Partnership Firm

Partnership Firm

The law relating to partnership firm in India is prescribed in the Indian Partnership Act of 1932. This Act lays down the rights and duties of the partners between themselves and other legal relations between partners and third persons, which are incidental to the formation of a partnership. Thus, the Act establishes the position of a partner as well as a partnership firm vis-à-vis third parties, in legal and contractual relations arising out of and in the course of the business of a partnership firm.

Is partnership firm registration necessary?

No, partnership registration is not necessary. However, it is advisable for you to have a partnership firm registration online. Also, remember that for a partner to sue another partner or the firm itself, the partnership should be registered. Moreover, for the partnership to bring any suit to court, the firm should be registered. For this reason, it is recommended that larger businesses register the partnership deed.

Documents Required For Unregistered Partnership Firm

  • PAN Card and address proof of the partners.
  • Passport size photographs of all the partners.
  • Address Proof for the place of business – Electricity Bill / Rent or Lease Agreement / Sales Deed.

Documents For Registered Partnership Firm

  • Form No. 1 (Application for registration under Partnership Act).
  • Original copy of Partnership Deed, signed by all partners.
  • Affidavit declaring intention to become partner / Specimen of an affidavit certifying all the details mentioned in the partnership deed and documents are correct.
  • Rental or lease agreement of the property/campus on which the business is set.
  • PAN Card and address proof of the partners.

Essential Elements Of Partnership

  • Agreement :- There should be agreement between two individuals who are willing to enter into partnership.The reason is that this kind of an alliance is a creation only out of a mutual agreement. Thus, the nature of a partnership is voluntary and contractual.
  • Sharing Profit Of Business :- The sharing profit of business should be predecided and it should be mutually agreed upon. The profit sharing ratios should be mentioned in the agreement in order to avoid future difficulties.
  • Running The Business :-The business must be carried on by all the partners or by one or more of the partners acting for all. This is the crucial principle of the partnership law. An act of one partner in the course of the business of the firm is, in fact, an act of all partners. A partner carrying on a business is the principal as well as the agent for all the other partners. Therefore, it should be noted that the real test of a partnership is a mutual agency rather than sharing of profits.

Advantages of Partnership Firm

  • Easy To Incorporate – As compared to LLP or Private Limited, it is easy to incorporate. Partnership firm can be made by merely entering in an agreement with the individuals. It is voluntary to get the partnership firm registered, not mandatory.
  • Less Compliances – Compliances as compared to LLP or Private Limited is less. As there is no necessary requirement to file various forms at MCA, no statutory audit, no DSC for partners, no DIN requirement for partners. They do have legal restrictions on their activities. It is cost-effective, and the registration process is cheaper compared to a company or LLP. The dissolution of the partnership firm is easy and does not involve many legal formalities.
  • Sharing Of Profits And Losses – The partners share the profits and losses of the firm equally. They even have the liberty of deciding the profit and loss ratio in the partnership firm. Since the firm’s profits and turnover are dependent on their work, they have a sense of ownership and accountability. Any loss of the firm will be borne by them equally or according to the partnership deed ratio, thus reducing the burden of loss on one person or partner. They are liable jointly and severally for the activities of the firm.
  • Quick Decision – The decision-making process in a partnership firm is quick as there is no difference between ownership and management. All the decisions are taken by the partners together, and they can be implemented immediately. The partners have wide powers and activities which they can perform on behalf of the firm. They can even undertake certain transactions on behalf of the partnership firm without the consent of other partners.

Disadvantages of Partnership Firm

  • Unlimited Liability – The biggest disadvantage of the partnership firm is having an unlimited liability of the partners. The partners have to bear the loss of the firm out of their personal estate. Whereas in a company or LLP, the shareholders or partners have liability limited to the extent of their shares. The liability created by one partner of the partnership firm is to be borne by all the partners of the firm. If the firm’s assets are insufficient to pay the debt, then the partners will have to pay off the debt from their personal property to the creditors. 
  • No Perpetual Succession – The partnership firm does not have perpetual succession, as in the case of a company or LLP. This means that a partnership firm will come to an end upon the death of a partner or insolvency of all the partners except one. It may also be dissolved if a partner gives notice of dissolution of the firm to the other partners. Thus, the partnership firm can come to an end at any time.
  • Limited Resources – The maximum number of partners in a partnership firm is 20. There is a restriction on the number of partners, and hence the capital invested in the firm is also restricted. The capital of the firm is the sum total of the amount invested by each partner. This restricts the firm’s resources, and the partnership firm cannot take up large scale business.
  • Difficult To Raise Funds – Since the partnership firm does not have perpetual succession and a separate legal entity, it is difficult to raise capital. The firm does not have many options for raising capital and growing its business as compared to a company or LLP. As there are no strict legal compliances, people have less faith in the firm. The accounts of the firm need not be published. Thus, it is difficult to borrow funds from third parties.