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Pratnership Firm

What Is a Partnership?

A partnership is a formal arrangement by two or more parties to manage and operate a business and share its profits.

There are several types of partnership arrangements. In particular, in a partnership business, all partners share liabilities and profits equally, while in others, partners may have limited liability. There also is the so-called “silent partner,” in which one party is not involved in the day-to-day operations of the business.

KEY TAKEAWAYS

  • A partnership is an arrangement between two or more people to oversee business operations and share its profits and liabilities.
  • In a general partnership company, all members share both profits and liabilities.
  • Professionals like doctors and lawyers often form a limited liability partnership.
  • There may be tax benefits to a partnership compared to a corporation.

According to section 4 of the Partnership Act of 1932,”Partnership is defined as the relation between two or more persons who have agreed to share the profits of a business carried on by all or any one of them acting for all”. This definition superseded the previous definition given in section 239 of Indian Contract Act 1872 as – “Partnership is the relation which subsists between persons who have agreed to combine their property, labor, skill in some business, and to share the profits thereof between them”. The 1932 definition added the concept of mutual agency. The Indian Partnerships have the following common characteristics:
1) A partnership firm is not a legal entity apart from the partners constituting it. It has limited identity for the purpose of tax law as per section 4 of the Partnership Act of 1932.
2) Partnership is a concurrent subject. Contracts of partnerships are included in the Entry no.7 of List III of The Constitution of India (the list constitutes the subjects on which both the State government and Central (National) Government can legislate i.e. pass laws on).
3) Unlimited Liability. The major disadvantage of partnership is the unlimited liability of partners for the debts and liabilities of the firm. Any partner can bind the firm and the firm is liable for all liabilities incurred by any firm on behalf of the firm. If property of partnership firm is insufficient to meet liabilities, personal property of any partner can be attached to pay the debts of the firm.[23]
4) Partners are Mutual Agents.The business of firm can be carried on by all or any of them acting for all. Any partner has authority to bind the firm. Act of any one partner is binding on all the partners. Thus, each partner is ‘agent’ of all the remaining partners. Hence, partners are ‘mutual agents’.

Section 18 of the Partnership Act, 1932 says “Subject to the provisions of this Act, a partner is the agent of the firm for the purpose of the business of the firm”[23]
5) Oral or Written Agreements. The Partnership Act, 1932 nowhere mentions that the Partnership Agreement is to be in written or oral format. Thus the general rule of the contract applies that the contract can be ‘oral’ or ‘written’ as long as it satisfies the basic conditions of being a contract i.e. the agreement between partners is legally enforceable. A written agreement is advisable to establish existence of partnership and to prove rights and liabilities of each partner, as it is difficult to prove an oral agreement.
6) Number of Partners is minimum 2 and maximum 50 in any kind of business activities. Since partnership is ‘agreement’ there must be minimum two partners. The Partnership Act does not put any restrictions on maximum number of partners. However, section 464 of Companies Act 2013, and Rule 10 of Companies (Miscellaneous) Rules, 2014 prohibits partnership consisting of more than 50 for any businesses, unless it is registered as a company under Companies Act, 2013.
7) Mutual agency is the real test. The real test of ‘partnership firm’ is ‘mutual agency’ set by the Courts of India, i.e. whether a partner can bind the firm by his act, i.e. whether he can act as agent of all other partners.

Registration of Partnership Deed:

All the rights and responsibilities of each member are recorded in a document known as a Partnership Deed. This deed can be oral or written; however, an oral agreement is of no use when the firm has to deal with tax. A few essential characteristics of a partnership deed are:

  • The name of the firm.
  • Name and addresses of the partners.
  • Nature of the business.
  • The term or duration of the partnership.
  • The amount of capital to be contributed by each partner.
  • The drawings that can be made by each partner.
  • The interest to be allowed on capital and charged on drawings.
  • Rights of partners.
  • Duties of partners.
  • Remuneration to partners.
  • The method used for calculating goodwill.
  • Profit and loss sharing ratio

Partnership Deed Contents

While making a partnership deed, all the provisions and the legal points of the partnership deed are included. This deed also includes basic guidelines for future projects and can be used as evidence at times of conflict or legal procedures. For a general partnership deed, the below mentioned information should be included.

  • Name of the firm as determined by all partners.
  • Name and details of all the partners of the firm.
  • The date on which business commenced.
  • Firm’s existence duration.
  • Amount of capital contributed by each partner.
  • Profit sharing ratio between the partners.
  • Duties, obligations and power of each partner of the firm.
  • The salary and commission if applicable that is payable to partners.
  • The process of admission or retirement of a partner.
  • The method used for calculating goodwill.
  • The procedure that must be followed in cases of dispute arising between partners.
  • Procedure for cases where a partner becomes insolvent.

Importance of partnership deed

A few important advantages of a well-drafted deed are listed:

  • It controls and monitors the rights, responsibilities and liabilities of all the partners
  • Avoids dispute between the partners.
  • Avoids confusion on profit and loss distribution ratio among the partners.
  • Individual partner’s responsibilities are mentioned clearly.
  • Partnership deed also defines a remuneration or salary of the partners and working partners. However, interest is paid to each partner who has invested capital in the business.

Advantages of partnership deed

The following are the advantage of the Partnership deed.

  1. It helps in regulating the liabilities, rights and duties of the partners.
  2. It helps in avoiding misunderstandings between the partners by mentioning all the terms and conditions beforehand.

List of documents for registration of a partnership firm?

Documents required for registration of a partnership firm are:

  1. Certified original copy of Partnership deed
  2. Partner’s documents ( PAN Card and Aadhar or Driving License)
  3. Address proof of the firm ( rent agreement and electricity Bill copy)
  4. GST registration
  5. Specimen of an affidavit certifying all the details mentioned in the partnership deed and documents are correct.
  6. Application for registration of partnership i.e Form 1

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