Based BusinessPartnership firm is formed when the individuals enter into an agreement-based business and are ready to sign a partnership deed/agreement.
Registration isn’t mandatoryThe partnership firms are not compliant to get themselves registered. However, if not registered, they may not get access to legal benefits in cases where legal actions are required.
Equal Sharing of Profits And LossesIn a partnership firm, the members agree to share the profits as well as the losses equally or in any agreed ratio.
Unlimited LiabilityIn partnership firms, the partners have unlimited liability and therefore in case of losses or debts, all the members are called for joint action. Also, the personal assets of the members can be attacked to repay the debts.
Not Recognized As Separate EntityPartnership firms aren’t recognized as separate legal entities and can cease to exist in the event of death, bankruptcy, or any mishappenings.
No transfer of assetAny partner can't transfer his share of assets until and unless all the partners agree to it unanimously.
On the basis of the duration, Partnership firms are of two types-
Partnership at-willWhere there is no agreement made for the duration of the partnership firm, such a partnership is called Partnership at-will. There is no determination regarding the time period of the partnership and till when it’ll continue to operate.
Partnership for a fixed termWhen the partnerships are made for a certain period of time and cease to exist beyond that duration, such partnerships are called fixed-term partnerships. In such cases, if the partners agree to continue the business beyond the time period, the role of the partnership changes, and it becomes a Partnership at will.
On the basis of the extent and the nature of the business activity, partnerships are of two types-
Particular PartnershipsTo carry on an existing business or to create a new or a particular venture, sometimes, the partners enter into an agreement and such partnerships are called Particular Partnerships. Such Partnerships dissolve after the competition of the target and if the partners wish to continue the business, the Partnership continues to exist.
General partnershipsUnlike a particular partnership, General Partnerships arise where there’s no particular motive and scope of business, and to continue an existing business, the partnership is defined.
Ease of Registration -Partnerships are easy to be formed and require no mandatory registration with the Registrar of companies. The only thing required is a partnership deed and that's it.
Fewer Compliances -There’s lesser complexity when it comes to Partnership firms. They have few legal restrictions and the registration process is quite simple. All the more, the formation and dissolution of a partnership are quite easy and hassle-free.
Quick Resolution of Problems -In Partnership firms, there’s a gap between the owners and the management, and all the decisions are made by the partners collectively. Even in the absence of one or more partners, one partner can effectively make decisions on behalf of others, and thus, there’s a quicker solution to the day-to-day activities.
Equal Sharing of Profits And Losses -In Partnership firms, the partners agree to share all the profits and losses equally or depending upon the partnership ratio. The partnerships are accountable for all the profit and losses and there is no loophole in the management.
Greater Liability -The biggest disadvantage of a Partnership firm is the bearing of liability. In cases of losses, the partners have to bear the burden of loss from their personal assets. The liability of one partner has to be borne by all the partners and this can create a harmful impact on the financial status of the company.
No perpetual succession -The Partnership firms do not come with a policy of perpetual succession. This means that the firm will dissolve if the partners face bankruptcy or death. Also, the firm can be dissolved by simply passing notice of dissolution to other partners.
Limited Partnership -The maximum number of partners in a Partnership firm can be 20 only. This means that the resources that can be brought in the company get restricted as it is coming through a restricted number of resources. This in turn can lead to huge financial constraints and the business cannot scale higher at times.
Difficult to raise capital -Partnership firms don't have any legal compliances and keeping a check on the accounts is not mandatory, therefore people may seem less interested and may show lesser trust in these companies. Also, being a separate entity and the easily dissolvable nature of these firms too creates distrust in the firm.
The registration of partnership firms is not mandatory under the Indian Partnership Act, 1932. However, if the businesses wish to get their forms registered, they can do so at the time of formation of the firm or during the continuation of its existence.
There are certain benefits when it comes to the registration of a Partnership firm and should be taken into consideration to enjoy special privileges. Here are some of them:-
There are two ways within which the registration of partnership firms can be carried out.
The first step involves selecting the correct name for the partnership firm. There are two conditions that require to be fulfilled while selecting the name of the firm:-
The next step is drafting a Partnership Deed containing the basic details of the firm such as:-
Apply for a PAN card in the name of the firm with the Income Tax Department.
Draft an application to the Registrar of Firms of the state where you wish to start your partnership firm mentioning the following details;-
Next, submit all the desired documents:-
Next, submit all the desired documents:-
Partnerships firms are completely different from limited Liability firms in the sense that:-
| Particulars | Partnership firms | LLPs |
|---|---|---|
| Registration | These are registered under section 58 of the Indian Partnership Act, 1932 | of Limited liabilities. The partners are free from any personal liabilities |
| liability | Unlimited liability. The partners need to bear the burden of any loss | These are registered under the Companies Act, 2008 |
| Number of partners | Minimum 2 and maximum 20 partners are required. Minors can even be partners with the joint decision of the partners | Minimum 2 partners are required and there is no upper limit on the partners. Minors can’t be a part of LLPs. |
| Agreement | Partnership deeds govern all the activities | LLP agreement governs all the activities of the firm |
| conversion | A Partnership firm can be converted into an LLP registration or Private Limited Company. | LLP cannot be converted back to partnership firm but can be upgraded to Private |
| Annual filing | Not mandatory to file annual returns | It is mandatory to file annual returns |
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The registration of the partnership firm may take up to 4 to10 days depending on the situation and the availability of the documents.
Yes, LLPs come with limited liability and the liability of the partners is limited to their amount invested in the company. Partnership firms, on the other hand, bear unlimited liability on the partners, and any loss or the debt has to be borne by the partners personally.
No, it isn't necessary to make the partnership deed but it is a sensible approach when it comes to money handling matters.
Yes, a person of foreign origin can be a partner in the partnership firm, if he or she fulfills all the necessary guidelines and permissions.
A Partnership firm is constituted solely on an agreement between the partners and hence, there is no requirement of any minimum paid-up capital.
Yes, a partner can be another firms’ partner too.
The income tax is applicable on the income of the firm and not on the partners’ individual income. So, they don't need to file for income tax returns.