What is a Partnership?
A partnership is one of the most important forms of business organization. A partnership is when two or more people join forces to start a business and share the profits in an agreed ratio. The business of partnership encompasses all types of trades, occupations and professions. A partnership company is easy to set up and requires less compliance compared to companies. Partnerships in India are governed by the Indian Partnership Act, 1932.
Reasons to set up a Partnership in India
Easy to incorporate - Establishing a partnership is easy compared to other forms of business. The partnership can be constituted by drafting the partnership deed and entering into an agreement. Other than the deed, no further documents are required. You don't even have to be registered in the Registrar of Firms. A partnership company can be established and registered at a later date, as registration is voluntary and not mandatory.
Less Compliances - Compared to a company or LLP, the partnership company has to comply with very few compliance regulations. Partners do not need a Digital Signature Certificate (DSC), Director Identification Number (DIN), which is required for company directors or designated partners of an LLP. Partners can easily make changes to the business. It is inexpensive and the registration process is cheaper compared to a company or LLP. The dissolution of the firm is easy and does not require many legal procedures.
Quick Decisions - The decision-making process in a partnership company is fast, since there is no difference between ownership and management. Partners make decisions together and do not have to consult any authority. There are also certain functions that the partners can undertake without having to consult each other.
Sharing of Profits and Losses - The partners share the profits and losses of the company equally. You even have the freedom to determine the profit and loss ratio in the partnership. Since the company's profits and sales depend on their work, they have a sense of ownership and responsibility. Any loss of the company will be borne by them in equal parts or according to the partnership deed, which will reduce the burden of the loss for a person or a partner. You are jointly and severally liable for the activities of the company.
Registering a Partnership Firm
While it is not compulsory to register a partnership firm in India, it is advisable to do so and registration provides both the firm and the partners certain rights. For example, if the firm is registered, partners can file a suit or the firm itself can file a suit which will not be possible in the case of an unregistered firm. Here are the steps to register a partnership -
Application for Registration - The application must be filed with the Registrar of Firms of the respective state and must be signed by the partners. The application must include the following :
The name of the firm
The principal place of business of the firm
The location of any other places where the firm carries on business
The date of joining of each partner
The names and permanent addresses of all the partners
The duration of the firm
The Profit or loss share Ratio
The capital Ratio
Application for registration of partnership (Form 1)
Certified original copy of Partnership Deed.
Specimen of an affidavit certifying all the details mentioned in the partnership deed and documents are correct.
PAN Card and address proof of the partners.
Proof of principal place of business of the firm (ownership documents or rental/lease agreement).
The partnership deed clarifies all the rights, duties, obligations, and share of profits within a partnership. It can be written or oral. Here is the list of information to be included in a deed -
Name and address of the firm and all the partners.
Nature of business.
Date of starting of business Capital to be contributed by each partner.
Capital to be contributed by each partner.
Profit/loss sharing ratio among the partners.
Additionally, the following information can also be added -
Interest on capital invested, drawings by partners or any loans provided by partners to the firm.
Salaries, commissions or any other amount to be payable to partners.
Rights of each partner, including additional rights to be enjoyed by the active partners.
Duties and obligations of all partners.
Adjustments or processes to be followed on account of retirement or death of a partner or dissolution of the firm.
Other clauses as partners may decide by mutual discussion.
The registration process of a partnership firms takes approximately 10 days from the submission of the application.
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