What Is a Partnership Firm?
A partnership firm is about creating a legal relationship between two or more persons, in order to run a business to make profits and share it equally. In India, partnership firm functions as per the Indian Partnership Act 1932. A partnership firm can be formed by individuals, businesses, organizations, schools, and governments. It can be formed for the long run or to complete a particular task.
Features of partnership firm
- There must be a minimum of two members to start the firm, there is no mention of maximum members in the partnership act. As per the Companies Act, the maximum can be 10 for banking businesses and 20 for others.
- There must be an agreement between the partners for the firm either written or oral or implied in order to avoid any disputes in the future. Minors, unsound-minded persons, and persons disqualified by law can enter into an agreement.
- When it comes to sharing of profits, the agreement must be made between the partners on how and on what basis they are going to share profits, employees or creditors cannot share profits unless it’s bound by an agreement.
- It is not compulsory to register the partnership firm, but by registering it can obtain some legal benefits, and even when any dispute arises, registration acts as an instrument to settle the dispute in a court of law.
- The objective of the firm should be legal and valid as per the act.
- In India, the liability of partners is unlimited so even the personal assets of partners can be used to pay back debts.
- Every partner acts as both principal and agent, he can bind others for their actions or bound by others.
- Partner cannot make any decisions at his own will, he should discuss with co-partners and obtain the consent of all.
- There is no individuality as firms and partners are treated as the same.
- The partnership is flexible in nature which provides freedom to manage the business.
Basic requirements of Partnership Firm.
- There must be 2 or more persons to form a partnership firm.
- There must be a contract.
- Partnership deed.
- Capital based on the requirements of business
- Foreign investment is not allowed
Share of profits in Partnership Firm
- Every business main purpose is to earn profits, distribution of profits play a vital role and
- If partners have made an agreement regarding the share of profits or losses it will be done as per the agreement, whether to share profits equally or on the basis of capital contribution.
- After the agreement is made with the consent of all the partners, the agreement must be revised annually and should make any changes if needed.
- If no agreement, partners must share profits or losses equally as per Partnership Act.
Partnership firm v/s Limited Liability Partnership.
What is a Limited Liability Partnership?
Limited liability partnerships where it provides the flexibility of a partnership and limited liability to its partners as per the joint-stock company. Limited liability partnership is also called a hybrid of both partnership firms and Companies. In India LLP is governed by the Limited Liability Partnership Act 2008
Although LLP seems similar to a partnership, it does have some differences such as:-
Limited Liability Partnership
It is a separate legal entity
Here partners and firm and one and the same
Partners' liability is limited to the extent of their capital contribution except when he is found out fraud.
Partners liability is unlimited, thus partners personal assets can be used for repayment of debts
The firm can select any name but it has to attach LLP at the end of it
The firm can select any name
The partners cannot be sued as they are separate from their entity
Partners can sue or be sued as there is no difference between firms and partners
Registration is compulsory
Registration is voluntary
It is mandatory to audit accounting books when capital contribution and turnover exceed 25 lakhs and 45 lakhs respectively.
It is not mandatory to audit books
In LLP, a partner is solely responsible for his acts not others
Act of any partner can bind other partners
It should have an LLP agreement
It should have a partnership deed
Minimum is 2
Maximum is 100
Minimum is 2
Maximum is unlimited
Partners can choose any type of partnership according to their needs.
Registration of Partnership Firm in India
A partnership firm is classified into two categories such as:-
- Registered partnership firm
- Unregistered partnership firm
Registration of a partnership firm can be made anytime either at the start of a business or in the running of the business. Although registration of partnership firm is not compulsory, it is always advisable to register your firm as it comes with a lot of benefits such as
- Partner can sue or be sued by other partners of the firm for his rights
- Partner can file suit against the third party in case of any fraud and even apply for set-off.
- It can also claim tax benefits.
What are the documents required for the registration process?
- Partnership deed, which should be in written format to avoid future disputes. It should be created from stamp paper collected from the respective state registrar's office and duly signed by all the partners and attested with the fees of ?2000.
- Address proof such as land documents and any utility bill ( electricity bill, water bill, etc) and NOC from the owner. In case it is rented, NOC of landlord duly attested
- Residential proof such as AADHAR card, voter id, passport
What is a partnership deed?
A partnership deed is a mutual agreement between the partners, it includes the terms and responsibilities of partners. It is made in order to avoid any misunderstanding between the partners and ensure the smooth running of the business.
Contents of a Partnership deed :
- Name of firm
- Name and address of all partners
- Address of firm
- Capital contribution of partners
- Profit-sharing ratio
- Duties and obligations of partners
- Admission and retirement of a partner
- The method used for calculating goodwill
- Procedure for settlement of dissolution of the firm
- Treatment of insolvency
- Salary, interest on capital for partners
Procedure for Registration of partnership firm through online
Partnership registration is easier than other business registration, it only Requires a few documents and it’s done
- Select the name of the firm Which should not be similar to the existing business and should not include any offensive name
- Prepare partnership deed by own or with the help of any agency
- Fill up FORM 1
- Attach all the documents required as stated above with the form
- Pay the prescribed fees
- A minimum of 15 days is taken to issue an incorporation certificate.
After receiving your certificate you should apply for a firm's PAN card, GST registration if required and a bank account in the name of the firm.So it is that simple to start a partnership firm in India.
Unregistered partnership firms
As the name says unregistered it comes with a lot of disadvantages such as:-
- The provisions of the Indian Partnership Act 1932 are not applicable.
- There will be a lack of trust for outsiders to invest in these firms.
- It does not have the power to sue its partners or a third party and even to claim set-off.
- It is difficult for the unregistered partnership to convert into LLP without registration.
- It cannot enjoy any tax benefits under the provision of the act.
Rights that cannot affect unregistered partnership firm
- Partners can sue for dissolution of the firm or for its property
- The third-party can sue the firm
- It can only claim set-off not exceeding?100
- Right to sue the third party for infringement of the patent right
It is always advisable to register the firm in order to claim all kinds of benefits under the provisions of the partnership act.
Tax on partnership firm
A partnership firm is taxed as per the Income-tax act 1961. Here firms and partners are separately taxed whether it’s registered or unregistered firm. For the first year, the firm should submit a partnership deed and in later years it can submit only when there is any change in the deed.
- Share of firms profit is fully exempted and loss is ignored
- Interest on capital is exempt up to 12%.
- Partners salary, commission, and remuneration come under taxation
A partnership firm is taxed at 30% on total income after deducting salary and others for partners at desired ratios
12% surcharge( if income exceeds 1 crore)
Health and education cess at 4%
Procedure for filing ITR for partnership firm
Filing ITR is very simple, you just have to fill ITR-5 file tax for the firm only through online any income tax department portal. There is no need for any attachment of files until you asked for them. It can file with or without a digital signature. The firm can file through an electronic verification code. While filing, the partners must have class 3 digital signatures for verification of the filing process.
Is there any deadline for filing ITR?
Yes, there are 2 dates
- When it is not required to audit, ITR can be filed by 31st July every year.
- When the audit is required, the firm can file ITR by 31st October
Dissolution of partnership firm
Dissolution means termite or end. Here dissolution of partnership means the relationship between the partners and firm comes to an end.
What are the reasons to terminate the partnership firm?
- Due to the insolvency of a partner
- Admission of a partner
- Retirement of a partner
- Death of a partner
- On completion of particular work, the firm gets dissolved.
- Expiry of firm
- Dissolution can be made with or without court intervention.
- In partnership at will, any partner can give notice of termination for other partners
- If there is any disagreement between partners.
Procedure for dissolution of the partnership firm.
The partners must give notice before the dissolution of the firm
Dissolution can be done in many ways such as
- Through mutual agreement
- Compulsory government intervention in case the firm is conducting an illegal business and when one partner is declared insolvent.
- The firm can dissolve when the task is over or when there are only 2 members and one dies.
- If any partner transfers control to a third party as interest.
Documents required for dissolution of partnership firm
- PAN card
- Address proof of the firm
- Books of accounts
- Legal liability
- List of creditors
- Partnership deed along with modified versions
The firm can give intimation to the IT department of its dissolution and deactivate its PAN card after the dissolution of the partnership firm, the assets must be realized in order to pay the debts of the business. If the realized amount is not sufficient, the loss must be paid by partners from their personal assets.