What is Partnership ?
A type of business organization in which two or more individuals pool money, skills, and other resources, and share profit and loss in accordance with terms of the partnership agreement. In absence of such agreement, a partnership is assumed to exit where the participants in an enterprise agree to share the associated risks and rewards proportionately.
Partnership and propritership are the 2 most popular forms of business organisations in India. The reason why these 2 forms of organisations are so popular is because they are relatively easy to set-up and the no. of statutory compliance required to be done by these forms of organisations is relatively less than the statutory compliance applicable to LLP’s and Companies.
HOW TO START PARTNERSHIP FIRM?
Step 1- Choosing the Partnership Name
The partners are free to choose any name as they desire for their partnership firm subject to the following rules:-
1.The names must not be too identical or similar to the name of another existing firm doing similar business so as to lead to confusion. The reason for this rule being that the reputation or goodwill of a firm may be injured, if a new firm could adopt an allied name.
2.The name must not contain words like Crown, Emperor, Empress, Empire or words expressing or implying the sanction, approval or patronage of Govt except when the State Govt signifies its consent in writing to the use of such words as part of the firm name
Step 2 – How to Create Partnership Deed ?
The document in which the respective rights and obligations of the members of a partnership is written is called the Partnership Deed.
A partnership deed agreement may be written or oral. However, practically oral agreement does not have any value for tax purposes and therefore the partnership agreement should be written. The following are the essential characteristics of a partnership deed:-
1.Name and Address of the firm as well as all the partners
2.Nature of business to be carried on
3.Date of Commencement of business
4.Duration of Partnership (whether for a fixed period/project)
5.Capital contribution by each partner
6.Profit sharing ratio among the partners
The above are the minimum essentials which are required in all partnership deeds. The partners may also mention any additional clauses. Some of the examples of additional clauses which may be mentioned in the partnership deed are mentioned below:-
1.Interest on Partner’s Capital, Partners’ Loan, and Interest, if any, to be charged on drawings.
2.Salaries, Commissions etc, if any, payable to partners
3.Method of preparing accounts and arrangement for audit
4.Division of task and responsibility i.e. the duties, powers and obligations of all the partners.
Rules to be followed in case of retirement, death and admission of a partner
The Partnership Deed created by the partners should be on a stamp paper in accordance with the Indian Stamp Act and each partner should have a copy of the partnership deed. A Copy of the Partnership Deed should also be filed with the Registrar of Firms in case the firm is being registered.
Step 3-whether additional clauses are needed?
The partners may also mention any additional clauses. Some of the examples of additional clauses which may be mentioned in the partnership deed are mentioned below:-
1. Interest on the partner’s capital, partners’ loan, and interest, if any, to be charged on drawings.
2. Salaries, commissions etc, if any, payable to partners
3. Method of preparing accounts
4. arrangement for audit
5. Division of task and responsibility, namely, the duties, powers and obligations of all the partners.
6. The rules to be followed in case of retirement, death and admission of a partner
Step 4-Do the partnership deed in the appropriate form.
The deed so created by the partners should be on a stamp paper in accordance with the Indian Stamp Act. Each partner should have a copy of the partnership deed. A Copy of the Partnership Deed should also be filed with the Registrar of Firms in case the firm is being registered.
Step 5-Decide whether or not to register the partnership firm.
Partnerships in India are governed by the Indian Partnership Act, 1932. As per the Partnership Act, registration of partnership firms is optional and is entirely at the discretion of the partners. The Partners may or may not register their Partnership Agreement. However, in the case where the partnership deed is not registered, the partners may not be able to enjoy the benefits which a registered partnership firm enjoys.
Registration of a partnership firm may be done before starting the business or anytime during the continuance of partnership. However, where the firm intends to file a case in the court to enforce rights arising from the contract, the registration should be done before filing the case.
Step 6-Register.
The procedure for registration of a partnership firm in India is fairly simple. An application and the prescribed fees are required to be submitted to the Registrar of Firms of the State in which the firm is situated. The following documents are also required to be submitted along with the application:
1. Application for Registration of Partnership in the respective form
2. Duly filled specimen of Affidavit
3. Certified True Copy of the Partnership Deed
4. Ownership proof of the principal place of business or rental/lease agreement thereof.
Step 7-Sign the application.
The application or statement must be signed by all the partners, or by their agents especially authorised in this behalf.
Step 8-Expect the registration process to proceed formally.
When the registrar is satisfied with the points stated in the partnership deed, he or she shall record an entry of the statement in a register called the Register of Firms and issue a Certificate of Registration. The Register of Firms maintained at the office of the Registrar contains complete and up-to-date information about each registered firm.
This Register of Firms is open to inspection by any person on payment of the prescribed fees; any person interested in viewing the details of any firm can request the Registrar of Firms for the same and on payment of the prescribed fees, a copy of all details of the firm registered with the Registrar will be given to the applicant.
Step 9-Be registered for tax.
It should be noted that registration with the Registrar of Firms is different from registration with the Income Taxation Department. It is mandatory for all firms to apply for registration with the Income Tax Department and have a PAN Card. After obtaining a PAN Card, the partnership firm is required to open a Current Account in the name of the partnership firm and to operate all its operations through this bank account.
Advantages of Partnership:-
Capital
Due to the nature of the business, the partners will fund the business with start up capital. This means that the more partners there are, the more money they can put into the business, which will allow better flexibility and more potential for growth. It also means more potential profit, which will be equally shared between the partners.
Flexibility
A partnership is generally easier to form, manage and run. They are less strictly regulated than companies, in terms of the laws governing the formation and because the partners have the only say in the way the business is run (without interference by shareholders) they are far more flexible in terms of management, as long as all the partners can agree.
Shared Responsibility
Partners can share the responsibility of the running of the business. This will allow them to make the most of their abilities. Rather than splitting the management and taking an equal share of each business task, they might well split the work according to their skills. So if one partner is good with figures, they might deal with the book keeping and accounts, while the other partner might have a flare for sales and therefore be the main sales person for the business.
Decision Making
Partners share the decision making and can help each other out when they need to. More partners means more brains that can be picked for business ideas and for the solving of problems that the business encounters.
Disadvantages of Partnership:-
Disagreements
One of the most obvious disadvantages of partnership is the danger of disagreements between the partners. Obviously people are likely to have different ideas on how the business should be run, who should be doing what and what the best interests of the business are. This can lead to disagreements and disputes which might not only harm the business, but also the relationship of those involved. This is why it is always advisable to draft a deed of partnership during the formation period to ensure that everyone is aware of what procedures will be in place in case of disagreement and what will happen if the partnership is dissolved.
Agreement
Because the partnership is jointly run, it is necessary that all the partners agree with things that are being done. This means that in some circumstances there are less freedoms with regards to the management of the business. Especially compared to sole traders. However, there is still more flexibility than with limited companies where the directors must bow to the will of the members (shareholders).
Liability
Ordinary Partnerships are subject to unlimited liability, which means that each of the partners shares the liability and financial risks of the business. Which can be off putting for some people. This can be countered by the formation of a limited liability partnership, which benefits from the advantages of limited liability granted to limited companies, while still taking advantage of the flexibility of the partnership model.
Taxation
One of the major disadvantages of partnership, taxation laws mean that partners must pay tax in the same way as sole traders, each submitting a Self Assessment tax return each year. They are also required to register as self employed with HM Revenue & Customs. The current laws mean that if the partnership (and the partners) bring in more than a certain level, then they are subject to greater levels of personal taxation than they would be in a limited company. This means that in most cases setting up a limited company would be more beneficial as the taxation laws are more favorable
Profit Sharing
Partners share the profits equally. This can lead to inconsistency where one or more partners aren’t putting a fair share of effort into the running or management of the business, but still reaping the rewards.