What is a Partnership Firm?
A General Partnership consists of two or more individuals who manage and run a business. This is levelled with the terms spanned out in the partnership deed. Setting up a small business under this enterprise is relatively easy, cost effective and has minimum compliance needs. However, this kind of a firm is not recommended for a larger business that can take on substantial losses or debts. This is due to the fact that the partners have unlimited liability to the losses/debts in the business. The partners share all the liabilities and debts of the business in a ratio that is previously decided.
The risk of taking on an unlimited liability diverted business owners to a Limited Liability Partnership (LLP) immediately after its introduction in 2008 and now only small businesses adopt this business structure.
Partnership Firm is defined in section 4 of the Partnership Act, 1932. While a partnership deed may not be necessary for the setup of the business, it can be useful in the future under certain circumstances. The registration is optional, making the set up for the business easy and light on the pocket. A partner cannot sue the firm or another partner if the firm is unregistered. A Partnership Deed normally requires the following information:
- Name of the business/partnership.
- Type of partnership.
- Names and addresses of all partners.
- Commencement date of the firm.
- Capital investment by each partner.
- Profit sharing matrix.
- Place of business.
- Duties/rights of partners.
- Salary for the partners.
- Terms and conditions for intake/removal of partners.
- The number of partners in a partnership firm has to be a minimum of two. Any business can have up to 20 partners, except for a banking business. A partnership firm in the banking business can have only up to 10 partners.
Advantages of a Partnership Firm
- Partnership Firms have minimum compliance requirements. Although, there would be a few registrations depending on the type of business and the turnover. For example, if the turnover of the business exceeds Rs. 20 Lacs (Rs.10.0 lakhs for spécifie states) in a financial year, the partners need to register for GST (Goods and Service Tax Act).
- Easy to start or close, depending on the mutual decision of all partners. An unregistered partnership may start immediately and may not even need to file annual accounts at the registrar.
- All members of the partnership have an equal say in the decision making.
- It is cheaper as compared to an LLP owing to the lesser legal requirements. Firm may not even need an auditor.
Disadvantages of a Partnership Firm
The biggest disadvantage is the unlimited liability on the partners in the business. For example, if a business runs into debt or a lawsuit, the partners may have to clear the same from their own pockets.
It is not a separate legal entity.
Only Indians can form partnerships in India.
Shares can’t be sold by any partner without the consent of all the other partners.
Requirements for a partnership registration
Affidavit to declare intention to join partnership.
Application for registration under Partnership Act (Form No. 1).
Original and signed (by all members) copy of partnership deed.
Lease/rental agreement of the property where business is set.