Partnership Firm

Overview

       Partnership is a common form of business. Two or more people come together to carry on a business and share the profits and losses. A Partnership is one of the most important forms of a business organization, where two or more people come together to form a business and divide the profits thereof in an agreed ratio. Liability of the partners in a partnership firm is joint, several and it cannot be said limited to particular partner. A partnership firm is not a separate legal entity distinct from its members. It is merely a collective name given to the individuals composing it. Hence, unlike a company which has a separate legal entity distinct from its members, a firm cannot possess property or employ servants, neither it can be a debtor or a creditor. It cannot sue or be sued by others. A Partnership is easy to form, and the compliance is minimal as compared to companies.

Characteristics of Partnership Firm

Existence of an agreement

Partnership Firm is the outcome of an agreement between two or more persons to carry on business. The Partnership agreement may be oral or in writing. The Partnership Act, 1932 (Section 5) clearly states that “the relation of partnership arises from contract and not from status.”

Existence of business

The Partnership firm is formed to carry on a business. As stated earlier, the Partnership Act, 1932 [Section 2 (6)] states that a “Business” includes every trade, occupation, and profession. Business, of course, must be lawful. If there is only one partner, the business comes to an end. The partnership firm cannot continue to exist as Limited Liability Partnership.

Sharing of profits

The purpose of partnership firm should be to earn profits and to share it. The profit will be shared by the partners according to the partnership agreement. In the absence of any agreement, the partner should share profits (and losses as well) in equal proportions.

Contractual Relation

The person joining the partnership enters into a contract for running the business. According to Partnership Act, the relation of partnership arises from contract and not from status. The contract may be oral or written but in practice written agreement is made because it helps to settle the disputes if they arise later on.

Non-transferability of interest

No partner can assign or transfer his partnership share to any other person so as to make him a partner in the business without the consent of all other partners.

Nature of liability

The nature of liability of partners is the same as in case of sole proprietorship. The liability of partners is both individual and collective. The creditors have a right to recover the firm’s debts from the private property of one or all partners, where firm’s assets are insufficient. The liability of the partners are unlimited, joint and several.

Non-transferability of interest

No partner can assign or transfer his partnership share to any other person so as to make him a partner in the business without the consent of all other partners.

Existence of Business

The Partnership can only be for some kind of business. The term ‘Business’ includes any manufacture, trade, profession or occupation, etc. By business we mean all activities concerning production, distribution and rendering of services for the purpose of earning profits. If the work is related to social service, we do not call it a business and hence no partnership.

Unlimited Liability

As in the case of a sole-trade business liability of the partners of a firm is unlimited. In case some obligation arises then not only the partnership assets but also the private property of the partners can be taken for the payment of liabilities of the firm to the third parties. The creditors can claim their dues from anyone of the partner or from all the partners. The partners are liable individually and collectively.

Restriction and Transfer of Share

No partner can sell or transfer his share to anybody else without the consent of the other partners. In case any partner does not want to continue in the partnership, he can give a notice for dissolution of the firm.

How Partnership firm should be named?

Any name can be given to a partnership firm as long as you fulfill the below-mentioned conditions:

  • The name shouldn’t be too similar or identical to an existing any business entity doing the same business,
  • The name shouldn’t contain words like emperor, crown, empress, empire or any other words which show sanction or approval of the government.

How should be the agreement between partners formed?

Partnership deed is an agreement between the partners in which rights, duties, profits shares and other obligations of each partner is mentioned.

Partnership deed can be written or oral, although it is always advisable to write a partnership deed to avoid any conflicts in the future.

Documents Required

  • Name of your business firm.
  • Place, where the business is functioning.
  • Places, where any other branches carried out for business.
  • Partner’s full name, their permanent address with the date of joining as the partners in the firm.
  • PAN Copy of all the partners.
  • A copy of address proof of all the partners.
  • The main business activity of the firm.
  • Ownership proof of the business place if it is rental, copy of rental agreement or EB bill is required.
  • No-Objection Certificate from owner if it is Rented Property

What should a Partnership Deed contain?

1. General Details
  • Name and address of the firm and all the partners
  • Nature of business
  • Date of starting of business Capital to be contributed by each partner
  • Capital to be contributed by each partner
  • Profit/loss sharing ratio among the partners
2. Other Details

Apart from these, certain other clauses may also be mentioned to avoid any conflict at a later stage:

  • Interest on capital invested, drawings by partners or any loans provided by partners to firm
  • Salaries, commissions or any other amount to be payable to partners
  • Rights of each partner, including additional rights to be enjoyed by the active partners
  • Duties and obligations of all partners
  • Adjustments or processes to be followed on account of retirement or death of a partner or dissolution of firm.
  • Other clauses as partners may decide by mutual discussion

Process of Registration

First Step

The first step, choosing a name for Partnership Firm. For this, you have to choose a unique name which should not be similar to other partnership firm and it should not use the prohibited words in name of partnership firm, so the first step is choosing a unique name for Partnership firm so you will get your registration number on that name.

Second Step

The second step is to make a deed or agreement of partnership firm. This deed will contain all details of Registrar of Firms. In this deed, you have to mention all details of firms like an address of firms, capital of firms and you have to mention details of all Partners like their personal and professional details. And this agreement should be signed by all partners and should contain stamp on it and it should be notarized.

Third Step

After making of Partnership deed you have to register your partnership firm with Registrar of Firms. Every state has their own rules of registration and has the different office of the registrar of firms. For registering your partnership firm application should be made before state’s Registrar of Firm. You can apply through online or offline mode.