What is a partnership firm? A partnership business involves two individuals who jointly start a business on mutually agreeable terms and conditions. This type of business involves nominal permissions and authorisations in comparison to the establishment of large-scale organisations. All partnership businesses are regulated and governed by the 1932 Indian Partnership Act. One of the key formalities is a contract which includes all the details of the two partners, the terms and conditions including sharing of profits as well as other important clauses. This is better known as a partnership deed. Once a partnership deed is signed by both the said partners, it affirms the establishment of the firm. You will have to register it with the Registrar of Firms but do not have to do that immediately after the partnership deed has been signed. The registrations of such a partnership firm is dependent on the partners involved and are not binding. However, registration will enable the partnership firm to enjoy various benefits. Let's see some of them with examples.
- In case, Partner A tries to impose certain additional rights on the organisation which are not mentioned in the partnership deed; Partner B can sue Partner A.
- Once you register your partnership company, a third party cannot implement any provisions in their interests. This includes government agencies.
- A registered partnership business can press charges against a third party and recover a specific amount of money in damages in the event of any contingencies.
Did you know?
According to the Central Government of India, a partnership can be formed with a maximum of 50 partners.
Various Steps Involved in the Registration of a Partnership Firm
The application form for registration has to be signed by all the partners and submitted to the Registrar of Firms. This form includes the name, location, the dates on which the different partners have joined the business, their individual dates, and an anticipated date of the duration of the business.
Selecting the Name of the Partnership Business
The brand name of the partnership should be original. It should not be the same as another partnership firm involved in a business like yours.Words like empire, crown, the emperor as well as empress should not be a part of your partnership brand name. The usage of such words indicates that the firm has received government approval.
Also Read: How To Get A Business License In India?
All the details of the partners have to be furnished in the application form, which also has to be signed by them all. A fixed amount of fees has to be paid when the form is submitted to the Registrar. Once the application is accepted, the partnership firm gets registered, and the partners are issued a Certificate of Registration. The entire process does not take more than ten days.
Documents Required for Registration
- Application form (Form 1) for registration of partnership
- Original copy of the partnership deed, which has been certified
- An affidavit that affirms all the details in the said partnership deed, as well as the details of the document, are accurate
- Details like PAN card, postal addresses as well as contact numbers of all the partners
- Location of operations – Documents with regards to ownership or rented premises.
Details of the Partnership Deed
- Accurate details of all the partners in the business
- Commencement date of the business
- Amount of finance being invested by every partner towards the business
- Details of how the profit or losses will be shared by the partners
- Amount of withdrawals permitted for the partners, interest earned on the finance invested in the business, loan details (if any partner has taken a loan for investing in the business)
- Responsibilities and commitment of the partners
- All other details regarding retirement, closure, and the results thereof for the partners
The Different Types of Partnership Firm
There are various types of partnership firms you can choose from to set up your business in accordance with your requirements. Some of these include:
The individual partners are authorised to make an individual decision in the operations of the business. However, any mistakes made by one partner that causes losses to the business make the other partners accountable. Their assets are then used to cover up for the losses incurred by that one partner. A General partnership is further divided into two other types of a partnership business, namely:
Partnership at Will and Particular Partnerships
There is a mutual understanding amongst the partners to decide their association with the partnership business. The Particular type of Partnership involves the formation of the business to achieve a distinct goal. Once that has been achieved, the partnership can cease to exist. The various partners can also have a mutual understanding about wanting to continue with the business if they choose to. In most cases, e.g., an infrastructure project – the partners go their individual ways after the completion of the project.
Limited Liability Partnership is popularly known as an LLP partnership and includes a certain fixed amount of liabilities for the partners based on their prior agreement. No personal assets of any partner can be used to recover bad debts if any.
Different Types of Partners
Better known as active partners are closely involved in the successful operations of the firm. In case they wish to retire from the firm, they have to do it in the public domain i.e. a public notice. If they don’t, they will still be accountable for the actions of the existing active partners in the firm. Active partners have the authority to make meaningful decisions and have the right to remunerations.
Such partners invest a large amount of finance in the business and are not involved in the daily operations of the firm. They are not entitled to remunerations if any, unless the said deed states. If it is stated in the deed, the remuneration will not be liable to income tax.
Such partners are a part of the business only because of the brand value they possess like celebrities or reputed business icons. They are not associated with the everyday management of the business.
This involves existing partners sharing profits with a third party. The third-party individual is considered as a sub-partner. Such a person has no say in anything.
Partners in Profit
This involves partners who clearly state that they are in the business only for the profits and not the losses.
This involves individuals who have verbally claimed that they are partners in a specific partnership firm. They are liable to payment of all debts whenever the situation demands.
The details of this article give an insight into the various types of partnership firms, partners, and the process of starting a partnership business. Every step is covered in this article, and if you are a beginner looking to start a partnership firm, we hope that this article will be useful to you as well!
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