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A partnership is a form of business that enables two or more persons to co-own an organization, and they agree to share the profits and losses of the company. Each member of such a business is called a Partner, and collectively they are known as a partnership firm.
In a partnership, every owner contributes something to the welfare of the firm. These can be in the form of ideas, property, money, and sometimes a combination of all these. Owners of a Partnership share profits and losses in proportion to their respective investments.
Partnership businesses in India are regulated by Section 4 of the Indian Partnership Act of 1932.
Types of Partnership
Partnership at will: A partnership by will is a partnership where there is no provision made by contract between the partners for the duration of their partnership, or the determination of their partnership.
Particular Partnership: A particular partnership is when a person becomes a partner with another individual in a particular business enterprise or for a particular business venture or undertaking, such as the construction of a road, laying a railway line, etc. This sort of partnership shall come to an end on the completion of the task for which it was initially formed.
Types of Partners
Active/ Actual/ Ostensible Partner: When a partner of a partnership firm, has become a partner by an agreement and actively participates in the conduct of the partnership. The partner of the firm acts as a representative of other partners for all the acts carried out in the usual business lifecycle of the business. In the event of a retirement of a partner, the person must give a public notice to absolve himself of their liabilities for acts carried out by the other partners after his retirement.
Sleeping or Dormant Partner: These partners share their profits and losses and are liable to third parties for the business carried out by the partnership firm. However, they are not required to give public notice of their retirement from the partnership firm.
Nominal Partner: A nominal partner is an individual who lends his name to the partnership form. When this is done without having any real interest in the business, the person is a nominal partner. This kind of partner is not entitled to share the profits of the firm. This partner has neither invested in the firm nor taken part in how the business is run at the firm. Although, such a partner is liable to third parties for all the actions taken by the firm.
Partner in Profits only: This is a partner who is entitled to have a share of the profits without being liable for the losses. This kind of partner is liable to third parties only for acts of gain.
Sub-Partner: A Sub-partner is a partner in a partnership firm who agrees to share his profits in the partnership firm with an outsider to the firm. A sub-partner does not hold any right against the firm nor is liable for any debts caused by the firm.
Incoming partners: This is a partner who is admitted as a partner into an already existing firm with the consent of all the other existing partners. Such a partner is not liable for any acts of the form taken before his entry as a partner to the firm.
Outgoing Partner: An outgoing partner is a partner who leaves the firm the rest of the partners continue to carry on the business. Such a partner remains liable to third parties for all the actions taken by the firm until a public notice concerning his retirement is given.
Partner by holding out (Section 28): A partnership by holding out is also called as a partnership by estoppel. This is when an individual holds himself out as a partner or allows others to do so, the person is then stopped from denying the character he has assumed and upon the faith of which creditors may be presumed to have acted. When an individual represents himself or knowingly permits himself, to be represented as a partner in a partnership firm (when in fact he is not) he is liable, like a partner in the firm to anyone who on the faith of such representation, had given credit to the firm.
An individual may themselves, by their words or conduct has induced other to believe that they are a partner or they may have allowed others to represent them as a partner. The result in both situations is identical.
What are the key Advantages of a Partnership Firm?
A partnership firm is one of the most popular business structures in India and it offers the following benefits:
Easy to Incorporate: The incorporation of a partnership firm is relatively easy and seamless as compared to another form of business. The incorporation of a partnership firm begins with drafting a legal contract, known as a partnership deed. Keep in mind that the partnership deed is the only fundamental document required for incorporating a partnership firm.
Attracts minimal Compliances: The partnership firm has to stay in line with minimal compliances as compared to business structures like LLP. The absence of directors in a partnership firm mitigates the requirement of securing the DSC, i.e., a Digital Signature certificate or Director Identification Number. Reconstitution of the partnership firm via partnership deed is seemingly easier than other business structures. Also, these firms attract minimal operation-based compliances. The dissolution of such firms can be done without addressing heaps of compliances.
Allows partners to make a quick decision: The absence of a large management structure allows partnership firms to make swift decisions. Since the majority of the decision-making is in the hand of the serving partners, there is no need of appointing additional officials to serve such a purpose.
The profits and Loss Ratio is at the partners’ discretion: Partners have the right to decide on the Profit and loss ratio as per mutually agreed terms. This leaves no disparity or vagueness among the serving partners, thereby ensuring the improved stability of the firms. Given this, the individual partner is not required to address the entire loss. The presence of the associate partner can help them compensate for the loss on the agreed terms.
Key Documents required for incorporating the Partnership firm in India
- The documents required to be furnished before the ROFs of the partnership firm include;
- Application form, i.e. Form 1, duly signed by the serving partners
- A true copy of the Partnership Deed enclosing the seal and signature of the concerned authority
- Specimen of an affidavit authenticating all the information cited in the partnership deed & documents are legitimate.
- Permanent Account Number, i.e. PAN & resident proof of the partners
- Proof of the business place, i.e. lease agreement or rent agreement.
Checklist for the Registration of Partnership Firm
- Drafting of Partnership Deed
- Availability of at least two partners, the upper limit has been maxed out at 20 as per the prevailing Act.
- Selection of a legit name for a proposed firm
- Principal Place of business
Permanent Account Name, i.e. PAN & bank account of the Firm
Step-by-Step procedure of registering a Partnership firm in India & How can we assist?
We can assist with registering the partnership with the relevant government authorities, such as the Registrar of Companies. They can ensure that all necessary documents are filed correctly and promptly.
Step 1: Application for Registration
An application form must be filed to the ROFs of the respective state in which the Firm is situated and the standard fees. The registration form should enclose the signature of the proposed partners.
Usually, an applicant can send the application form to the ROFs via registered post. Refer to the below checklist before dispatching the application to the said authority. The checklist encloses the mandatory details that should be enclosed in the application form.
- Proposed Firm’s name
- The principal Place of business
- Address of the ancillary unit, if any
- The date of joining each partner
- The names & addresses of the proposed partners
- Year of the establishment of the Firm
We can advise on the different types of partnerships that are available, such as general partnerships, limited partnerships, and limited liability partnerships. We will help you choose the type that best suits your needs and goals.
We can assist in drafting a partnership agreement is a legal document that outlines the rights and responsibilities of each partner in the partnership. We draft a partnership agreement that meets the legal requirements and protects the interests of all parties involved.
Step 2: Choose the legalized name of the Firm
- The name should not create a conflict of interest with any third parties or the existing Firm.
- The name should be distinctive and original.
- The name must stay in line with prevailing acts like the Trademark Act and Emblem and Name Act, of 1950.
Step 3: Certificate of Registration
If the Registrar finds no error in the submitted form & documents, he will grant the registration certificate & register the proposed firms in the Register of Firms.
The register of firms encloses all the details of the registered Firm and is accessible to business owners, i.e. partners, after the submission of the standard fees.