The Ultimate Guide to Successfully and Effortlessly Forming a Partnership Business

Forming a Partnership Business involves an association of persons who agree to combine their financial resources and managerial abilities to run a business and share profits in an agreed ratio. A partnership business usually grows out of the need for business expansion with more capital, better supervision and control, division of work, and risk-sharing. Forming a Partnership Business requires drafting a partnership deed among the partners, which must be registered to establish a firm. The Indian Partnership Act, 1932, governs partnership firms in India. A partnership firm can have a maximum of 50 partners, and the profit and loss are shared as agreed upon in the partnership deed.

Features of Partnership :

• Existence of an agreement: In Forming a Partnership Business, two or more persons come together based on an agreement to carry on business. The partners lay down the terms and conditions of the partnership in a document known as the Partnership Deed.
• Registration: To form a partnership firm, it is not compulsory to register it. However, if the partners so decide, it may be registered with the Registrar of Firms. 
• Sharing of profits and losses: In Forming a Partnership Business, partners share the profits and bear the losses, if any.
• Unlimited Liability: The liability of partners is unlimited. If some obligation arises, both the partnership assets and the private property of the partners can be taken to pay the liabilities of the firm.
• Common Management: Every partner has a right to take part in the running of the business. It is not necessary for all partners to participate in the day-to-day activities of the business. However, they are entitled to participate. Even if the partnership business is run by some partners, the consent of all other partners is necessary for taking important decisions.
• Restriction on transferability of share: No partner can transfer his share in partnership to any other person. He may, however, do so with the consent of all other partners. 
• Duration: The partnership firm continues at the pleasure of the partners. Legally a partnership comes to an end if any partner dies, retires or becomes insolvent.

Agreement to Continue Business : However, if the remaining partners agree to work together under the original firm’s name, they will not dissolve the firm, ensuring continuity in Forming a Partnership Business.

Settling the Claim of the Outgoing Partner : In Forming a Partnership Business, the remaining partners will continue the firm’s business after settling the claim of the outgoing partner.

Types of Partnership in Forming a Partnership Business

• Partnership at-will: In Forming a Partnership Business, such a partnership exists at the will of the partners. That is, any partner can bring it to an end by giving notice of their intention to do so, as per Section 7 of the Indian Partnership Act, 1932.
• Particular Partnership: A particular partnership forms to undertake a specific venture. It automatically ends with the completion of the venture. (Section 8 of the Indian Partnership Act, 1932)
•  Partnership for a fixed duration: Such partnership is for a fixed period of time, say 2 years, 5 years, or any other duration.

1. Active Partners: Partners who actively participate in the conduct of the day-to-day business of the firm carry on business on behalf of the other partners.
2. Sleeping or dormant partners: Sleeping or dormant partners are those who do not take active part in the management of the business. Such partners only contribute capital to the firm and remain bound by the activities of other partners. However, they share in the profits and losses of the business. 
3. Others: Other types of partners may also associate with the partnership directly or indirectly. They are not full-fledged partners and may include the following:

Merits of Partnership in Forming a Partnership Business

1. Ease in formation: A partnership is very easy to form. The partners only need to agree among themselves. The expenses for registration are also minimal.
2. Pooling of financial resources: A partnership commands more financial resources compared to sole proprietorship. This helps in expanding business and earning more profits. Whenever a firm requires more money, it can admit more partners.
3. Pooling of managerial stalls: A partnership facilitates pooling of managerial skills of all its partners. This leads to greater efficiency in business operations. For instance, in a big partnership firm, one partner can handle the production function. Another partner can look after all marketing activities. Still, another can attend to legal and personnel problems, and so on.
4. Sharing of risks: Unlike a sole proprietorship, the partners share the risks of the partnership business on a predetermined basis. This encourages partners to undertake risky but profitable business activities. 
5. Division of work: In a partnership, the partners divide the entire firm’s work based on their knowledge and skills. Division of labor is possible in partnership. This division of work leads to efficient management, which results in higher profits.

Limitations of Partnership

1. Uncertainty of existence: The existence of a partnership firm is very uncertain. Forming a Partnership Business comes with the risk that the retirement, death, bankruptcy, or lunacy of any partner can put an end to the partnership. Furthermore, the partnership business can come to a close if any partner demands it.
2. Unlimited Liability: In a partnership, each partner has unlimited liability. This means they are personally responsible for the firm’s debts and obligations. This liability extends beyond their own actions to include the mistakes and decisions of their co-partners. If the business cannot pay its debts, partners may have to use their personal assets to settle liabilities, making this structure riskier compared to LLPs or companies.
3. Difficulty in withdrawal or Blocking of Capital: In Forming a Partnership Business, partnership investments are relatively easy to make but challenging to withdraw. A partner cannot exit or transfer their share without the unanimous consent of all partners, restricting financial flexibility and reducing investment liquidity. This limitation often deters potential investors.
4. Lack of institutional confidence: Banks and financial institutions do not have much confidence in a partnership business. Its activities remain undisclosed to the public, and no law regulates the agreement among partners. As a result, partnerships cannot raise large financial resources and cannot ensure business growth.
5. Lack of a Control: In a partnership, partners share decision-making, which can lead to conflicts and a lack of individual control. Each partner’s actions impact the business, and disagreements may arise over management, finances, or strategic direction. 
6. Difficulties of expansion: It is difficult for a partnership firm to undertake modernization of   expansion of its operations. This is because of its inability to raise adequate funds for the purpose. Therefore, partnerships generally cannot organize large-scale businesses.

Key Elements of a Partnership Deed

Forming a Partnership Business requires a well-drafted partnership deed, also known as a partnership agreement. This document outlines in detail the rights and responsibilities of all parties to a business operation. It guides the partners in the conduct of the business and has the force of law. Additionally, it helps prevent disputes and disagreements over each partner’s role in the business and the benefits due to them.

Benefits of Partnership Deed 

1. It enables business owners to file a suit in court in case of a dispute. 
2. The Deed helps business owners avoid any misunderstanding or conflict, as they have already decided and mentioned all the terms and conditions.
3. It clearly outlines the duties of each partner. 
4. It provides details of the profit/loss ratio and reduces the chances of misunderstanding. 
5. It mentions the amount invested by each partner in the business. 
6. It also details the salary and commission paid to partners, and if any of the partners withdraw the capital, then what interest they will have to pay. 

Registration procedure 

You can register the partnership firm either when you form it or later. One needs to file an application with the Registrar of Firms of the area where the business is located. 

1. You should include the following information in the application for partnership registration: your firm’s name, the place where you carry on the business, any other places where you carry on the business, the date the partners joined the firm, the full name and permanent address of the partners, and the firm’s duration. All the partners of the firm or their duly authorized agents should sign the application.
2. Every partner needs to verify and sign the application. 
3. Ensure that you enclose the following documents and prescribed fees with the registration application:

• Application for Registration in the prescribed Form 
• Duly filled Affidavit 
• The partners should create a certified copy of the Partnership deed on stamp paper, following the Indian Stamp Act or the applicable stamp paper in the State where they execute the Partnership Deed.
• Proof of ownership of the place of business or the rental/lease agreement thereof. 

Forming a Partnership Business does not require compulsory registration, as there are no penalties for non-registration. However, it is advisable to register the firm since an unregistered firm is denied certain rights.

• A partner cannot file a suit in any court against the firm or other partners. This is for the enforcement of any right arising from a contract or right conferred by the Partnership Act.
• Your firm cannot enforce a right arising from a contract in any court, either by itself or on its behalf. This applies against any third party.
• Further, the firm or any of its partners cannot claim a set-off (i.e., mutual adjustment of debts owned by the disputing parties).
• This applies to any other proceedings in a dispute with a third party.

Registration under income tax

Forming a Partnership Business requires firms to apply for registration with the Income Tax Department and obtain a PAN Card. After securing a PAN Card, the partnership firm must open a current account in the firm’s name and conduct all its operations through this bank account. This is a crucial step in Forming a Partnership Business, ensuring smooth financial transactions and legal compliance.