HOW TO START A PARTNERSHIP FIRM?

Dear Folks

Smiles for All

After sole proprietor ship another business model comes into our mind at the initial stage is Partnership firm, though its not a separate legal entity unlike companies or LLP still prevalent amongst small and medium sized businesses in the unorganized sectors, this business model is very much prominent in our country.

When a group of individuals known as partner, decide to set up the business and form a relationship to share the profits of the business carried on by all or any one of them acting for all, they form a partnership amongst them which is governed and regulated by agreement formed between them. The partnership is the most popular form of organization to carry business in India.

WHAT IS PARTNERSHIP FIRM?

A group of people comes together to form setup and to provide services and products through it. These firms are governed by the Indian Partnership Act, 1932. Rights and Duties of partners with each other as well with third parties are governed by this Act. In nutshell partnership firms are:

The form of organization which is formed with 2 or more partner;	To carry on the goals or objectives decided as per an agreement;
To share profit;	To run the business collectively by partners In mutual consent

Partnership firms are the result of an agreement formed between partners.

IS REGISTRATION MANDATORY?

Unlike the company, registration of a partnership firm is not compulsory. It’s as per the discretion of partners to whether get it registered or not. However, a registered firm can enjoy certain benefits over unregistered firm such as:

1.   Partner can file a case against firm or any other partner.
2.  Firm can file a case in a court against third party.
3. Registered firm can always claim a set-off.

AS PER SECTION 4 OF THE INDIAN PARTNERSHIP ACT, 1932:

“Partnership is a relation amongst the partners who have agreed to share the profit of business carried on by all or any one of them acting for all”. 

ELIGIBILITY TO ENTER INTO PARTNERSHIP

The following can enter into a partnership and becomes a partner:

v  Individual: Any person who is competent to enter into a contract can become a member of a partnership firm.

v  Partner of any other partnership firm: A Partnership firm cannot be the partner of any firm but its partner can enter into a partnership with another person.

v  Hindu Undivided Family: Karta of HUF can be a partner in a partnership firm

v  Company: A private limited/public limited company being an artificial legal person can be a partner in a partnership firm if authorized by an article.

v  Trustees: Unless and until constitution or objects of trustees forbids to the contrary, trustees of religious trust/family trust/or any other religious endowments can be partners in a partnership firm.

TYPES OF PARTNERSHIP

There are four types of partnership:

1.       Partnership at will: It’s a form of partnership that can be dissolved by any partner during any time, i.e., it has no agreement and no clause about expiration or tenure of partnership

2.       Fixed-term Partnership: Opposite of partnership at will, as the name suggests, this is a partnership with a fixed term. Partners may agree on duration in an agreement. After the expiry of such duration, such partnership comes to an end.

3.       Particular Partnership: Certain partnerships are formed to carry out a particular business or venture. The scope of business to be carried out is defined in an agreement. Such partnership stand dissolved as and when such activity or venture is completed

4.       General Partnership: When a partnership is created to carry out business in general with no particular scope, it is termed as a general partnership.

TYPES OF PARTNERS

Persons who have entered into a partnership with each other to carry on the business are known as “Partners”.

Partner is both an agent and principle for himself as well as for other partners of a partnership firm. He can bind others by his act and he can be bound by the acts of other partners.

Minimum Partners: A minimum of two people are mandatory to enter into a partnership

.

Maximum Partners: Indian Partnership Act is silent for the maximum number of partners. Though as per Companies Act 1956, maximum number can be: In the case of banking business- 10 In the case of other business- 20 and as per companies act, 2013, maximum number shall not exceed 100.

FOLLOWING ARE TYPES OF PARTNER AS PER THE EXTENT OF THEIR LIABILITIES IN PARTNERSHIP:

ACTIVE PARTNER: These partners become the partner by an agreement and they take active participation in the day-to-day activity and business of the firm. Active partners must give public notice when willing to retire.

 DORMANT OR SLEEPING PARTNER: This partner doesn’t actively participate in the daily functioning of partnership. He is though bound by the actions of all the partners. He needs not to give public notice for his retirement. Capital Contribution and profit-sharing are similar to those of other partners.

 NOMINAL PARTNER: These partners only lend their name to the firm as a partner. They don’t contribute to capital nor have any share in profit.

 PARTNER IN PROFIT: These partners will share profits only. They are not liable for any loss.

MINOR PARTNER: A Minor cannot enter into a contract thus accordingly he can’t be a partner; however he can be admitted to the benefits of partnership firm with the consent of all the partners.

KEY POINTS TO THE PARTNERSHIP FIRM

Essential elements that are the key necessity of any partnership firm are:

Prior Agreement is the reason for the creation of this alliance. A partnership firm is voluntary and contractual. Since partnership is the result of a contract, a minimum of two peoples are necessary to constitute a partnership. Agreement jot down the following terms:

1. Responsibilities of partners;
2. Duties and obligations of partner
3. Profits and loss sharing ratio and rate
4. Other matters such as withdrawal, capital contribution, financial reporting.

Profit is shared amongst partners as per the capital contributed by the partners or at any rate agreed upon between them. Thus sharing of loss is not an essential element of the agreement, but in case of damage or loss, the same has to be borne in profit-sharing ratio.

Third and last essential element for a partnership firm is that there must be a certain goal for carrying on the business by all the partners or any one of them acting for all. That there should be a mutual agency. There cannot be a partnership if there is no intention to carry a business.

STEPS FOR REGISTRATION OF PARTNERSHIP FIRM

Forming a partnership firm is easy and less complicated as compared to Companies. It even needs a minimum of compliances to be obligated. Following simple steps should be followed to register a partnership firm:

a. SELECT A NAME:

Select any name as per the discretion of partners. However the selected name:

    It should not be too identical or similar to the name of the already registered firm.

    The name should not make use of words like the Crown, Emperor, Empire, etc.

b. PREPARE AN AGREEMENT

The next step is to create a partnership deed. The terms and conditions to be noted in an agreement are as per the discretion of partners, also it is on the partner to get it down orally or written. However written deed is advisable in case of future conflict arise.

Written agreements should consist of the following:

1.       Full details of partners such as name address etc

2.       Name & Complete address of the firm

3.       Nature of the business to be conducted

4.       Date of entering into an agreement i.e., date of commencing the business

5.       Duration of partnership

6.       Capital Contribution;

7.       Profit and loss sharing ratio;

8.       Management;

9.       Voting;

1.     Tax Implications;

1      Withdrawal;

1       Dissolution;

1    Interest on capital, loan, etc;

1    Salaries and commissions;

1    Retirement, death, and admission

Partnership deed so created should be made on stamp paper with necessary stamp duty paid as per the Indian Stamp Act.

c. SUBMIT AN APPLICATION TO REGISTRAR

Registration of a partnership is a very simple process. It’s not complicated like Company registration. An application form along with specified fee has to be paid with necessary documents to be submitted to the registrar:

v        Form-1 for applying for registration

v        Duly filled specimen of an affidavit

v        Certified original partnership deed

v       Proof of address of firm (Owned registry in case of owned property or rent agreement/ lease deed in case property is rented or leased

d. CERTIFICATE OF REGISTRATION

If the registrar verifies an application after scrutinizing an application and all the documents, he will register the firm and issue a Certificate of Registration.

CRUX: A partnership has many advantages as a form of business, such as

• Formation of a partnership firm is an easy task. You only require a contract of partnership. Registration is not compulsory in most cases.
• Since many partners are involved in a business they all bring their own expertise and management styles. This helps in better management of the business.
• All partners also contribute to the capital of the firm so it has more funds to work with
• The risk of the business is also shared among all partners.

  CS Annu Sharma is a Commerce Graduate and an Associate Member of the Institute of Company Secretaries of India (ICSI). She has cumulative experience of more than 3 years with Listed Company, CA and CS firms. She authored various articles on the topics of Corporate Laws, Securities Laws, DGFT, Income Tax, Start-ups among other. Articles authored by her are published on prominent Professional Websites. 

(Author be Contacted at csannusharma123@gmail.com & +91-7021848742 : CS Annu Sharma for any discrepancy.)