THINGS TO KNOW BEFORE YOU REGISTER A - PARTNERSHIP FIRM
It is basically a relation between two or more persons who join hands to form a business organization with the objective of earning profit. The persons who join hands are individually known as ‘Partner’ and collectively a ‘Firm’.
To expand business, more capital and better managerial skills are required. A proprietor may find himself unable to fulfill them.
Actually, when such group of persons decides to start a business, they should decide
- the amount of capital to be contributed by each one of the partner
- who will manage the business
- how will the profits and losses be shared
Thus, there must be some agreement between the partners before they actually start the business. This agreement is termed as ‘Partnership Deed’.
The agreement must state the ratio in which profits and liabilities are to be shared.
Therefore, it is always better to insist on a written agreement among partners in order to avoid future controversies. A partnership firm is governed by the provisions of the Indian Partnership Act, 1932. Section 4 of the Indian Partnership Act, 1932, defines partnership as “a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.
Characteristics of Partnership Firm
- More than one Person Involved:
There should be at least 2 persons while incorporating Partnership Firm.
- Profit and Loss are Shared:
The profits and losses of the firm are shared between all the partners in agreed Profit Sharing Ratio. The Ratios should be same as mentioned in Partnership Deed.
- Partnership Deed:
Partnership is formed by an agreement-oral or written-among the partners.
- Existence of Lawful Business:
Partnership is formed to carry on some lawful business and share its profits or losses. For example, if the purpose is to carry some charitable works, then it is not regarded as partnership.
- Unlimited Liability:
All the partners have unlimited liability for all the debts and losses of the firm.
- Restrictions on Transfer of Share:
No partner can transfer his/her share to any outside person without seeking the consent of all other partners.
Benefits of Forming Partnership Firm
- Easy Formation
- More Number of Partners implies Larger Resources
- Flexible to Operate
- Better Management
- Sharing the Risks
- Increased ability to raise funds
- For Formation of Partnership Deed:
- Commencement of Partnership Firm
- Partners’ Name, Address, Father’s Name and PAN (if available)
- Name, Address and Nature of Business
- Capital Contribution
- Profit sharing Ratio
- Duration (if firm is made for a fixed period of time)
- Salaries of the partners, Interest on capital and Interest on Loans/ Drawings
Note: The formation of Deed can be on Stamp Paper in accordance with Indian Stamp Act and is filed with Registrar of Firms.
- For Registration of Partnership Firm:
- Application for Registration of Partnership Firm in Form No. 1
- Duly Filled specimen of Affidavit
- Partnership Deed (on the Stamp Paper) – Original and Signed
- Copy of PAN card of all Partners with address proof
- The date when each partner joined the firm
- Address Proof of Place of Business – Ration Card/Voter ID/Driving License
- Registered Power of Attorney of the premises where Firm is to be registered
- If rented, Rent Deed, Rent Receipt
- NOC from Landlord
Note: Registration is not compulsory. It can be done before or during the course of business.
Partnership Firm cannot be constituted by a single person. It requires two or more persons to come together to form an association.
The Partnership comes into force after its basic requirement – Partnership Deed. The agreement should be prepared and fulfill the basic requirement of being a contract as per Contract Act.
Therefore, the person who is eligible to enter into a contract can form a Partnership Firm.
As per Contract Act, following persons cannot enter into an agreement:
- person with unsound mind
Conclusion: Any two or more persons can form Partnership Firm if they are eligible to enter into contract.
FAQ on Partnership Firm
As per Income Tax Act, interest payable to partners shall be in accordance with the terms of the partnership deed; however, it shall not exceed 12% per annum.
Remuneration payable to partners shall be in accordance with the terms of the partnership deed, however, it shall not exceed the following limit:
- On first Rs. 3 Lakhs of book profit or in case of loss – Rs. 1,50,000 or 90% of book profit, whichever is more
- On the balance of the book profit – 60% of book profit
I am not a citizen of India. Can I be a partner in an Indian firm?
Is a deed of partnership necessary?
A minor admitted to the partnership firm, has the option to become a partner within six months of attaining majority. He has to give a public notice stating his acceptance or rejection of partnership. In the absence of a notice, it is considered that he has become a partner of the firm.
A partnership firm cannot become a partner of another firm because it is not a legal person. However, the partners may be partners in another firm in their individual capacity.
Partnership can be dissolved according to the contract between the partners. The partnership deed should contain the provision of dissolution. The consent of all the partners is not necessary.