The partnership is another important form of the business organization other than sole proprietorship and company form of business structures.
There are situations where it would not be necessary for an entrepreneur to provide the necessary capital and resources. Furthermore, the nature of business is such that it requires supervision and control, division of work and sharing of risks.
But, the number of members available to share the risk as well as the profits is not very large in the case of the company. In addition, the size of the business undertaken to adopt the company form of the organization is not large enough.
This is when a partnership form of business can be taken by the entrepreneur. So let’s understand about business under partnership and how to do partnership firm registration?
A partnership is a form of the business unit where two or more individuals come together to provide the expected resources and share profits in an agreed ratio.
The Indian Partnership Act, 1932 defines “partnership” as
“Relations between individuals who have agreed to share the profits of the business done for all or any of them acting for all.”
Thus, individuals who agree to form a partnership firm of a business unit are called individual partners. In addition, individuals forming partnerships are collectively known as “firms”.
As per the Companies Act, 2013, the minimum number of persons required to form a partnership form is 2., whereas, in case of a partnership firm, the maximum number of members should not exceed 100.
This is contrary to the Companies Act 1956, where the maximum limit of members is set as 10 in case of partnership and banking and other businesses.
Characteristics of a Partnership Firm
- Formed on the basis of an agreement
A partnership firm comes into existence based on an agreement between two or more partners that agrees to start a business. The terms and conditions governing such a partnership are known as partnership documents.
- The existence of a business activity
A partnership firm of business activity can only be formed on the basis of the existence of business activity. Business can be anything and may include any trade, industry or profession.
- Profit and loss partnership between partners
The partners are entitled to share the profits as well as bear any losses during the course of the business.
- The existence of an agency relationship
All partners or one partner acting on behalf of the other may carry on the business of the partnership. This means that each partner is a leader in himself who can act on his own. In addition, he can also act on behalf of other partners by acting as his agent.
- Unlimited Liability of Partners
Each partner is personally liable for all losses incurred during the business. That is to say, their personal assets can be used to pay off the outstanding debts of the partnership firm.
- Joint Management
Each partner is entitled to participate in the day to day operations of the business. However, it is not mandatory for every partner to participate in the day-to-day business of the business. But, the partners running the business need to seek the consent of other partners to make the expected decisions.
- Limit on transferability of share
A partner cannot transfer his share to another person. However, he can do so on the consent of other partners.
- No Compulsory Registration
It is not mandatory to register the entity’s partnership form. However, partners may choose to register the firm with the Registrar of Firms.
- Duration of partnership firm
A partnership firm can continue as long as the partners wish to do so. However, by law, a partnership can terminate if either partner dies, retires or goes bankrupt. However, the remaining partners can continue to do business under the same name after sorting the payable shares of the outgoing partner.
How to choose a name for partnership Firm
Partners who became a part of a partnership business unit will choose any name for their business. It is, however, subject to the following rules. As per section 58
- of the Indian Partnership Act, 1932:
- A partnership firm must not have the following words in its name. These include the terms Crown, Emperor, Empire, Empress, Imperial, King, Queen, Royal, or other words indicating approval or approval by the government.
- The name should not be similar to any of the names of existing firms engaged in similar businesses. The idea behind such a rule is to avoid injuring the reputation or goodwill of the existing firm if the new firm adopts a similar business name.
What is a Partnership deed and how is it prepared
A Partnership Deed is basically a document that charts the rights and responsibilities of all partners in a business unit. The deed is enforceable by law and serves as a guide for partners to carry out day-to-day business activities.
In addition, it helps to avoid any discrepancies or disagreements so that each partner is aware of the role and the benefits that will befall them. The key elements of the partnership deed are:
- A brief outline of the name, key address and nature of the business conducted by partners.
- Important financial information such as:
- The amount of capital invested,
- Profit and loss sharing,
- Payable and
The method of distributing income to each partner
Method of accounting for cash flow, profit and loss and assets and liabilities of the business. In addition, this financial year is determined in all accounting statements and such statements are shared between partners and other shareholders.
Duties, powers and obligations of each partner. The deed can also name the partners who will act as managing partners and be responsible for managing the day-to-day business.
Information regarding necessary action in case of return or death of a partner. Details on how to change partnership rights in case of partner expulsion.
Method of dissolving a partnership in case of termination of business. Information regarding the mode of arbitration of disputes.
Partnership Firm Registration in India
The partnership form of business entities comes under the Indian Partnership Act, 1932. According to the Act, it is not mandatory to register partnership firms. This means that it is entirely an option of the partners to register such a business entity. However, if partners choose not to register a partnership firm, they will not be able to reap the benefits available to registered partnership firms.
The provisions of partnership registration are mentioned in section 58 of the Indian Partnership Act, 1932. These provisions are as follows:
- Application for Registration
The partnership firm can be registered by sending an application in Form No. 1. Along with the form, the required fee and a true copy of the partnership deed must also be sent to the registrar. Such an application has to be filed with the registrar of firms in the area in which the business is located. Thus, the application should be designed:
Name of the firm and nature of business of the firm Place of business or principal place of business
Names of other places where the business is conducted Date of joining of each partner
Full names and addresses of partners Duration of the firm
Furthermore, such applications must be signed by all partners or agents who are specifically authorized to do so on their behalf. Further, it should be sent to the
Registrar within a period of one year from the date of formation of partnership firm.
- Verification of application for registration
Every partner signing such an application must verify in the manner suggested under the Act.
- Documents to be attached for application for registration
The following documents have to be submitted to the Registrar along with the prescribed fee. Contains:
Registration application in Form 1 Duly filed affidavit
A certified and true copy of partnership deed. It should be noted that the partnership deed created by the partners should be on a stamp paper in the form of the Indian Stamp Act. Or the deed must be on a stamp paper that is applicable in the state in which such deed is applied.
Rent or lease agreement or proof of ownership of the place of business
- Fees for Registration
As per Section 71 of the Act, the State Government is free to make rules regarding fees to be paid to the Registrar along with other documents for registration.
- Naming a Partnership Firm
The name of the partnership firm should consider the rules mentioned in the above part while choosing a name for the partnership firm. However, the registered firm should use parentheses and words (registered) after their name.
Further, if any partner is not satisfied with the order of the Registrar regarding the name of the firm, he can appeal to the person authorized by the State Government in this regard. This appeal must be made within 30 days from the date of communication of such order and on payment of the requisite fee.
On receiving the appeal, the authorized officer will decide in this regard.
- The entry of the statement in a register
Finally, as per section 59 of the Act, the registrar enters a statement in a register called the Register of Firms and files the statement. After the Registrar is satisfied it is discussed that the registration application complies with all necessary provisions. The date on which the registrar records and records the statement is considered the date of registration of the partnership firm.
- Apply for PAN Card
It is important to note that registration with the Registrar of Firms is not the same as registration with the Income Tax Department. All companies are required to apply for registration in the Income Tax Department and obtain a PAN card.
- Open a bank account
After obtaining the PAN card, the partnership firm has to open a current account in the name of the firm. This is done to carry out all the functions through the current account of the business.
Q: How do the partners in a partnership business share profits?
Ans: The partners share the profits in accordance with the details of the partnership deed that is crafted before its submission for registration.
Q: How much does it cost to register a partnership firm in India?
Ans: The costs vary across the different states of India. Accurate details are available online.
Q: Is it easy to start a partnership firm in India?
Ans: Yes.It is very simple as it does not require too many compliances.
Q: How many individuals are necessary to start a partnership firm?
Ans: A minimum of two individuals are required to establish such a business.
The details of this article give an insight into the various types of partnership firms, partners, and the process of starting a partnership business. Every step is covered in this article, and if you are a beginner looking to start a partnership firm, we hope that this article will be useful to you as well!
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