A Partnership is necessarily a collaboration between two individuals to start/expand a business with a view to earning profits. It is a kind of upgraded form of Sole Proprietorship with the only difference being the distribution of ownership as to investment (contribution) and profits. As and when the business is a sole proprietorship begins to expand, it calls for increased investment and managerial intelligence. Consequently, more people (partners) need to come together and take up responsibilities agreed for a fixed ratio of profit distribution. Sometimes the partners only bring money, sometimes their expertise to handle operations and sometimes both. The main necessity is to invest in either monetarily or technically.

Let’s have an in-depth study on how a partnership firm works, its characteristics and the registration process.

Characteristics of a Partnership Firm

  • 2 or more persons: As the name suggests, for a partnership to start, it is imperative two or more persons should come into the picture. They should bring along with them, either the capital or other skillsets to be contributed toward the business carried out.
  • Agreement/Partnership Deed: A Partnership resists on a Partnership deed and constitutes the most important foundation of the same. A partnership deed must cover the following areas:
    • Name of the Firm
    • Name and Address of the partners
    • Nature of business
    • Place of business
    • Profit-Sharing ratio
    • Amount of capital brought by the partners
    • Drawings allowed to the partners
    • Amount of compensations, salary, commission payable to the partners
    • Rights, duties, and obligations of the partners
    • Loans and advances taken from partners
    • Settlement of amounts in case of dissolution
    • Arbitration clause
    • Process of appointment, resignation, cessation, removal of partners.
  • Unlimited Liability: As in the case of a company or LLP, which is a legally recognized form of business, the partnership firm has unlimited liability since the identities of the firm and the partners are not separate. In case of loss of business, the partner may be held accountable and liable for repayments of the loan.
  • Principal-Agent Relationship: All the partners may act equally in the daily operations of the business or there can be anyone acting for them all. This constitutes the Principal-agent relationship and the condition for the same has to be stipulated in the partnership.
  • Low-cost Formation: A partnership is relatively easier and cheaper to incorporate than a company form of business.
  • Risk distribution: One of the good features of a partnership is that, along with the distribution of profits in a fixed ratio, the risks also get distributed mutually, making it easy for one single person to bear the burden of loss.
  • Tax Implication: Being in partnership business fetches lower tax rates, since not the firm, but the partners get taxes.
  • Less preferred by banks for loan: Banks, in order to ensure the protection of their asset, prefer giving loans to legal forms of business like company and an LLP

Documents Checklist for incorporation a Partnership Business

  • PAN card of all the partners
  • Address proof (Voter ID/Aadhar card/Driving License)
  • Copy of utility bills
  • Proof of address of the Firm – if rented, then copy of rent agreement; if owned then property papers or utility bills (not more than 2 months old)
  • NO objection certificate from the landlord if the office premises are rented.
  • Documents for opening a current account in a bank (more or less as same as above)

Process of Registration

Step 1: Choosing a partnership name and draft a partnership deed with all conditions and covenants decided mutually.

Step 2: Get the deed signed and notarized.

Step 3: Apply for PAN card on the Partnership Firm

Step4: Apply for Current Account on the basis of PAN card and partnership deed.

Step 5: in addition to the above, based on the type of business carried on by partners, following registration may also be required:

  • For Manufacturing Business, the partnership firm may require one or more of the following registrations:
  1. VAT/Sales TAX/TIN registration
  2. Micro small and medium enterprise certification (MSME)
  3. Shop and Establishments certificates (in some cases)
  4. CA certification

While for Firm registration, the documents required are more or less similar as provided in the checklist above, the VAT registration procedure may vary state to state.

  • For Service based business or consultancy, the two main requirements would be:
  1. Service Tax Certification – a certificate provided by the central government.
  2. CA Certification attesting the business objects of the proprietorship.
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