A Partnership is defined by the Indian Partnership Act, 1932, as ‘the relation between persons who have agreed to share profits of the business carried on by all or any of them acting for all’. This definition gives three minimum requirements to constitute a partnership firm, viz.
• Agreement of between persons desiring to form partnership whether oral or written,
• The object of the agreement is to share the profits of the business, and
• The intended business must be carried on by all the partners or by any of them acting for all of them.
A partnership firm is best for small businesses that plan to remain small. Low costs, ease of setting up and minimal compliance requirements make it a sensible option for such businesses. Registration is optional for General Partnerships. However, for larger businesses, it has lost its relevance with the introduction of the Limited Liability Partnership (LLP). This is because an LLP retains the low costs of a partnership while providing the benefit of limited liability, which means that partners are not personally liable for the debts of the business.
The partners in a partnership firm are the owners, and thus, are not separate entities from the firm. Any legal issues or debt incurred by the firm is the responsibility of its owners, the partners. A partnership must have at least two partners. A partnership firm in the banking business can have up to 10 partners, while those engaged in any other business can have a maximum of 20 partners. The consent of all the partners plays an important role in matters like an admission of new members, dissolution of the firm, conversion of the firm, etc.
A partnership is easy to form as no cumbersome legal formalities are involved. A partnership is formed by an agreement, which may be either written or oral. When the written agreement is duly stamped and registered, it is known as "Partnership Deed" which may be registered or not registered. Ordinarily, the rights, duties, and liabilities of partners are laid down in the deed. But in the case where the deed does not specify the rights and obligations, the provisions of The Indian Partnership Act, 1932 will apply.
The partnership deed contains goals, vision, strategies, details of partners, profit-loss sharing ratio, duties of partners, etc. It is important to note that other than individuals, companies can become a partner in a firm due to their separate legal entity.
Why Partnership Firm?
NO MINIMUM CAPITAL
There is no prescribed any minimum capital requirement for obtaining registration allowing small businesses to reap the benefits of a registered partnership.
A registered partnership is considered as more credible for borrowing purposes than an unregistered partnership.
One of the registering partnership that it easy to change the legal structure.
RIGHT TO SUE
Only a registered partnership has the right to sue the third party whereas the third party can sue irrespective of registration & therefore can claim set off. Also, a partner of an unregistered partnership cannot sue the firm for enforcing any rights given under the partnership act.
Partners share the decision making and can help each other out when they need to. More partners mean more brains that can be picked for business ideas and for the solving of problems that the business encounters.
Due to the limited number of partners, there is flexibility in the operations of the business as the partners can amend any objectives or change any operations any time by mutual consent.
Partners can share the responsibility of the running of the business. This will allow them to make the most of their abilities. Rather than splitting the management and taking an equal share of each business task, they might well split the work according to their skills and the risk is also shared among partners.
EASE OF FORMATION
A Partnership is easy to form as no cumbersome legal formalities are involved Registration is not compulsory in the case of the Partnership firm. It can be formed without any legal formality and expenses. Thus, it is simple and economical to form and operate.
General Partnerships do not need to appoint an auditor or, if unregistered, even file annual accounts with the registrar. Annual compliances are also fewer as compared to an LLP. General Partnerships do need to file Income Taxes and, depending on turnover, service and sales tax.
A General Partnership is cheaper to start than an LLP and even over the long-term, thanks to the minimal compliance requirements, it is inexpensive.
In Registered partnership Firm
Every partner needs to verify and sign the application & ensure that the following documents and prescribed fees are enclosed with the registration application:
• Application for Registration in the prescribed Form – I.
• Duly filled Specimen of Affidavit.
• Certified copy of the Partnership deed on appropriate non-judicial stamp paper.
• Proof of ownership of the place of business or the rental/lease agreement thereof.
• Affix court fee stamp & payment of a prescribed fee for registration by demand draft.
And, In Unregistered Partnership Firm
A Partnership deed on appropriate non-judicial stamp paper duly signs by every partner required to be notarized by a notary is require executing and from that date Partnership Firm deemed to be registered.
Once the Registrar of Firms is satisfied that the application procedure has been duly complied with, he shall record an entry of the statement in the Register of Firms and issue a Certificate of Registration.
Any person who is an Indian citizen and a Resident of India can become a partner in a partnership firm. However Non-Resident Indians can only invest in a partnership with after obtaining prior approval of the Government.
The partners in a partnership firm are the owners, and thus, are not a separate entity from the firm. Any legal issues or debt incurred by the firm is the responsibility of its owners, the partners. The partners have unlimited Liability.
A partnership must have at least two partners. A partnership firm in the banking business can have up to 10 partners, while those engaged in any other business can have 20 partners. These partners can divide profits and losses equally or unequally.
No, registration of a partnership is not necessary. However, for a partner to sue another partner or the firm itself, the partnership should be registered. Moreover, for the partnership to bring any suit to court, the firm should be registered. For this reason, it is recommended that larger businesses register the partnership deed.
The deed should contain names of the partners and their addresses, the partnership name, the date of commencement of operation of the firm, any capital invested by each partner, the type of partnership and profit-sharing matrix, rules and regulations to be followed for the intake of partners or removal.
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