Partnership Firms in India

Partnership Firms in India

A Partnership is the relation between persons who have agreed to share profits of the business carried on by all or any of them acting for all. Partnerships are a very good form of business entity for small enterprises wherein more than one person decides to contribute in a partnership and share the profits. In India, Partnerships are widely prevalent because of its ease of formation and minimal regulatory compliance. In this article, we look the types of partnership, advantages and process of registering a partnership firm.

Partnership Firm

There are two types of Partnership, registered Partnership and unregistered Partnership. In terms of the Indian Partnership Act, 1932, (Act), the only criterion to commence business as a partnership is the finalisation and execution of a Partnership Deed between the Partners. The Act does not require the Partnership Deed/Partnership Firm to be registered and in other words does not require the Partnership Firm to be a registered Firm. Therefore various partnership businesses exist as an unregistered Firm without impacting the business of the Firm.

There are no penalties for non-registration of a partnership firm and a partnership firm can even be subsequently registered after formation. However, unregistered partnership firms have certain rights denied in Section 69 of the Partnership Act, which deals with the effects of non-registration of a partnership firm. Some of the disadvantages of an unregistered firm are: i) A partner of an unregistered firm cannot file a suit in any court against the firm or other partners for the enforcement of any right arising from a contract or right conferred by the Partnership Act, ii) no suit to enforce a right arising from a contract shall be instituted in any Court by or on behalf of a firm against any third party unless the firm is registered, iii) an unregistered firm or any of its partners cannot claim a set off or other proceedings in a dispute with a third party. Therefore, it is advisable for any partnership to be registered sooner or later.

Partnership Firm Registration

A Partnership firm can be registered under Section 58 of the Indian Partnership Act at any time, even subsequent to formation. The registration of a partnership firm is done by filing an application with the Registrar of Firm of the area in which any place of business of the Partnership Firm is situated or proposed to be situated. When the Registrar of Firms is satisfied that the provisions of Section 58 are duly complied with, a record of entry of the statement is made in the Register of Firms and Certificate of Registration is issued. The application for registration of Partnership Firm must contain the prescribed registration form for incorporation of a company, certified true copy of the Partnership deed entered into and ownership proof of the principal place of business.

Advantages of a Partnership Firm

One of the main advantages of a Partnership Firm is that there are very minimal requirements in terms of compliance. For instance, a Company requires annual filing of its financial statements with the Registrar of Companies and the part of the financial statements of the Company are made public documents. On the other hand, registered/unregistered Partnership Firms are not required to file any annual returns / the Firms financial statements with any Regulatory body. Therefore, the financial statements of a Partnership Firm are not available in the public domain. Also, the accounts of a registered / unregistered Partnership firm are not required to be audited. Whereas, the accounts of a Limited Liability Partnership are required to be audited when the turnover exceeds Rs.40 lakhs per annum or when capital contribution exceeds Rs. 25 lakhs.

Disadvantages of a Partnership Firm

Partnership firm do not provide its Partners with limited liability and do not have a perpetual existence. Also, the interest of a Partner in a Partnership firm is not easily transferrable and the ownership structure is not conducive for Private Equity Investors. In addition to being tougher (almost impossible) to obtain private equity investment in a partnership firm, it is also harder for Partnership Firms to obtain loans from Banks & Financial Institutions. Banks / Financial Institutions prefer to lend to Companies than Partnership Firms as Companies are separate entities and the regulatory requirement for financial reporting of Companies, makes Companies more transparent and structured.

Partnership Firm Taxation

Partnership firms may be assessed either as a partnership firm or as an association of persons(AOP). Interest paid to partners, salary, bonus, commission, or remuneration to a partner will be allowed as a deduction if it is paid to a working partner who is an individual, when the partnership is assessed as a Partnership Firm. However, when the Partnership Firm is assessed as an AOP, the above deductions cannot be claimed. Therefore, for a partnership firm it is more advantageous to be assessed as a partnership firm than as an AOP. For a Firm to be assessed as a Partnership Firm, the Partnership Firm should be evidenced by a written partnership deed, individual shares of the partners should be very clearly specified in the deed and a certified copy of partnership deed must accompany the return of income of the firm of the previous year in which the partnership was formed.